TCNS Clothing Co. Ltd

Transcription

1 IPO Review Rating matrix Rating : Subscribe for long term July 17, 2018 TCNS Clothing Co. Ltd Price band Issue Details Issue Opens Issue Closes 18-Jul Jul-18 Issue Size ( Crore) Price Band ( ) No of Shares on Offer (crore) 1.57 QIB (%) 50% Non-Institutional (%) 15% Retail (%) 35% Minimum lot size (No. of shares) 20 Objects of issue Its is purely an offer for sale (OFS) by the promoter group and Wagner Ltd. Listing of equity shares is expected to enhance brand visibility and image Shareholding Pattern Pre-Issue Post-Issue Promoter & promoter group 43.7% 32.4% Public 56.3% 67.6% Financial Summary Crore FY16 FY17 FY18 Total Revenue EBITDA (3.9) EBITDA Margin (%) (0.8) PAT (41.5) EPS (6.8) Valuation Summary (at 716 ;upper price band) (x) FY16 FY17 FY18 P/E NA Price/Sales Research Analyst Bharat Chhoda bharat.chhoda@icicisecurities.com Cheragh Sidhwa cheragh.sidhwa@icicisecurities.com Incorporated in 1997, TCNS is one of India s leading women s branded apparel company housing three popular home-grown brands, W, Aurelia and Wishful. Over the years, TCNS has grown to take a leadership position with ~45% market share among national players whose core offering is ethnic apparel like kurtas, salwar kameez and fashion ethnic bottoms. It has built a robust distribution network, where products are sold through 465 exclusive branded outlets (EBOs), 1469 large format store outlets (LFS) and 1522 multi branded outlets (MBOs). In the last five years, TCNS has displayed a robust financial performance, with revenues growing at 45% CAGR in FY13-18 to crore. Subsequently, PAT has grown from 4.8 crore in FY13 to 98.1 crore in FY18 on the back of positive operating leverage and enhancement in gross margins (51% in FY13 to 60% in FY18). TCNS IPO consists of offer for sale of 1.57 crore shares at price band of /share. Post IPO, promoter s stake would reduce to 32.4% from the current 43.7%. Key business aspects Innovative product design process TCNS has a dedicated team of 37 designers with significant experience in their relevant fields. Fabric prints that are developed for brands are designed in-house, enabling it to create exclusivity and uniqueness for its products. Across two seasons in a 12-month period ending March 31, 2018, TCNS design team, together with its sourcing team, prepared ~3000 preliminary fabric print designs and ~1750 preliminary products, in order to launch ~2,700 fabric print designs for 1,600 products in various sizes across product categories. The designing team generally seeks to refresh its product offerings every two to three weeks. Longstanding relationship with suppliers and job workers Unlike men s apparel, the structure of a women s ethnic wear garment requires a combination of various fabrics and trim materials. Consequently, sourcing raw material becomes a critical factor in the ethnic wear industry, for continuity and product line execution on time. TCNS has a well balanced and diversified base of 181 suppliers across India, providing printed fabrics along with unprocessed fabrics and other materials. TCNS follows an asset light distribution model, with production outsourced on a job work basis. It has ~78 job workers for manufacturing apparels. Key risks and concerns Increasing competition can reduce pace of revenue growth Significant dependence on third party sales channels Increase in rentals can negatively impact margins Priced at 44x FY18 EPS on higher band TCNS has a capital efficient business model, generating healthy return ratios (32% RoCE in FY18) and EBITDA margins (18% in FY18). The asset light nature of the business has led TCNS to generate robust asset turnover ratio of ~11x as on FY18. Going forward, steady cash flow generation will enable it to fund its capex through internal accruals, keeping the company virtually debt free. At the IPO upper price band of 716, the stock is priced at P/E multiple of 44x and price/sales of 5x FY18. We believe the current valuation factors in the near term growth prospects. Hence, we believe one should subscribe with a long term horizon.

