Workers sweep cotton into a pile at a ginning mill in Rajkot, Gujarat, India. (Photographer: Dhiraj Singh/Bloomberg)

Brokerages Bearish Even as Welspun India Hits 20% Lower Circuit For 2nd Consecutive Session 

Welspun India Ltd. stock hit the 20 percent lower circuit for the second straight day as the controversy over the quality of cotton used by the company in its sheets threatened more of its business.

Bloomberg News reported that Wal-Mart Stores Inc. is reviewing Welspun India’s certification records. This after Target Corp. terminated its contract with the Indian textile maker, saying the latter supplied cheaper cotton in the name of Egyptian cotton. Welspun India initiated an internal audit process, which is likely to get over in six to eight weeks.

Here’s what brokerages have to say about the impact of the loss of the Target contract on Welspun India.

Edelweiss

  • Maintains ‘buy’ rating
  • Lowers target price to Rs 101 per share from Rs 116.
  • Loss of contract will lead to fall in earnings by 11 percent in financial year 2016-17 and 14 percent in the next financial year.
  • This loss will not impact Welspun India’s core business and key customers due to long-standing relationships and strong execution track record.
  • Enterprise value by EBITDA is maintained at 7 times for financial year 2017-18.

Elara Capital

  • Downgrades to ‘sell’ from ‘buy’, citing lower earnings visibility.
  • Lowers target price to Rs 74 per share from Rs 147.
  • Lowers current year revenue estimate by 2.2 percent and net profit estimate by 11.7 percent.
  • Lowers financial year 2017-18 revenue estimate by 9 percent and profit estimate by 22.3 percent.
  • Enterprise value by EBITDA reduced to 6.5 times from 7 times for current fiscal year.

Centrum Wealth Research said Welspun India’s rating is under review. Earlier they had a ‘buy’ rating with a target price of Rs 130.