W, Aurelia brand owner TCNS Clothing has just launched IPO; should you buy?

TCNS Clothing, a branded women’s apparel in India, has kicked off its initial public offering (IPO) on Wednesday to raise Rs 1,125 crore with most brokerages recommending 'subscribe' on the issue for the long-term. The issue is being launched in the price band of Rs 714-716, and will close on Friday. 

The IPO consists entirely of an offer for sale (OFS) of 1.57 crore shares (25.6% of post-dilution equity) by the promoter & group and others. As the issue is 100% OFS, the company will not receive any funds raised from the issue.

TCNS Clothing's brand portfolio includes W (58 per cent of FY18 revenue) which is a premium fusion wear brand, Aurelia (34 per cent) a contemporary ethic wear brand and Wishful (9 per cent) a premium occasion wear brand.

Here is what brokerages recommend on TCNS Clothing IPO:

Centrum Wealth

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.

Prabhudas Lilladher

TCNS Clothing is a pure play on branding opportunity in USD6.5bn “ethnic women wear” segment. Branded segment is only 23% and is growing at 30% CAGR in comparison to industry growth of 10%. 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) ~60% gross margins which enable spend on distribution and brand building 5) 3456 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. 

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.

Hem Securities

The company is bringing the issue at P/E multiple of approx 45 on FY18 EPS at price band of Rs 714-716/share. Co 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 issue.

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Ambit Capital

Ambit Capital has not rated the issue, but has this to say:

TCNS is the most profitable of the small, emerging breed of Indian ethnicwear brands given low competition early on and expansion to a national brand. Over FY13-17, impressive revenue CAGR of 54% and margin growth from 12% to 21% (gross margin up 930bps) drove RoCE (post-tax) from 8% to 37%. While peers stumbled, TCNS improved recall among youth (25-35 years) and trebled its own-store network since FY13.

However, both in India and globally, single category brands in womenswear have failed to scale up due to limited target audience and fashion risk. Before ascribing rich valuations, one must question sustainability of TCNS’ high gross margin of 63% despite own stores drawing only 30% of revenue. A price differential of up to 60% invites competition from value fashion players and new entrants, who can play truant; a case in point being Madura, a premium offering of ABFRL, which took gradual price hikes until FY16.