2 Company Background Incorporated in 1997, TCNS is one of India s most profitable brands, operating in a US$6.5 billion women s ethnic wear market. TCNS has three established home grown brands, W, Aurelia and Wishful each positioned to cater to well-defined needs of their respective target consumers. It has built a robust distribution network, which has been a mix of EBOs, LFS and MBOs. As of March 31, 2018, TCNS operates through 465 exclusive branded outlets, 1469 large format store outlets (LFS) and 1522 multi branded outlets (MBOs). Distinguished brand portfolio Over the years, TCNS has developed three distinctive brands; Exhibit 1: Brand Portfolio W : W is a premium fusion ethnicwear brand, which merges Indian and western sensibilities with an emphasis on distinctive design and styling. The brand is targeted primarily at modern Indian women s casual and work wear requirements. Revenues from the brand grew at 23% CAGR in FY16-18 to 483 crore (58% of revenues). The brand is retailed through 281 exclusive branded outlets and 717 large format stores. Aurelia : Aurelia is a contemporary ethnic wear brand targeted at women looking for great design, fit and quality for their casual and work wear requirements. The brand has recorded a robust revenue trajectory registering 48% revenue CAGR in FY16-18 to 283 crore, contributing 33.7% of overall revenues. The brand is available through 183 exclusive stores and 752 large format stores. Wishful : Wishful is a premium occasion wear brand, with elegant designs catering to women s apparel requirements for evening wear and occasions such as weddings, events and festivals. The company has been leveraging its W store network for selling under the Wishful brand. However, the company recently launched its first EBO of Wishful in September, Revenues from the brand have grown at 40% CAGR in FY16-18 to 73 crore (9% of revenues). Exhibit 2: Revenue split brandwise % FY16 FY17 FY18 W Aurelia Wishful Page 2

3 Exhibit 3: Price range across portfolio Brand Product Portfolio Price Range W Aurelia Wishful top-wear, bottom-wear, drapes top-wear, bottom-wear, drapes, combination-sets top-wear, bottom-wear, drapes Top-wear from Top-wear from , combination-sets from 1999 to 4499 Top-wear from Wide distribution network In terms of distribution reach, TCNS follows an asset light business model, with ~66% of revenues being derived from franchised EBOs, LFS, MBOs and online retailers as on FY18. Exclusive branded outlets: From opening its first exclusive showroom in 2002 in New Delhi, the management has aggressively shored up the number of exclusive branded outlets to 465 as on FY18. The company either enters into leased property or franchise agreements with third parties for exclusive branded outlets. As on FY18, it had 289 leased exclusive brand outlets and 176 franchised outlets, spread across 108 cities. The average size of a store ranges between 800 and 1200 per square feet, with investments in fit-outs of around 3000 per sq feet for new stores. Over the last three years, TCNS has added ~75 stores each year, and expects to maintain the current run rate, going forward. EBOs contribute 50% to the total topline, with revenue from this channel growing at 47% CAGR in FY16-18 to 416 crore. Other distribution channels: Apart from exclusive stores, other channels such as LFS, MBOs and e-commerce, together contribute 50% of overall revenues. The products are retailed through 1469 LFS (stores like Pantaloons, Shoppers Stop and Lifestyle) 1522 MBOs and e-commerce channel (own websites and third party website such as Myntra, Jabong and Amazon). Exhibit 4: Revenue breakup distribution channel wise Exhibit 5: Point of sales MBO 11% LFS 29% Online 10% EBO 50% Touch points FY16 FY17 FY18 EBO LFS MBO Source: Company, ICICIdirect.com, Research Source: Company, ICICIdirect.com, Research Page 3

4 Industry overview The women s apparel market in India is pegged at US$19.3 billion and forms 38% of the total apparel market. The women s apparel market is expected to grow at a faster rate than the men s segment largely due to an increase in the number of working women, a shift towards aspiration rather than need based buying along with the emergence of home grown national brands. Exhibit 6: Women s apparel market: Expected to grow at ~10% CAGR by FY % FY16 FY17 FY18 W Aurelia Wishful Of the total women s apparel market, 71% (US$13.7 billion) comprises the Indian wear (traditional) market. While the market is fragmented with large number of brands, a few national brands dominate this sector along with popular regional players. Exhibit 7: Traditional wear comprises 71% of US$19.3 billion women s apparel market Sleepwear 3% Winterwear 3% Innerwear 15% Others 8% Indian Wear 71% Exhibit 8: Women s ethnic wear market at US$6.5 billion US$ Bn Salwar Kameez, Kurtis, Mix & Match etc 1 Blouse Petticot 6.2 Sarees Source: Company, ICICIdirect.com, Research : Company, ICICIdirect.com, Research Page 4

