Egyptian Cotton Controversy Rakes Up A Loss For Welspun India
Textile manufacturer Welspun India Ltd. warned of muted revenue growth in financial year 2017-18 after at least three large U.S.-based retailers decided to stop selling its Egyptian cotton products.
While Target Corp in August this year ended all business with Welspun India, alleging in a media statement that the supplier was sending it phony cotton sheets, the world’s largest retailer Wal-Mart Stores Inc. said in September it would stop selling the company’s Egyptian cotton sheets. On Monday, Bed Bath & Beyond became the latest U.S.-based customer to follow suit. JCPenny is still conducting third-party audit of items sourced from the Gujarat-based textiles manufacturer.
“In financial year 2017-18, we will have muted growth. But, definitely we will have some growth compared to last year,” said BK Goenka, chairman of Welspun India.
The company has also cut its EBIDTA margin guidance to 23-24 percent on account of rising cotton prices. In the second quarter, its margins on earnings before interest, tax, depreciation and amortisation stood at 25.5 percent.
In the July-September quarter, the company reported a consolidated net loss of Rs 147.52 crore compared to a net profit of Rs 179.37 crore in the corresponding period last year. Revenue rose 22 percent to Rs 1789.94 crore on a year-on-year basis.
It also made a provision of Rs 500.48 crore to cover costs related to the Egyptian cotton issue, and any costs that may result from U.S. class action lawsuits.
After U.S.-based Target Corp severed all ties with the company, the bed sheet and towel manufacturer appointed consultancy firm EY India as an auditor to examine alleged lapses. Goenka said the fault with its cotton products was due to "a complex supply chain" that Welspun is now working on simplifying by bringing it in-house rather than outsourcing. The company has also voluntarily withdrawn its product from its other existing customers.
It is primarily a traceability issue and we have taken it very seriously. EY has suggested many remedial measures going forward and one of them is on the technological side. We will make all Egyptian cotton products in-house. We are not going to outsource, whether it is from various vendors of grey fabric or in the form of cotton yarn, particularly Egyptian cotton.BK Goenka, Chairman, Welspun India
Sales of Egyptian cotton products, which earlier contributed to 6 percent of total revenue, fell to 3-5 percent in the quarter-ended September, as a result of the quality issue, Goenka added.