Shares of ethnic wear manufacturer TCNS Clothing crashed 20% on Monday and witnessed its biggest single-day drop since its IPO in 2018. Its share price reached an intraday low of ₹ 416.75 apiece on the Bombay Stock Exchange (BSE), after announcing its merger with Aditya Birla Fashion and Retail Limited (ABFRL).
TCNS Clothing is the owner of leading ethnic brands W, Aurelia, Wishful, Folksong, and Elleven. At 12:04 PM, its shares were locked at ₹ 416.65 apiece, very close to its 52-week low of ₹ 414.90, reached on March 29, 2023.
ABFRL’s shares were trading 3.59% lower at ₹ 206.50 apiece. It owns India’s largest brands like Louis Philippe, Van Heusen, Allen Solly and Peter England. Additionally, the business has long-standing exclusive alliances with companies like Ralph Lauren, Hackett London, Ted Baker, Fred Perry, Forever 21, American Eagle, and Reebok.
The Deal
According to a filing on the BSE, TCNS Clothing has entered into definitive agreements for combining with ABFRL. The deal, if carried out, will be one of the largest deals in the Indian Fashion space.
ABFRL will make a conditional open offer to acquire up to a 29% stake at ₹ 503 per share from public shareholders and acquire the remaining stake from the founder promoters to reach an overall shareholding of 51% in TCNS, for a consideration of ₹ 1,650 crores.
Following the acquisition, TCNS will be amalgamated with ABFRL under the merger scheme. Retail shareholders of TCNS (as of effective date) will receive 11 shares of ABFRL for every 6 shares that they hold in TCNS.
The transaction is subject to regulatory approvals including approvals from the Competition Commission of India (CCI), the Securities and Exchange Board of India (SEBI), the Stock Exchanges, and the National Company Law Tribunal.
What are analysts saying?
ABFRL has forayed into branded ethnic wear business including brands such as Jaypore, Tasva and Marigold Lane. The company also has strategic partnerships with designers ‘Shantanu & Nikhil’, ‘Tarun Tahiliani’, ‘Sabyasachi’ and ‘House of Masaba’. Analysts from brokerage firm Motilal Oswal Financial Services said that most of these acquisitions are loss-making and yet-to-stabilise.
ABFRL, however, said that its ethnic wear portfolio is expected to reach ₹ 5,000 crores in the next three years after the merger with TCNS Clothing.
Motilal Oswal said that while its lifestyle business remains healthy, a sluggish recovery in Pantaloons and incremental investments in new businesses can drag profitability in the near term. However, it expects the acquisition to impact the company’s Earnings per Share (EPS) by 18 percent. It added that TCNS’s earnings revival would be challenging and that building scale internally could have been a good alternative for ABFRL
Financials
With a market capitalization of ₹ 3,215 crores, TCNS Clothing is a small-cap company. It has a negative return on equity of 0.93% and an ideal debt-to-equity ratio of 0.76. Moreover, its shares were trading at a price-to-earnings ratio of 656.08, which is significantly higher than the industry P/E of 21.01 crores, indicating that the stock is overvalued as compared to its peers.
Written by Simran Bafna
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