Aditya Birla Fashion Retail (ABFRL) has likely paid a high price to acquire women’s premium ethnic wear retailer TCNS Clothing but the management of ABFRL allayed investor concerns saying that the valuations justified the future prospects of the brands being acquired.

Analysts apprehend that ABFRL would have its work cut out to revive growth in TCNS, which has been sluggish over the last 4-5 years.

Late on Friday, ABFRL announced its acquisition of TCNS through a cash and share swap deal for a total estimated value of ₹2,900 crore. According to analysts, the merger ratio – 11 shares of ABFRL for 6 shares of TCNS – values the target company shares at ₹275 apiece, while ABFRL is paying ₹503 per share for acquiring the shares from the promoters and for the open offer.

Kotak Institutional Equities said the price of ₹503 was nine per cent higher than the fair value of TCNS in its estimate.

On the valuation front Ashish Dikshit, MD, ABFRL, said it had been done keeping in mind the value creation that TCNS is expected to bring in the long run. TCNS is expected to deliver double-digit EBITDA margin in the next 2-3 years and then it would be back to pre-Covid levels of high double-digits, he added.

Completing the Portfolio

For ABFRL, the acquisition completes a gap in its portfolio of premium women’s ethnicwear, of which TCNS has some leading brands including W and Aurelia. Both the brands are seen to have the potential to become ₹1500 crore-plus businesses and all the five brands in the company are expected to drive the growth for ABFRL, Dikshit said.

ABFRL has a wide portfolio of apparel brands – partnerships with Tarun Tahiliani, Sabyasachi Mukherjee at the top end, Marigold, Jaypore and Tasva in the premium segment and a whole range in the value segment.

Emkay Global Financial Services said TCNS had unique strengths because most of its brands have strong brand recall among its key customer segments. They are brand leaders in penetration with the added advantage of being profitable.

The Challenges

TCNS has been an underperformer for several years now and ABFRL will have to devote time and resources to turn around the company. Between FY19 and FY23, TCNS’ topline has grown just by 1-2 per cent every year.

Kotak Institutional Equities pointed out that the ABFRL has set itself a “lofty goal of resuscitating a company that is witnessing growth challenges.”

Dikshit explained that TCNS was hit by Covid and was going through a bad patch and it was taking a longer time to recover. He said that the strength of the brands was intact and the brands would be able to command a premium as they had before.

According to Emkay Global, despite its strong brands, TCNS was “undergoing a rough patch now, given its muted topline growth and stretched cost-base effecting a deterioration in profitability.”  The company’s cost-base has expanded due to network expansion and cost inflation leading to its just breaking even in FY23 compared to a profit of ₹190 crore in FY19.

All these are concerns that ABFRL will have to address if it wants to see value proposition from the acquisition going forward.

The management said the acquisition will be financed from the cashflows worth ₹1,430 crore generated by the conversion of warrants issued to Singapore’s GIC and another Rs 700-800 crore of debt.

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