Verdict: The Cool and Nice Stock

IPO Snapshot:

TCNS Clothing Co. Limited is entering the primary market on Wednesday 18^th July 2018, with an offer for sale (OFS) of up to 1.57 crore equity shares of Rs.2 each by PE investor, promoters, current MD and former employees, all in the price band of Rs. 714 to Rs. 716 per share. Representing 25.63% of the post issue paid-up share capital, total issue size is Rs. 1,125 crore at the upper end of the price band. Issue closes on Friday 20^th July and listing is likely on 30^th July.

Company Overview:

TCNS Clothing Co. is a New Delhi head quartered branded apparel maker for ethnic women wear, operating 3 brands - W, Aurelia and Wishful, with sales mix of 57:33:8. Its 465 exclusive branded outlets (281 for W, 183 for Aurelia, 1 for Wishful) accounted for approximately 50% of FY18 topline of Rs. 838 crore. Further, products are sold through 1,469 large format stores, 1,522 multi-brand outlets and online/ e-commerce websites, which account for 28%, 11% and 10% of the topline respectively. While design operations are in-house, manufacturing is completely outsourced. The brand outlets, all on long term leases, are either company operated or franchised out. Company plans to open 75-80 new stores each year, to strengthen its brands.

Financial Performance:

During the 4 year period from FY14 to FY18, company’s revenue has grown at a CAGR of 49%, from Rs. 170 crore in FY14 to Rs. 838 crore in FY18. While EBITDA CAGR was an impressive 64%, reported PAT jumped at 83% CAGR to Rs. 98 crore in FY18, from just Rs. 9 crore in FY14 i.e. 10 fold rise in 4 years! Reported net margins at 11.7% in FY18 are also very healthy. To attract and retain talent at the top, company has generously awarded ESOPs over the past few years, which augmented employee costs by Rs. 22 crore, Rs.74 crore and Rs. 90 crore in FY18, FY17 and FY16 respectively. This lead to company reporting net loss of Rs.41 crore in FY16 and net profit of only Rs. 16 crore in FY17. Adjusting for this one-off item, adjusted net profit for FY18 would be Rs. 113 crore, leading to net margin of 13.4% vis-à-vis reported net margin of 11.7%. Going forward, while ESOPs will continue to appear in the P&L, impact will be reduced as most of stock options are granted. Current equity of Rs. 12.26 (FV Rs. 2 each) is also very low, leading to reported EPS of Rs. 15.36 for FY18. As of 31-3-18, net worth stood at Rs. 431 crore, translating into BVPS of Rs. 77. RoE for FY18 at 22.7% is also very healthy. Despite high growth rates, company’s working capital management has been strong, with both outstanding inventory and debtor days reducing gradually over the past 4 years, to 2.5 months and 1.2 months respectively. Company is debt free, with cash surplus of Rs. 51 crore or Rs. 8.30 per share.

Objects of Issue and Shareholding Pattern:

Since the IPO is a 100% OFS, no funds will flow into the company. Free cash flow from operations will be used to fund future expansion. Promoter holding of Pasricha family at 43.68% currently, will shrink to 32.42% post IPO. Shareholding of US based PE investor TA Associates (through entity Wagner) will contract to 29.39%, from current 40.66%. With acquisition price per share (via a secondary deal in Aug 2016 from another PE firm Matrix) of Rs. 373, the PE fund is making a handsome 39% CAGR on its 2 year investment, while continuing to hold a sizeable chunk. Company’s financial performance over FY16-18 is also supportive of this spurt in valuations, wherein revenue grew at 31% CGAR while adjusted net profit grew 5 fold. A key positive for the company, which is quite uncommon for mid-sized ones, is it has been a professionally run organisation for many years now, which augurs well for business sustainability. Current and former senior leadership team have sizeable ownership (~16% pre-offer holding). While current MD, 41 year old Anant Daga is part encashing his 7.93% holding, two former heads are also only part-exiting via the OFS.

Valuation:

At Rs. 716 per share, company’s market cap will be Rs. 4,390 crore, with EV of Rs.4,340 crore. This leads to PE multiple of 39x, based on adjusted FY18 earnings and a multiple of 32x, based on adjusted FY19E.

Below is a peer comparison table:

While Arvind Limited, with a basket of own and international licensed brands, has topline of close to Rs. 11,000 crore with double digit revenue growth, its margins are on the lower side. On similar lines, Aditya Birla Fashion, with some industry leading brands like Louis Phillipe and Van Heusen, clocks very slim margins of 2% on the net level. Future Lifestyle, Shoppers Stop and Trent lag due to poor RoEs. Page Industries has been a market out-performer with its consistent growth and high return ratios, which are aptly reflected in its premium valuation multiples. Although Kewal Kiran operates on very high margins, its growth rates have tapered off over the past couple of years, making investors uncomfortable in assigning higher multiples. TCNS falls in between Page and Kewal Kiran, enjoying the best of both worlds with high growth rates, healthy margins and attractive valuation. Based on FY19E, its EV/Sales multiple stands at 4.3x (5.2 on FY18 basis) while EV/EBITDA multiple for FY18 is 27x and for FY19 22x. Thus, TCNS seems to be in a sweet spot with respect to valuations.

Conclusion:

While the company size is still small, high growth rates and huge market opportunity make the valuation reasonable. Professional management and marquee investor pedigree are added positives. Hence, we assign a ‘subscribe’ to the IPO. 

Disclosure: No interest.