Buy This Small Cap Branded Apparel Stock For 25% Potential Upside: ICICI Securities

Leading brokerage firm ICICI Securities is bullish on TCNS Clothing Co. Ltd., suggests 'buy' for a target price of Rs 800 apiece. TCNS Clothing Co. Limited is India's leading women's branded apparel company in terms of total number of exclusive brand outlets as of May 2018 according to Technopak.

Given its multi-distribution channel approach and robust supply chain infrastructure, TCNS has emerged as the market leader in women's ethnic space through its three popular homegrown brands.

TCNS follows an asset-light business model, with production outsourced on a job-work basis. This enables the company to generate a high RoIC Healthy balance sheet with cash reserves worth Rs 150+ crore.

Stock outlook

The current market price of TCNS is Rs 642.65 apiece. The 52-week low level is Rs 494.10 apiece and 52-week high level is Rs 932 apiece, respectively. TCNS is a small cap clothing company with a Market Capitalization of Rs 3,960.62 crore.

The stock is likely to gain 25% considering the brokerage's given target price and the CMP of the stock.

Returns on investment

The stock has given 7.67% negative return in the past 1 week, 11.24% positive return in the past 1 month, and 26.1% positive return in the past 3 months, respectively. In the past 1 year, it has given 1.4% negative return, and in the past 3 years, it has given 1.24% negative return, respectively. 

Key highlights

TCNS' revenue recovery has been sluggish with sales reaching 100% of preCovid levels vs. other lifestyle retailers posting 120-140% recovery rate in Q1FY23. It mainly caters to office, festive ethnic wear for women that was slow to pick up post economy re-opening vs. other segments (western wear).

We envisage a material improvement in operating metrics, going ahead, on the back of a gradual recovery in SSSG (double digit growth) during festive season. Also, after muted store addition pace in the past two years, TCNS has embarked on an aggressive store addition with plan to open 100+ stores in FY23 (54 stores added in FY20).

Over the past two years, key agenda of TCNS was conserving balance sheet strength with a conservative approach on the working capital front (down 5% vs. pre-Covid levels). This may have led to revenue loss but with robust cash on the books (Rs 150 crore), the company is now well geared up to accelerate its growth trajectory. It has advanced its inventory purchases by two months to launch the season and is maintaining a healthy inventory.

Buy for a target price of Rs 800

Since our initiation report, the stock has appreciated ~65% (from Rs 400 in April 2020 to Rs 660 in September 2022). With normalisation of business scenario and renewed impetus on growth by the company, the financial performance is expected to improve in ensuing quarters. "We maintain BUY recommendation on the stock. We value TCNS at Rs 800 i.e. 3x FY24E EV/sales (earlier TP: Rs 940)," the brokerage has said.

Key triggers for future price performance

Undertaking category expansion (beyond its core ethnic wear) in a bid to tap opportunities across non-apparel categories. Foraying into make-up, colour cosmetics under brand 'Aurelia'. Over longer term, the management aspires to achieve ~20% contribution from the non-apparel segment. 

Continues to scale up its omni distribution channel with new business models via third party market place & creating 'online-first' product ranges. 
Has set up a new integrated warehouse (~1.4 lakh sq ft) to enhance supply chain and scale up its B2C delivery efficiency.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.