Detailed Rationale

CRISIL Ratings has placed its ratings on the bank facilities of TCNS Clothing Co. Limited (TCNS) on ‘Rating Watch with Positive Implications’.

 

The ratings watch is following a public announcement that Aditya Birla Fashion and Retail Limited (ABFRL; rated CRISIL AA+/Stable/CRISIL A1+) will acquire 51% stake in TCNS and subsequently TCNS will be amalgamated into ABFRL. Ratings are placed on ‘Watch with Positive Implications’ on account of the synergies benefit that would be accrued to TCNS; these synergies include strengthening of organizational capabilities, coverage of complementary markets and consumer segments, channel efficiencies, revenue synergies through sharing of consumer understanding and market insights, among others. This would also enable a comprehensive management of business with focus on quality, distribution and brand building thereby further strengthening the market position.

 

CRISIL Ratings will monitor the acquisition of 51% stake in TCNS by ABFRL which is expected to complete in the near-to-medium term. CRISIL Ratings will also continue to monitor the subsequent merger of TCNS into ABFRL which is subject to regulatory and other approvals and is likely to take around 12 months to complete. CRISIL Ratings will resolve the watch following the completion of acquisition of majority stake in TCNS by ABFRL as well as a detailed discussion with the management with regards to clarity on business and financial profiles of the business.

 

There has been a revival in the overall operating performance of the company which had got impacted due to Covid-19 during the two fiscals ended fiscal 2022. Company has achieved revenue of Rs 933 crore during 9M FY23, ~41% YOY growth from Rs 662 crore during 9M FY22 and the company is expected to report revenue of around Rs.1200 crore for the full fiscal 2023 (against the revenue of Rs.897 crore during fiscal 2022). The above growth has been driven by improved footfalls and improved demand backed by festive season as all stores are now fully operational. TCNS is expected to have added around 100 stores during fiscal 2023 and will further introduce new showrooms which will support the revenue growth over the medium term. Operating margin had remained moderate in fiscal 2022 at 10.2% on account of business getting impacted during Q1FY22 due to second wave of COVID-19. Various mitigation measures are undertaken like closing of some stores, focus of online channels, lease rent waivers, supply chain optimization etc. leading to improvement of margins. For 9M FY23, company has reported operating margin of 12.56% and is expected to be in the range of 12-13% for the full year fiscal 2023. Financial risk profile of the company has remained comfortable in absence of any long-term debt obligations supported by healthy networth expected to be over Rs 645 crore as on March 31, 2023. Supported by continuous healthy accretion to reserves and in absence of any major debt funded capex and nil long term debt obligations over the medium term, the financial risk profile of the company is expected to remain healthy.

 

The ratings continue to reflect the company’s strong brand equity, its focus on design and marketing, pan-India market reach, and established position in the women's ethnic wear segment. The ratings also factor in a strong financial risk profile. These strengths are partially offset by large working capital requirement and exposure to intense competition in the textile garments business.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy business risk profile: The business risk profile is supported by TCNS’s strong brand equity, large retail footprint, and an in-house design team. Garments are retailed under the W, Aurelia, Elleven and Wishful brands, which cater to different segments, through specific pricing strategies. W brand contributes more than 50% of total operating income, followed by Aurelia brand in range of 30-40% and Wishful at below 10% over past 4 years. Elleven brand is the newest and sales under the same are miniscule. Company have continuously increased their physical presence by continuous opening of new stores and increasing the market presence with continuously increased physical presence with continued focus in tier 2 and tier 3 cities through branding and opening new stores. TCNS has over 4200 points of sales with strong owned omnichannel network and deep partnerships across all key offline and online retailers. 

 

There has been a revival in the overall operating performance of the company which had got impacted due to Covid-19 during the two fiscals ended fiscal 2022. Company has achieved revenue of Rs 933 crore during 9M FY23, ~41% YOY from Rs 662 crore during 9M FY22 and the company is expected to report revenue of around Rs.1200 crore for the full fiscal 2023 and is expected to remain healthy owing to demand coming from new showrooms.