5 The women s ethnic apparel market in India was at US$6.5 billion (bn) for FY17 and is projected to reach US$9.5 bn by FY20E (CAGR of 13%). The unorganised segment dominates the women s ethnic apparel in India, with organised players having a share of a mere 22%. Going forward, the organised market is expected to grow at a CAGR of 30% and constitute 33% of the overall ethnic wear market in India. Exhibit 9: Organised market expected to constitute of 33% of total market from existing 22% US $ bn % CAGR FY17 FY20 Unorganised Organised As on FY17, national retail brands such as W, Aurelia, BIBA, Global Desi and Fabindia accounted for ~39% of the total organised women s ethnic apparel retail market. National brands are expected to increase their market dominance with a CAGR of 36% to account for 44% of the branded ethnic apparel market by FY20E. Exhibit 10: National players into ethnicwear Brand Year of Inception Number of EBO's Focus Geography W Pan India Aurelia Pan India Wishful 2006 Sold through W stores Pan India BIBA North, South and West Global Desi North & West FabIndia Pan India Soch South Page 5

6 Key financials: Story in charts In the last five years, TCNS has put up a robust financial performance, with revenues growing at 46% CAGR in FY13-17 to crore. Subsequently, PAT has grown from 4.8 crore in FY13 to crore (adjusted for Esop provision) in FY18 on the back of positive operating leverage and enhancement in gross margins (51% in FY13 to 60% in FY18). The asset light nature of the business has led TCNS to generate high asset turns (11x) and 32% RoCE. Exhibit 11: Revenue grows at CAGR of 46% in FY16-18 Exhibit 12: Gross margin trend crore FY13 FY14 FY15 FY16 FY17 FY FY13 FY14 FY15 FY16 FY17 FY18 Gross Profit Gross Margins Source: Company, ICICIdirect.com, Research Source: Company, ICICIdirect.com, Research Exhibit 13: Adjusted EBITDA and EBITDA margin trends Exhibit 14: Adjusted PAT trend crore FY13 FY14 FY15 FY16 FY17 FY18 EBITDA EBITDA Margin % crore FY13 FY14 FY15 FY16 FY17 FY18. EBITDA figures are excluding the Impact of ESOP payment Source: Company, ICICIdirect.com, Research. PAT figures are excluding the Impact of ESOP payment Source: Company, ICICIdirect.com, Research Page 6

7 Key strategies Expand physical retail and online presence Across its three brands, the company plans to annually open ~75-85 EBOs in India during FY19E, FY20E and increase the size and visibility of their existing EBOs, wherever possible. The company also seeks to expand its geographical footprint to get access to a more diversified customer base across geographies. Furthermore, it intends to utilise modern trade channels like LFS and online platforms to increase sales in India as well as international markets. Leverage marketing initiatives to enhance brand recognition The women s apparel market is highly fragmented in nature. Hence, superior brand recognition is critical in driving revenues. TCNS intends to continue to enhance the brand recall of its products through expansion of footprint of their EBOs as well as the use of targeted marketing initiatives such as digital and print advertisements, communications and public relation initiatives. The management intends to increase the proportion of advertisement spends with key focus on Aurelia and Wishful brands. Exhibit 15: Advertisement as percentage of revenues crore % FY14 FY15 FY16 FY17 FY18 Advertisement Expense As a % to revenues Expand and strengthen brand portfolio In addition to strengthening and expanding the reach of the brands W and Aurelia, the management intends to (i) continue to grow their brand Wishful targeting the premium occasion wear market; (ii) launch new brands; and (iii) acquire other brands. Currently, Wishful brand is sold through W stores. Going forward, the management intends to add 10 Wishful exclusive stores each year for the next three years. Increasing range of products under existing brands The company assesses consumer demand, international and local fashion trends and evolving market preferences to evaluate the feasibility of new types of product introductions. In order to enhance and diversify their product offerings and cater to a larger proportion of Indian women s wardrobe requirements, they intend to continue to develop and launch an additional range of products. Page 7

