Rating Rationale
November 10, 2023 | Mumbai
TCNS Clothing Co. Limited
Rating upgraded to 'CRISIL AA-/Positive'; Removed from 'Watch Positive'
 
Rating Action
Total Bank Loan Facilities RatedRs.170 Crore
Long Term RatingCRISIL AA-/Positive (Upgraded from 'CRISIL A+'; Removed from 'Rating Watch with Positive Implications')
Short Term RatingCRISIL A1+ (Reaffirmed)
Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of TCNS Clothing Co. Limited (TCNS) to ‘CRISIL AA-' from ‘CRISIL A+’. CRISIL Ratings has also removed the rating from ‘Rating Watch with Positive Implications’ and assigned a 'Positive' outlook. The short-term rating has been reaffirmed at ‘CRISIL A1+’

 

The rating was placed on watch, 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 shall be merged with ABFRL. 

 

The Rating Watch has now been resolved as the aforesaid transaction of ABFRL acquiring majority stake in TCNS has been consummated as on September 26, 2023, as per the company announcement. The Positive outlook reflects CRISIL Ratings belief that the credit risk profile of TCNS shall further strengthen over medium term as benefits of merger begin to realise.

 

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

Analytical Approach

CRISIL Ratings has changed its analytical approach and applied its parent notch-up criteria to arrive at the rating of TCNS. This is because the company became a subsidiary of ABFRL in September 2023 and is likely to be merged with it in the current fiscal.

 

CRISIL Ratings had previously taken a standalone approach for TCNS.

Key rating drivers and detailed description

Strengths:

  • Strategic importance to ABFRL as product offering gets strengthened with entry into premium ethnic wear and its strong operational and management support:  TCNS is a part of the ABFRL group. ABFRL acquired TCNS in September 2023. It is of strategic interest to ABFRL, as with this acquisition the ABFRL group would increase presence in ethnic wear portfolio and shall establish the credible presence in the premium ethnic womenwear category. Further, TCNS is likely to be merged with ABFRL in the current fiscal. The  synergies benefit that would accrue to TCNS shall 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 of the entity.

 

  • Estabilished market position: The business risk profile is supported by TCNS’ 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 has 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, which can be seen in consistent improvement in operating income over last 3 years through FY23, with year to date operating income of ~Rs 470 crores till September and festive demand expected to step in H2 of current fiscal gives revenue visibility over medium term and continues to support the estabilished market position of the company.

 

  • Healthy capital structure:  The healthy financial risk profile is marked by healthy capital structure as reflected in gearing of 0.2 times as on September 30, 2023, which demonstrates sufficient headroom to take additional debt for business requirements and management stance on keeping debt levels at its minimum. Going ahead, the same is expected to remain healthy over medium term.

Weaknesses:

  • Working capital-intensive operations: The operations of the company are working capital intensive as realisation from its customers generally takes 60-90 days of time and company keeps inventory of 130-150 days to meet up the requirement of its customers. Resultantly, gross current assets have ranged from 230-250 days during past three fiscals through fiscal 2023; 150-160 days estimated as on Mar 31, 2024. Although the working capital cycle is supported through utilisation on bank lines and credit period offered by suppliers, however with expected increase in scale of operations,  the working capital requirements are also expected to increase. Efficient management of working capital cycle amid sustained improvement in operating income would therefore remain a key monitorable.

 

  • Low operating profitability: The operating margins of the company have been volatile since FY20 majorly on account of COVID related disruptions and non-rationalization of stores to breakeven capacities. The company has also booked an operating loss of ~Rs 137 crores in H1 of FY24 on account of standardization of accounting policy to value inventories and sales return as per ABFRL’s policy. Though most of these losses are notional in nature ensuring no fund outflow, the same has impacted the debt protection medians; operating profitability is estimated at negative 29% during April-Sep in fiscal 2024 (declined from 10.5% during fiscal 2023). Going ahead, with synergy benefits expected to flow in from ABFRL and healthy festive demand in H2 of FY24 expected to step in, operating margins are expected to improve, however, the same shall remain lower than previous fiscal. Sustained improvement in operating margins amid steady operating income would therefore remain a key monitorable.

