TCNS deal may raise debt, near-term profitability risks for ABFRL: Analysts

Street gave a thumbs down to Aditya Birla Fashion and Retail (ABFRL)-TCNS Clothing deal as analysts flagged near-term profitability risks for ABFRL with its latest acquisition.

At the bourses, shares of the Aditya Birla group company tumbled 6.2 per cent in the intra-day trade, before settling 3.27 per cent lower at R 207.2.

Those of TCNS, meanwhile, plunged 20 per cent to end at Rs 416.64.

By comparison, the benchmark indices gained 1.2 per cent.

The crash comes after Aditya Birla Fashion and Retail (ABFRL), announced last week that it will acquire a controlling stake (51 per cent) in TCNS Clothing for Rs 1,650 crore.

“Assuming TCNS’s recovery to 8 per cent Ebitda margin, and 3 per cent PAT margin in FY25E, it may generate revenue/PAT of Rs 1,600 crore/Rs 48 crore. i.e., 9 per cent/12 per cent of ABFRL.

“After adjusting for the financial cost of an 8 per cent interest on Rs 1,650 crore cash outlay and 5.4 per cent equity dilution, TCNS could register an incremental net loss and EPS of Rs 51.3 crore and Rs 0.7/share, respectively, for FY25E,” pointed out analysts at Motilal Oswal Financial Services.

According to ABFRL, the transaction will be carried out through the acquisition of the founding promoter’s stake, through a sale and purchase agreement, and a conditional public open offer followed by a merger between the two entities.

Later, public shareholders of TCNS (as on effective date) will receive 11 shares of ABFRL for every six shares that they hold in TCNS.

The Indian wear market has a total size of Rs 1.15 trillion as on FY20.

Within this, TCNS has an estimated revenue of over Rs 1,200 crore for FY23.

It has four brands (W, Aurelia, Wishful, and Elleven) with over 660 exclusive brand outlets (EBOs), more than 2,300 large format stores, and over 1,100 multi-brand outlets on pan India basis, which is more than double the reach of its peers.

Yet, TCNS has had weak revenue growth over the past few years as the Indian ethnic wear market remains highly crowded with a large section of unorganized players catering to highly price conscious women consumers, whereas TCNS operates at a premium pricing.

“Given that TCNS has been lagging peers in recovery and underperforming for more than two years now, only a successful turnaround of the same can create shareholder value,” said Nuvama Institutional Equities.

Concurring with the view, Kotak Institutional Equities added given TCNS’ performance struggles in recent years, with -8 per cent revenue CAGR over FY2019-22, in driving growth, we see limited rationale for this acquisition.

ABFRL, the brokerage said, will need to fine-tune TCNS’ expansion and merchandising strategy to revive its growth.

That apart, the acquisition has also raised debt concerns for ABFRL.

The company had raised Rs 2,195 crore from GIC last year, reducing its leverage from the peak of Rs 2,100 crore in FY20.

Since then, it has done a series of acquisitions in Ethnic Wear, including Sabyasachi, Tarun Tahiliani, and Marigold Lane, reaching Rs 340 crore net debt in Q3FY23.

The TCNS acquisition, analysts said, will likely push it back to net debt of Rs 500 crore (excluding lease liability) against a net cash of Rs 1,100 crore in December, 2023.

“In the last few years, ABFRL has invested in multiple new businesses that are yet to stabilize, with revenue/operating loss of Rs 570 crore/Rs 73 crore in the ethnic wear segment (FY23E).

“TCNS’ acquisition may raise risks to near-term earnings as ABFRL already has  a long tail of fragmented portfolio mix, in multiple categories, with a prolonged phase of investments,” said MOFSL.

ABFRL had, in March 2021, set a revenue target (from ethnic wear segment) of Rs 2,000 crore, which was to be achieved in FY26.

Kotak Institutional Equities expects the company, with all its previous acquisitions, to generate revenue of Rs 5,949 crore by FY25.

It said the current target is achievable only if the company pursues other inorganic opportunities or is implicitly building sharply higher growth rates from TCNS.

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