The Rs 1,125-crore initial public offering of TCNS Clothing has opened for subscription on Wednesday, with a price band of Rs 714-716 per share.
The initial public offering of 1,57,14,038 equity shares comprises an offer for sale by Onkar Singh Pasricha, Arvinder Singh Pasricha (promoters), Anant Kumar Daga, Saranpreet Pasricha, Angad Pasricha, Vijay Kumar Misra and Amit Chand (other selling shareholders) and Wagner (investor). The company will not receive funds from the issue.
The issue, which will constitute up to 25.63 percent of the post-offer paid-up equity share capital, will close on July 20. Bids can be made for a minimum lot of 20 equity shares and in multiples of 20 equity shares thereafter.
On Tuesday, the day before issue opened, the women’s apparel maker raised over Rs 337.54 crore by alloting 47,14,210 equity shares to 18 anchor investors at higher end of price band.
Among the anchor investors are Goldman Sachs India Ltd, Auburn Ltd, Fidelity Securities Fund Fidelity Blue Chip Growth Fund, DB International Asia Ltd, ICICI Prudential Life Insurance Company Ltd and UBS Principal Capital Asia Ltd.
Given the decent financials, mature valuations and growth prospects, majority of brokerage houses are of the view that investors can subscribe the issue with a long term perspective, but not for listing gains.
Here are views of several brokerage houses:
TCNS Clothing is a pure play on branding opportunity in $6.5 billion ‘ethnic women wear’ segment. Branded segment is only 23 percent and is growing at 30 percent CAGR in comparison to industry growth of 10 percent.
TCNS has ‘W’, ‘Aurelia’ and ‘Wishful’ brands which cater to across price segments. TCNS stands out in the ethnic wear segment due to 1) scaled up operations with 3 brands across price points 2) team of 37 designers with new products every 3 weeks 3) Supply chain with 225 vendors and 78 job work suppliers 4) around 60 percent gross margins which enable spend on distribution and brand building 5) 3,456 points of sale across EBO’s, LFS and MBO’s with a successful franchisee based EBO model 6) Professional management and 7) debt free balance sheet with 3.5x inventory turns and working capital at 32% of sales.
TCNS is looking at around 75 new EBO additions per year which would enable 17 percent sales CAGR, 20 percent EBIDTA CAGR and 18.5 percent PAT CAGR (excluding ESOP provisions) over FY18-21.
The stock is being offered at 33.7xFY18 EPS (Before ESOP Provisions) which offers scope for decent gains over the medium term given strong growth outlook. Recommend Subscribe.
TCNS has a capital efficient business model, generating healthy return ratios (32 percent return on capital employed (RoCE) in FY18) and EBITDA margins (18 percent in FY18). The asset light nature of the business has led TCNS to generate robust asset turnover ratio of around 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 Rs 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.
The company business is subject to seasonality. Lower revenues in the festive period of any fiscal may adversely affect company business, financial condition, results of operations and prospects.
However, the company is yet to receive the trademark for its main brand W, and earlier the same was rejected by the owners of the brand ‘Wrangler’ on various grounds including prior proprietorship of the ‘W’ stitch design, prior registration and a claim of a well-known status of their mark in India.
So, in the absence of this trademark registration for the ‘W’ brand and in the event of misuse of the ‘W’ logo by a third party, the company may not be able to initiate an infringement action against such third parties.
As the issue is offer for sale, fund raised will not go to the company. Also the issue price looks expensive. Considering all these aspects, investors with high risk appetite, may invest for long term. We have given 1.5 rating out of 5.
Centrum Wealth Research
At the higher end of the price band of Rs 716, the issue is priced at P/E of 44.8x (post dilution) on FY18 basis, (versus average industry composite of closely comparable listed peers at 51.9x). At this valuation, the issue seems fully priced.
TCNS is positioning its brands to carve a niche for itself in terms of comfort, fit and concepts of products. The company is looking at capitalising on the opportunity in the Indian women’s apparel industry and capture market share by strengthening its brand portfolio.
Given the mature valuations and growth prospects, investors can subscribe to the issue from a long term perspective.
The company is bringing the issue at P/E multiple of approximately 45 on FY18 EDS at price band of Rs 714-716 per share. Company being leading women’s apparel company in India with a portfolio of established brands & widespread distribution network and presence across a variety of retail channels but valuations looks bit stretched at present level.
Hence, we recommend ‘long term subscribe’ on the issue.
Asit C Mehta
TCNS Clothing is one of the leading players in the Indian women apparels market. Its brands W, Aurelia, and Wishful have a strong presence across segments.
TCNS’ splendid revenue growth and pervasive presence place it well to benefit from the flourishing Indian women apparels market, outperforming the industry growth of 10 percent CAGR.
At the upper price band of Rs 716, the asking price is at a P/E of 44X at FY18 EPS of Rs 16.12 making it fairly priced. We recommend to Subscribe the issue from a long-term perspective.
TCNS’ 62 percent gross margin is the key to its high EBITDA margin of 21 percent and return on equity (RoE) of 22.74 percent, whereas profit margins are in the range of 11-12 percent.
At upper price band of Rs 716, TCNS business is valued at a P/E of 46.61x to its FY18 EPS of Rs. 15.36. We have a ‘3 star’ rating on the issue.
On valuation front, at higher price band, the company is demanding a P/E valuation of 44.8x (to its restated FY18 EPS of Rs 16) as against the peer average of 38.8x.
With respect to FY18E and FY19E EPS too, it is asking a premium valuation to its peers. Thus, considering its short financial history and premium valuation, we assigning an ‘Avoid’ rating to the issue.