Analysis & Review by Pawan, IIM Ahmedabad

Issue Details

WHAT DO THEY DO?

TCNS is a women’s branded apparel company and is mostly into Ethnic/Fusion
Wear. They operate under three brands, W, Aurelia & Wishful W. Now, if you are a
woman, you have probably heard of these brands. If you are not, try a small
experiment. Find a lady near you and ask her about W, Aurelia and Wishful. If you
are lucky, she will offer you deep insights about these brands because TCNS isn’t a
small time company. It’s a company that houses brands with significant brand
equity in the apparel industry and has a board run by a professional team backed
by a Marquee Private Equity Investor (TA Associates/Wagner).

HOW DO THEY DISTRIBUTE THE PRODUCTS?

They operate their distribution through four different channels:

Exclusive Brand outlets – They have 465 exclusive outlets, all on lease,
1
either company operated or managed by a franchisee. 281 outlets for W, 183
for Aurelia, 1 for Wishful. 50% of their sales comes from these outlets

Large Format stores – They operate through 1469 large format stores and
2
about 28% of their revenue comes from such stores.

Multi Brand Outlets – They also sell their products through 1522 Multi Brand
3
channels. 11% of their revenue comes from such stores

Online channels – 10% of their sales come from online channels                    

4

A leading player in the Women’s Apparel Segment

 In terms of total exclusive outlets, they are the leading branded women’s apparel
company in India. However, they do not manufacture their own clothes. Instead,
they source their fabric from multiple suppliers across India and outsource their
manufacturing to Job workers mostly located in the NCR.

The promoters Mr. Onkar Singh Pasricha and Mr. Arvinder Singh Pasricha and the
Managing Director Mr. Anant Kumar Daga have most definitely created something
special here. But will it continue to be special. We are going to tell you TCNS’s story
through quotes we picked from the DRHP.

1. “Our Revenues and Profits are showing healthy

growth”
Revenues have gone from 486 Crores (FY 2015-16) to 710 Crores (FY 2016-17).
During the same period, the cost of materials went from 143 Crores (29% of Total
Income) to 180 Crores (25% of total income).

Due to economies of scale, the company managed to source their raw material at
cheaper rates and this has helped them improve their profitability.

However, it must also be noted that the company made losses during the Financial
Year 2015-16 due to a sharp rise in employee benefit expense, after issuing ESOP’s
(Employee Stock Ownership Plan) to retain top talent (The company states that it
has had no attrition within the professional management team in the past 5 years).
Since then however, the company has posted solid numbers. During FY 2017-18, the
company made 842 Crores in Revenue and 97 Crore in PAT and is looking to
expand in a big way. Also, the company has very little debt and that’s always a
plus. 

FY 17-18 FY 16-17 FY 15-16

Particulars (%of total (%of total (%of total
(in Cr) (in Cr) (in Cr)
income) income) income)
Total Income 849.1 100% 712.9 100% 488.1 100%

Cost of Material consumed 219.9 25.9% 180.4 25.3% 143.8 29.5%

Profit After Margin (%) 97.7 11.6% 156.5 2.2% -416.00 -8.5%

Company Financials

2. “We are going to add 75-80 new stores each year”

The growth plan is quite clear. The company wants to grow by expanding into new
outlets i.e. by increasing total points of sale. However, there is an interesting trend
here in that “same store sales growth” has been declining. 

Particulars FY 17-18 FY 16-17 FY 15-16

Total points of sale 3462 2487 2061

Same store sales growth 8.0% 8.50% 27.30%

*Total Points of Sale includes exclusive stores, large format stores, multi-brand
retail stores and International Outlets

A same-store sales figure of 8% indicates that total revenues at an existing

exclusive brand outlet or a large format store increased by 8% over the same
given time-period from the previous year. Growth of 8% is still a good number, but
if the number decreases, then our company will have a problem.

3. “The Market for Branded Ethnic Wear and

Women’s Apparel is growing”
We are not going to bother with the big numbers here. However, it is quite evident
that the market for Branded Ethic Wear and Women’s Apparel is bound to grow as
consumer spending in India increases. Here is the one statement we thought was
relevant to the discussion.

“The branded Ethnic wear market, valued at US$ 1.5 billion for Fiscal 2017, is
projected to grow at a CAGR of approximately 30% till Fiscal 2020 and brands like
Aurelia, W, Biba and Global Desi who accounted for 39 % of the Organized Ethnic
Apparel Market are expected to increase their market dominance to account for
46% of the Apparel Market”

So the agency that ran the study thinks the top line is expected to grow at a
healthy rate. But they also foresee threats to the brand play, mainly from
unbranded players and branded men’s apparel companies shifting their focus
towards women’s ethnic wear.

4. “Our Working Capital Management efficiency is

important for maintain our profitability”
The company says that managing their inventory will help them effectively prevent
stock shortfall and deal with unsold stock, while reducing their debtor days (
average number of days required for a company to receive payment from its
customers), will improve their cash flow cycle and enable them to redeploy their
working capital in an efficient manner. Interestingly, this number, average debtor
days, is increasing.

As of March 2018, it took them 60 days to collect payments, while in 2016, it took
them only 48 days. On the other hand, Days Payable Outstanding has been
decreasing. Days payable outstanding measures the company's average payable
period i.e. how long it takes a company to pay its suppliers. From 63 days in 2016,
to 49 days in 2018, the company is keeping its suppliers happy by sacrificing its
own financial interests. 

Particulars FY 17-18 FY 16-17 FY 15-16

Debtor days 60.0 51.2 48.2

Days Payable outstanding 49.2 56.1 63.5

If you are not following everything here, just know this much.
1. The company is taking longer to collect its payments.
2. The company is paying its suppliers in fewer days
3. When both of this happen simultaneously, you use your cash much faster i.e. put
pressure on your working capital
These numbers are not alarming but it is something you must pay close attention
to if you are planning to invest in this stock for the long term.

5. “All our proceeds will go to existing shareholders

who will divest some of their position in the
company”
So none of the proceeds will go to the company. Promoter holding will go down
from 43% to about 32% after listing. The Marquee PE investor Wagner will divest
about 11% of its stake taking its holding from 40% to about 29%. In addition, current
and past members of the top management team will also divest small portions of
their stake, most notably Mr. Anant Kumar Daga, the Managing Director.

SHOULD YOU BUY IT?

Overall, the company has a lot going for it. It has definitely built a niche (Ethnic
Wear) for itself in an extremely competitive market and that in itself is an
accomplishment.
 However the company is hoping to raise 1,125 Crores (upper band of Rs. 716) and
that price translates to a PE of about 44. It’s fully priced. If you believe in the larger
Indian growth story and TCNS, maybe this one is for you. But if you are unsure
about the valuations, maybe get a second opinion.

In any case, we wish the company all the best in its future endeavour.

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author accepts no liability for any interpretation of articles or comments on this blog
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