TCNS Clothing Co’s muted recovery outlook weighs on investor sentiment

Its March quarter results announced on Monday don’t inspire confidence. True, the company saw steady improvement in each quarter in the financial year 2021. Even so, revenue growth for the March quarter was subdued at just about 1% year-on-year to Rs221 crore. Here, online momentum remained strong with sales more than doubling over the last year. The Aurelia brand did well, reporting 11% revenue growth. On the other hand, premium brands, W and Wishful saw their respective revenue drop 2% and 23%.

Further, gross profit margin contracted 45 basis points year-on-year to 57.5%. One basis point is one-hundredth of a percentage point. This was primarily due to a higher mix of online sales channel and provisioning to account for higher dormancy on unsold inventory, said analysts from Kotak Institutional Equities in a report on 22 June. Sequentially, the gross margin contraction was steeper at 362 basis points.

“Despite cost saving initiatives round the year, TCNS reported 4Q Ebitda of Rs22.9 crore, missing estimates by 31% due to weak gross margins and higher employee costs (up 24% quarter-on-quarter),” pointed out Kotak’s analysts. Ebitda is earnings before interest, tax, depreciation and amortization.

To be sure, TCNS did well on the cash conservation front in fiscal 2021, ending the year with higher cash reserves of Rs182 crore. This was a result of more than 30% cost reduction on a year-on-year basis and working capital reduction. The company is kick-starting expansion, having signed up 30 stores in 4QFY21 which will be operational in half year ending September (H1FY22).

The company has said, as on date, about 60% of its offline network is operational with stipulated restrictions. Even so, the delay in recovery is a dampener for investment sentiment. Plus, the stock has already appreciated as much as 35% so far this calendar year, which could well cap meaningful upsides.

In the near term, understandably the pandemic is expected to have an adverse impact on demand and in turn, TCNS’s revenues. In keeping with this, analysts have trimmed their earnings expectations. “We incorporate the impact of the 2nd and 3rd Covid wave in our estimates. Accordingly, we have trimmed down our earnings per share estimates by 14% and 2.4% during FY22-23E,” said analysts from IDBI Capital Markets & Securities Ltd in a report on 22 June.