(Bloomberg) -- Wal-Mart Stores Inc. is reviewing Welspun India Ltd.’s cotton certification records after Target Corp. raised concerns that the supplier is passing off cheaper bed sheets as premium Egyptian cotton.
Wal-Mart, the world’s largest retailer, plans to hold further discussions with Welspun and “handle it appropriately” if any issues are discovered, according to spokeswoman Marilee McInnis. The chain is also reviewing its other suppliers of Egyptian cotton products out of an abundance of caution, McInnis said. The announcement sent Welspun’s shares down by daily limits for a second straight session.
Wal-Mart is Welspun’s third-largest customer, behind Target, which said late last week it had pulled sheets and pillowcases off its shelves after discovering they were mislabeled as Egyptian cotton. It also terminated all businesses with the supplier. A Welspun representative didn’t immediately have a comment when reached by Bloomberg News. Part of a roughly $3 billion conglomerate headed by Balkrishan Goenka -- with interests spanning textiles, steel, pipes, energy and infrastructure -- Welspun said it manufactures every fifth towel sold in the U.S. and counts J.C. Penney Co. and Macy’s Inc among its customers.
“This is a serious issue,” said S.P. Tulsian, who runs investment advisory firm SPTulsian.com. “On one hand the company has been talking of $2 billion top line by 2020 and on the other hand the U.S. is a very big market for them. Now that goal of $2 billion revenue will be difficult to meet.”
Welspun fell another 20 percent to 65.85 rupees on the Mumbai exchange Tuesday. The 36 percent two-day slide -- the steepest since 1999 -- cut the company’s market value to 66.2 billion rupees ($990 million). Welspun Group said it wants to become one of India’s top 50 groups by market value by 2020, according to its website.
Sumant Kumar, an analyst at Elara Securities India Pvt., cut his rating on the stock to sell from buy. Goenka’s family and group companies hold about 74 percent in the home-textiles supplier, with his wife Dipali Goenka acting as CEO and joint managing director. On Monday, a company connected to founder Goenka bought 500,000 Welspun shares in the open market, according to an exchange filing.
Welspun said it’s reviewing its supply chain and would hire a “Big Four” accounting firm to examine its processes. The company is engaging with key customers, managing director Rajesh Mandawewala said during a conference call Monday.
“It is likely that other customers too will start raising questions over Welspun’s supplies,” said Arun Kejriwal, a director at Kejriwal Research & Investment Pvt. in Mumbai.
Welspun makes towels, sheets, rugs and carpets for 18 of the top 30 global retailers. Sales to Target amounted to $90 million in the fiscal year that ended in March, or about 10 percent of the company’s revenue.
Egyptian cotton, which has a longer fiber that creates a softer thread than other cotton, often carries a higher price because shoppers consider it to be of higher quality.
J.C. Penney is reviewing its Welspun products to verify product claims, spokeswoman Daphne Avila said in an e-mail. It’s too early to determine what actions the retailer might take, she wrote. The company requires suppliers to certify the quality compliance of raw materials, and for Egyptian cotton, that includes a certificate issued by the Cotton Egypt Association, Avila said.
Macy’s said it sells Welspun sheets under private brands, but not ones that are marketed as Egyptian cotton. It doesn’t plan to make any changes, spokesman Jim Sluzewski said in an e-mail.
“Of course, we continue to monitor the situation,” he said.