Detailed Rationale

CRISIL Ratings continues its rating on the long term bank facilities of TCNS Clothing Co. Limited (‘TCNS’) on ‘Rating Watch with Developing Implications’ and reaffirmed its short-term rating at ‘CRISIL A1+'.  The rating watch takes into account the impending merger of TCNS with its parent, Aditya Birla Fashion and Retail Limited (ABFRL, ‘CRISIL AA+/Rating Watch with Negative Implications/CRISIL A1+’), which is expected to be completed over the next 2-3 months, subject to regulatory and statutory approvals.

 

The ratings of Aditya Birla Fashion & Retail Limited had been placed on watch with negative implications on April 29, 2024, following an announcement it made on April 19, 2024, that its Board of Directors have approved a scheme of arrangement between ABFRL and Aditya Birla Lifestyle Brands Limited (‘ABLBL’) and their respective shareholders and creditors. The scheme, inter alia, provides for demerger, transfer and vesting of the Madura Fashion and Lifestyle Business (‘MF&L’) from ABFRL to ABLBL. The rating of TCNS factors in the operational, managerial and ongoing financial support from the parent ABFRL, and hence its rating has linkages with that of ABFRL.

 

CRISIL Ratings will continue to engage with the management of TCNS and ABFRL and monitor developments in this regard and will resolve the watch after consummation of the transaction. Post resolution of watch, upon completion of merger, TCNS will cease to exist. Considering the same, CRISIL Ratings does not anticipate any material downside risk to the ratings.

 

In March 2024, the outlook of TCNS was revised to ‘Stable’ from ‘Positive’ after factoring in the lower-than-expected operating profitability in the third quarter of fiscal 2024, when the company had reported negative EBITDA (earnings before interest, taxes, depreciation, and amortisation) of around 4% (post-Ind AS) against expected profits on account of festive demand. Revenues for the full fiscal year of 2024 declined by around 20% to Rs. 960 crores owing to subdued demand and curtailment of discretionary spending.

 

The company during fiscal 2024 reported post Ind-AS EBITDA (earnings before interest, taxes, depreciation, and amortization) loss of Rs. 185 crores as against a profitability of Rs. 127 crores during the previous fiscal. The operational losses were on account of lower fixed costs absorption due to decline in ‘same store’ sales followed by the alignment of dormancy norms with the parent, ABFRL. Profitability is expected to be under pressure during the first half of fiscal 2025 until the complete re-alignment with the policies of ABFRL, post which margins are expected to improve.

 

Owing to operational losses leading to increased dependance on working capital borrowings, the company’s key debt protection metrics weakened during fiscal 2024 as against fiscal 2023, hence, sustained improvement in margin amid steady operating income would remain monitorable. That said the overall financial risk profile is comfortable on the back of unlevered capital structure followed by liquidity comfort owing to the absence of debt re-payment obligations and moderate utilisation of fund-based bank limits. Furthermore, the operations of TCNS shall continue to benefit from parent support.

  

The ratings reflect the strategic importance of TCNS to ABFRL as product offering gets strengthened with entry into premium ethnic wear; strong operational and management support from the parent; and established market position of TCNS. These strengths are partially offset by working capital-intensive operations and low operating profitability.

Analytical Approach

CRISIL Ratings continues to apply its parent notch-up framework factoring in the strong operational, financial, and managerial support from the parent company ABFRL. This is because TCNS became a subsidiary of ABFRL in September 2023 and shall be merged with it in the near term.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance to ABFRL and strong operational and management support: TCNS became a part of the ABFRL group in September 2023. It is of strategic interest to the parent, given that, with this acquisition, the group would increase presence in the ethnic wear segment and establish credible presence in the premium ethnic womenswear category. Furthermore, TCNS will likely merge with ABFRL in the near term. The synergistic benefits that would accrue to TCNS shall include strengthening of organisational 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 comprehensive management of the business with a focus on quality, distribution and brand building; thereby further strengthening the market position.

 

• Established market position: Business risk profile is supported by the strong brand equity, large retail footprint, and in-house design team of TCNS. Garments are retailed under the W, Aurelia, Elleven and Wishful brands, which cater to different segments through specific pricing strategies. The brand W accounted for more than 50% of the total operating income, followed by Aurelia at 30-40% and Wishful at below 10% over the past four fiscals; since Elleven is the latest brand, sales under it are miniscule. The company has continuously increased its physical presence by opening new stores and widening its market presence to tier 2 and 3 cities. TCNS has over 4,200 points of sales with a strong owned omnichannel network and deep partnerships across all key offline and online retailers.