8 Key risks and concerns Increasing competition may reduce pace of revenue growth The company operates in the branded ethnic wear for women. Overall, the women s wear segment is expected to grow at 10% CAGR to US$25.7 billion in FY The ethnic women s wear is expected to grow at a faster pace at a CAGR of 13% to US$9.5 billion in FY The faster growth in the ethnic women s wear segment is expected to lead to newer Indian brands entering the segment along with global brands also vying for market share. This could lead to increased competitive intensity and can slow down the revenue growth of players like TCNS and lead to muted margins, going ahead. Significant dependence on third party sales channels The company derives ~ 66% of its revenues (FY18) from third party sales channels [franchisee exclusive business outlets (EBO), multi brand outlets (MBO), large format stores (LFS) and online retailers]. TCNS, on a regular basis, enters into agreements with channel partners regarding brand pricing and distribution guidelines along with other contractual obligations. Any inability to manage the various channels effectively can negatively impact future revenue growth of the company. Also, among third party channels there is significant client concentration with Top 5 LFS contributing around 82% of LFS sales (23% of FY18 revenue) and top five online retailers contributing ~ 91% of online sales (9% of FY18 revenue) while top five franchisees accounted for 22% of revenues from franchised exclusive brand outlets (3.7% of FY18 revenues). Increase in rentals may negatively impact margins Majority of the exclusive brand outlets (~ 62% i.e. 289 out of 465 EBOs) and all the company s warehouses have been taken on lease. Rent paid by the company for FY18 is to the tune of 93.8 crore, which is ~ 11% of its revenues. If the company is unable to renew these leases on favourable terms and there is a significant increase in lease rentals, then it could negatively impact the EBITDA margin of the company, going ahead. Page 8

9 Financial Summary Exhibit 16: Profit and Loss Statement (Year-end March) FY16 FY17 FY18 Net Sales Growth (%) Total Raw Material Cost Fabrication Charges Gross Margins (%) Employee Expenses % to sales Other Expenses % to sales 30% 30% 26% Total Operating Expenditure EBITDA (3.9) EBITDA Margin % (0.8) Interest Depreciation Other Income PBT (13.6) Total Tax Profit After Tax (41.5) Adjusted PAT Adjusted PAT excludes the Impact of ESOP payment Exhibit 17: Balance Sheet (Year-end March) FY16 FY17 FY18 Equity Capital Reserve and Surplus Other Equity instruments Total Shareholders funds Total Debt Deferred Tax Liability (15.5) Non Current Liabilties Source of Funds Gross Block Less: Accumulated Depr Net Block Intangible assets Capital WIP Net Fixed Assets Investments Inventory Cash Debtors Loans & Advances & Other CA Total Current Assets Creditors Provisions & Other CL Total Current Liabilities Net Current Assets LT L& A, Other Assets Other Assets Application of Funds Page 9

10 Exhibit 18: Key Ratios (Year-end March) FY16 FY17 FY18 Per share data ( ) EPS Cash EPS BV Cash Per Share Operating Ratios (%) EBITDA margins PBT margins Net Profit margins Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE Valuation Ratios (x) P/E NA EV / EBITDA NA Market Cap / Revenues Price to Book Value Solvency Ratios Debt / Equity Debt/EBITDA NA Current Ratio Quick Ratio Page 10

11 RATING RATIONALE ICICI Direct Research endeavours to provide objective opinions and recommendations. ICICI Direct Research assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Subscribe: Apply for the IPO Avoid: Do not apply for the IPO Subscribe only for long term: Apply for the IPO only from a long term investment perspective Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com Page 11

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