 

• Strong financial risk profile and liquidity: The company has nil long term debt. Debt protection metrics are robust, indicated by adjusted interest coverage and net cash accruals to adjusted debt ratio expected to be over 50 times and over 7 times in fiscal 2023. Company’s networth has remained healthy and is expected to be over Rs 645 crore as on March 31, 2023; with stable profitability expected and continuous accretion to reserves, the net worth of the company is expected to improve further. Going forward gearing is estimated to remain nearly nil as company does not plan to take debt for its capex and working capital requirements.

 

Over the last three years company is continuously doing capex for expansion of its stores. In-line to that company will be doing further capex in fiscal 2023 also. The capex will be fully funded through companies’ internal accruals. Company is into the expansion mode to increase its brand visibility and is expected to have opened around 100 stores in fiscal 2023.

 

Weaknesses:

• Large working capital requirements: Gross current asset (GCAs) days are expected to be around 185-190 days as on March 31, 2023, driven by sizable inventory of around 160 days and moderate receivables of around 80-85 days. The business model necessitates conceptualization and manufacturing of garments well in advance, and hence, maintenance of large number of units for each season, resulting in large inventory. With improvement in scale, the bank limits are moderately utilized, though dependence on payables persists.

 

• Exposure to intense competition in the women's retail ethnic wear segment: Competition in the women's retail ethnic wear segment is becoming intense, notwithstanding the strong growth momentum. The company has been ramping up its retail distribution network and advertising campaigns to sustain growth and maintain brand awareness. However, other established brands, such as Biba, Fab India, Meena Bazaar, Global Desi, and Anokhi, in addition to several regional brands also pursue such strategies. Furthermore, the ever-changing nature of trends makes it imperative to revamp the portfolio periodically. The company’s ability to constantly innovate and update its portfolio will, therefore, remain a key monitorable.

Liquidity: Strong

Liquidity is supported by sizeable cash accruals, expected to be around Rs 140-190 crores going forward against nil repayment obligations. Bank limits are sparingly utilized; average utilization in bank limits was ~4% for the 12 months ended Nov-2022. Company had unencumbered cash and cash equivalents (including mutual fund investments) of over Rs 20 crore as on Dec 31, 2022. This has reduced from ~Rs 42 crore as on Sep 30, 2022 as the funds have been deployed for opening of stores, investment in capex, revamping of stores, and to fund the incremental working capital requirements of regular business, etc. This portion is likely to be remain unencumbered and support the liquidity. Current ratio of the company has remained healthy and is expected to be around 1.9 times as on March 31, 2023.

Rating Sensitivity factors

Upward factors

• Successful completion of the proposed acquisition of majority stake in TCNS by ABFRL
• Growth in revenue to over Rs. 1500 cr. on along with operating margin above 18% resulting in improved cash accruals on a sustained basis.
• Improvement in working capital cycle with GCA days below 150 days and sustenance of financial risk profile.

 

Downward factors

• Substantial increase in working capital requirement with GCA days above 250 days, weakening the liquidity and financial risk profile
• Decline in revenue below Rs. 1000 cr. with operating margins below 10%

About the Company

TCNS was set up in December 1997 by the promoters, Mr OS Pasricha and Mr AS Pasricha and is a professionally managed company listed on the BSE and the NSE. The company manufactures and retails ethnic and fusion women's wear. Garments are retailed through exclusive stores, multi-brand outlets, and chains such as Lifestyle, Reliance Trends, Pantaloons, and Shoppers Stop. It has 648 exclusive stores in more than 100 cities as on date.

Key Financial Indicators

As on / for the period ended March 31		2022	2021
Operating income	Rs crore	897.59	635.94
Reported profit after tax	Rs crore	-5.73	-56.3
PAT margins	%	-0.64	-8.87
Adjusted Debt/Adjusted Net worth	Times	0.00	0.01
Interest coverage	Times	3.24	-0.50

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs crore)	Complexity level	Rating assigned with outlook
NA	Cash Credit	NA	NA	NA	36.0	NA	CRISIL A+/Watch Positive
NA	Working Capital Facility	NA	NA	NA	31.0	NA	CRISIL A+/Watch Positive
NA	Proposed Short Term Bank Loan Facility	NA	NA	NA	8.0	NA	CRISIL A1+/Watch Positive