 

Weaknesses:

• Working capital-intensive operations: Realisations generally take around 60-90 days and inventory is around 130-150 days to meet client requirements. Hence, gross current assets have been around 230-250 days in the past three fiscals through 2023. Working capital requirement is met through bank limit and credit from the suppliers. Efficient management of the working capital cycle amid sustained improvement in operating income would remain monitorable.

 

• Low operating profitability: Post Ind-AS EBITDA margins have been volatile since fiscal 2020 due to pandemic-related disruptions and non-rationalisation of stores to breakeven capacities. The company incurred EBITDA loss of around Rs 185 crore during fiscal 2024 on account of lower fixed costs absorption due to decline in ‘same store’ sales followed by the alignment of dormancy norms with the parent, ABFRL. Consequently, the company’s post Ind-AS EBITDA margins were negative at around 19% for fiscal 2024, and margins are expected to be under pressure during the first half of fiscal 2025 up until the complete re-alignment with the policies of ABFRL, post which margins are expected to improve. After adjusting for lease payments, the company has reported pre Ind-AS EBITDA losses from fiscal 2021 to 2023. Sustained improvement in margin amid steady operating income would remain monitorable.

Liquidity: Strong

TCNS has strong liquidity on the back of parent company ABFRL. Its own liquidity position is average due to constrained cash generation on account of operational losses. That said, liquidity comfort is taken from the absence of long-term debt repayment obligations due to unlevered capital structure and moderate utilisation of fund-based bank limits, which on-average has been utilised to the tune of 67% during the past six months through to June 2024. Working capital requirements and yearly capex of Rs. 40-50 crore is likely to be met through internal cash accruals and appropriate mix of external debt and parent support.

Rating Sensitivity factors

Upward factors:

• Merger of TCNS into ABFRL.
• Sustained improvement in operating income and sustenance of operating margins, in range of 10-12% (Pre IND-AS; after adjusting for lease payments), leading to higher-than-expected cash accruals while maintaining healthy capital structure.

 

Downward factors:

• Sharp deterioration in credit profile of ABFRL.
• Decline in operating income or operating margins remaining below 5% (Pre IND-AS; after adjusting for lease payments) for a prolonged period impacting the financial risk profile of the company.

About the Company

TCNS was set up in December 1997 by Mr. OS Pasricha and Mr. AS Pasricha and is a professionally managed company listed on the Bombay Stock Exchange and the National Stock Exchange. It manufactures, and retails ethnic and fusion womenswear through exclusive stores, multi-brand outlets, and chains such as Lifestyle, Reliance Trends, Pantaloons, and Shoppers Stop. TCNS has 648 exclusive stores in more than 100 cities.

About the Parent

ABFRL is the apparel retail venture of the Aditya Birla group, which merged the Madura division (formerly, a division of Aditya Birla Nuvo Ltd) with the erstwhile PFRL on January 9, 2016, with appointed date of April 1, 2015; PFRL was renamed ABFRL subsequent to the merger. The Madura division holds leading brands while the departmental stores are under Pantaloons. ABFRL acquired Forever 21 in India in 2016 to ramp up its fast fashion segment. As of March 2024, the company operated on a retail area of 11.9 million square feet with 4,247 brand outlets and 417 Pantaloons stores

Key Financial Indicators - CRISIL Ratings adjusted financials

Particulars	Unit	2024*	2023
Revenue	Rs.Crore	960	1,203
Profit After Tax (PAT)	Rs.Crore	-289	-18
PAT Margin	%	-30.1	-1.5
Adjusted debt/adjusted networth	Times	2.01	0.9
Interest coverage	Times	-2.4	2.7

*Fiscal 2024 financial figures and ratios is based on the published abridged audited financial statements.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Levels	Rating Assigned with Outlook
NA	Cash Credit	NA	NA	NA	20	NA	CRISIL AA-/Watch Developing
NA	Cash Credit	NA	NA	NA	30	NA	CRISIL AA-/Watch Developing
NA	Cash Credit	NA	NA	NA	8	NA	CRISIL AA-/Watch Developing
NA	Cash Credit	NA	NA	NA	36	NA	CRISIL AA-/Watch Developing
NA	Cash Credit	NA	NA	NA	42	NA	CRISIL AA-/Watch Developing
NA	Cash credit	NA	NA	NA	30	NA	CRISIL AA-/Watch Developing
NA	Short-term Loan	NA	Repo Rate + spread per annum	NA	50	NA	CRISIL A1+
NA	Working capital demand loan*	NA	NA	NA	50	NA	CRISIL AA-/Watch Developing

*Fully interchangeable with cash credit