TCNS Clothing Co. Ltd, the women’s branded ethnic-wear maker, intends to raise about 1,125 crore through its initial public offering (IPO). At a time when other retail peers hit rough patches, TCNS was able to carve a niche for itself and emerge profitable thanks to an early-mover advantage in the category. Innovative design differentiation, and optimizing fit and sizing have helped immensely.

Spread across varied price points, the company sells clothes under “W", “Aurelia" and “Wishful" brands, and these contributed nearly 58%, 34% and 8%, respectively, to FY18 revenues. Over FY16-18, these brands saw a compound annual growth rate (CAGR) of 23%, 48% and 40%, respectively. Overall revenue CAGR, thus, was 32% over FY16-18.

For FY18, the company reported a profit after tax (PAT) of 98 crore, reflecting a vast improvement from 15.8 crore in FY17. Its employee costs included payments to employees in relation to employee stock options (ESOPs) granted, which ate into profits. Accordingly, adjusted PAT for FY18 works out to almost 120 crore, reckons TCNS.

The balance sheet looks good without debt. As on 31 March, TCNS had 465 exclusive brand outlets (or EBOs). The firm retails its products through 1,469 large-format stores and 1,522 multi-brand outlets (including distributors) across India. For FY19 and FY20, it intends to add 75-85 EBOs, which should boost growth. Further, payments relating to ESOPs are expected to reduce compared to FY18, which should prove helpful.

But all is not rosy. For some, the decline in promoters’ stake post-IPO to 32.42% from 43.68% pre-IPO is a dampener. “That makes me a bit cautious," says Arun Kejriwal, director of Kejriwal Research and Investment Services Pvt. Ltd.

Moreover, the threat of becoming obsolete remains and there is stiff competition from retailers offering value-for-money products. “Both in India and globally, single category brands in womenswear have failed to scale up due to limited target audience and fashion risk," wrote analysts from Ambit Capital Pvt. Ltd in a report on 11 April.

What of valuations?

The price band is 714-716 per share. At the upper end of the price band, the valuation works out to 45 times based on FY18 earnings per share (EPS). That is not cheap, suggesting a good share of the positives is baked into the price. However, according to Prabhudas Lilladher Pvt. Ltd, the stock is being offered at about 34 times FY18 EPS (before ESOP provisions). That offers scope for decent gains over the medium term given strong growth outlook, adds the brokerage firm.

The issue opens on Wednesday. It is an offer for sale comprising a 25.6% post-issue paid-up capital and TCNS will not receive any funds.