TCNS Clothing’s muted outlook to weigh on investor sentiment

TCNS Clothing Co. Ltd’s March quarter results were lacklustre. Even though it has seen a steady improvement in revenue performance every quarter during the fiscal 2021 (FY21), the March quarter revenue growth of just 1% year-on-year to ₹221 crore is far from inspiring.

Online momentum remained strong, with sales more than doubling over the last year. The Aurelia brand did well, reporting 11% growth. On the other hand, the company’s premium brands, W and Wishful saw revenues decline by 2% and 23%, respectively.

Further, there is little respite on the gross margin front, which contracted by 45 basis points year-on-year to 57.5%. One basis point is 0.01%. 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. Gross margin fell sequentially, too.

To be sure, TCNS did well on the cash conservation front in FY21, ending the year with higher cash reserves of ₹182 crore. This was helped by cost rationalization (more than 30% reduction in costs vis-à-vis FY20) and working capital reduction.

The company is kick-starting growth and has already signed up deals for 30 exclusive brand outlets in Q4FY21 which are slated to open in the half year ending September. Even so, the delay in recovery owing to the second covid wave is a dampener for investment sentiment. Understandably, there is a risk to near-term demand, which would hurt revenues.

The company said that as on date, about 60% of its offline stores network is operational with stipulated restrictions. “TCNS may receive some rental waivers in Q1FY22 on account of weak sales during the period,” points out Kotak.

In keeping with these conditions, many analysts have trimmed their earnings expectations for TCNS. “We have cut our earnings per share estimates by 14% in FY22E and 2.4% in FY23E to factor in the impact of second wave in Q1FY22 and third wave in Q3FY22,” said analysts from IDBI Capital Markets & Securities Ltd in a report on 22 June.

Note that the TCNS stock has already gained around 33% so far this calendar year, which may well limit sharp upsides in the near future.