Liquidity: Strong

TCNS has strong liquidity as there are NIL term debt obligations to repay and the cash and cash equivalents are expected to be in range of Rs 18-20 crores over medium term. TCNS also has access to fund based limits of Rs 167 crores , which have been utilised to ~30% for last 12 months through September 2023 on average basis.  Liquidity profile further remains supportive of strong financial support from parent ABFRL. CRISIL Ratings expects cash & cash equivalents and unutilized bank lines and strong parent support to be sufficient to meet the incremental working capital requirements.

Outlook: Positive

The credit risk profile of TCNS is expected to further strengthen with merger of TCNS with ABFRL.

Rating sensitivity factors

Upward factors:

  • Completion of merger related approvals leading to acquisition of balance stake of TCNS by AFRL.
  • Sustained improvement in operating income and sustenance of operating margins, in range of 10-12%, leading to higher than expected cash accruals while maintaining healthy capital structure.

Downward factors:

  • Deterioration of credit profile of parent.
  • Decline in operating income and operating margins falling below 5-6% having an impact on the capital structure 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 2023, the company operated on a retail area of 10.8 million square feet with 3,546 brand outlets and 431 Pantaloons stores.

Key financial indicators

Particulars

Unit

H1-FY24

2023

2022

Revenue

Rs.Crore

469.7

1202.6

897.5

Profit After Tax (PAT)

Rs.Crore

-173.3

-17.5

-5.7

PAT Margin

%

-36.8

-1.46

-0.64

Adjusted debt/adjusted networth

Times

0.2

0.06

-

Interest coverage

Times

-3.9

2.7

3.2

Any other information: Not Applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings` complexity levels are assigned to various types of financial instruments and are included (where applicable) in the 'Annexure - Details of Instrument' in this Rating Rationale.

CRISIL Ratings will disclose complexity level for all securities - including those that are yet to be placed - based on available information. The complexity level for instruments may be updated, where required, in the rating rationale published subsequent to the issuance of the instrument when details on such features are available.

For more details on the CRISIL Ratings` complexity levels please visit www.crisilratings.com. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instruments

ISIN Name of the instrument Date of
Allotment		 Coupon
Rate (%)		 Maturity
Date		 Issue size
(Rs.Crore)		 Complexity
Level		 Rating assigned
with outlook
NA Cash Credit NA NA NA 20 NA CRISIL AA-/Positive
NA Cash Credit NA NA NA 30 NA CRISIL AA-/Positive
NA Cash Credit NA NA NA 8 NA CRISIL AA-/Positive
NA Cash Credit NA NA NA 36 NA CRISIL AA-/Positive
NA Cash Credit NA NA NA 42 NA CRISIL AA-/Positive
NA Non-Fund Based Limit NA NA NA 15 NA CRISIL A1+
NA Proposed Fund-Based Bank Limits NA NA NA 3 NA CRISIL AA-/Positive
NA Working Capital Facility NA NA NA 16 NA CRISIL AA-/Positive
Annexure - Rating History for last 3 Years
  Current 2023 (History) 2022  2021  2020  Start of 2020
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 155.0 CRISIL AA-/Positive 14-08-23 CRISIL A+/Watch Positive   -- 30-10-21 CRISIL A+/Negative / CRISIL A1+ 17-07-20 CRISIL A+/Negative / CRISIL A1+ CRISIL A1+ / CRISIL A+/Stable
      -- 16-05-23 CRISIL A1+/Watch Positive / CRISIL A+/Watch Positive   --   --   -- CRISIL A1+ / CRISIL A+/Stable
      -- 11-01-23 CRISIL A1+ / CRISIL A+/Stable   --   --   -- --
Non-Fund Based Facilities ST 15.0 CRISIL A1+ 14-08-23 CRISIL A1+   --   --   -- CRISIL A1+
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Name of Lender Rating
Cash Credit 36 HDFC Bank Limited CRISIL AA-/Positive
Cash Credit 8 YES Bank Limited CRISIL AA-/Positive
Cash Credit 20 HDFC Bank Limited CRISIL AA-/Positive
Cash Credit 42 YES Bank Limited CRISIL AA-/Positive
Cash Credit 30 ICICI Bank Limited CRISIL AA-/Positive
Non-Fund Based Limit 15 Citibank N. A. CRISIL A1+
Proposed Fund-Based Bank Limits 3 Not Applicable CRISIL AA-/Positive
Working Capital Facility 16 Citibank N. A. CRISIL AA-/Positive
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating Criteria for Retailing Industry
CRISILs Approach to Recognising Default
CRISILs Criteria for rating short term debt

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