Welspun India’s 30-Year Track Record Undermined by Bed Sheets Controversy
Welspun tanks over 40% in 3 days.
Welspun India Ltd.’s stock price stabilised on Thursday after tanking 42 percent in just three trading sessions after its second biggest customer Target Corp. on August 19 said it has terminated all business ties with the company for passing off cheaper bed sheets as premium Egyptian cotton.
The stock fell 20 percent and remained locked in lower circuit on Monday. On Tuesday, Welspun’s third largest customer Walmart Stores Inc. said it is reviewing the company’s cotton certification records in light of the complaints raised by Target. The stock tumbled another 20 percent on Tuesday and again remained locked in lower circuit.
To make matters worse, J.C. Penney Co., the manufacturer’s fifth biggest customer, said it is reviewing Welspun’s product claims, according to a Bloomberg report. The stock fell another 10 percent on Wednesday, taking the total decline to 42 percent since Friday’s closing.
On Thursday, the stock opened 5 percent lower, but recovered after 1 percent of equity changed hands in a block deal.
About Welspun India
Welspun India is one of the world’s largest manufacturers of home textiles and sells towels, bath robes, bath rugs/mats, area rugs, carpets, bed sheets, utility bedding and fashion bedding. It’s part of the $3 billion Welspun Group headed by Balkrishan Goenka, and has interests in textiles, steel, pipes, energy and infrastructure.
Welspun India derives approximately 45 percent of its sales from key customers such as Bed Bath and Beyond, Target, JC Penney, Walmart, etc. Target was its third biggest customer in terms of revenue contribution in financial year 2015-16, contributing nearly 10 percent of total sales.
Welspun India sells its products in over 50 countries and generates approximately 95 percent of its sales through exports. The company’s manufacturing facilities are located at Anjar and Vapi in Gujarat. Its production capacity for towels, sheets, rugs, and carpets stands at 60,000 tonnes, 7.2 million metres, and 0.8 million square metres, respectively.
Strong Financial Track Record
Welspun’s textile revenues have grown at a compounded average annual growth of 25 percent during FY07-16. Revenue, operating profit, and net profit have grown at a compounded annual growth rate of 18, 38, and 46 percent, respectively, during FY12-16. Its return on equity has also averaged 40 percent during FY12-16.
Free Cash Flows Rise Sharply in FY16
Welspun’s free cash flows have improved by about Rs 1,000 crore over FY14-16 on higher profits, improvement in working capital and calibrated capital expenditure. The company also stepped up dividend payments with rising free cash flows.
Immediately after the Target fiasco, Welspun announced that it will appoint an external auditors, one of the top four firms, to audit its supply systems and processes, in a statement to the Bombay Stock Exchange.
Brokerages Edelweiss and Elara Capital lowered their price targets on the stock and cut earnings estimate for the next financial year. With one customer already out of the bag and others such as Walmart and JC Penny in the process of verifying its product claims, Welspun’s order pipeline may be affected, Sumant Kumar, a research analsyt at Elara Capital told BloombergQuint in a phone interview.
I do not expect Walmart and J.C. Penney to go the Target way and quit the business relationship. But, order inflows are likely to be affected going forward for WelspunSumant Kumar, Research Analyst at Elara Capital
Elara Capital had advised investors to reduce their positions in Welspun, given lower visibility of earnings” in a research note on August 23.