The news that Welspun has run into trouble with one of its biggest US-based clients has stressed its suppliers and investors alike
A Surat-based elastic bands supplier to Welspun hasn’t slept well this week. Sipping tea at a stall outside the sprawling 2,500-acre Welspun City at Anjar in southern Kutch, about 40-km from Kandla port, the supplier (who did not wish to be named) said he was reviewing his decision to shift base from Surat to Anjar.
“I have been supplying about 100,000 metre of elastic bands per day to Welspun. The payments have always been on time. The company recently asked me to set up a plant at Anjar to improve the logistics. But given the recent developments, I will discuss the future course of action with the company,” he said.
The news that Welspun has run into trouble with one of its biggest US-based clients has stressed its suppliers and investors alike. In the past four days, the company has lost over Rs 4,800 crore (Rs 48 billion) in market capitalisation on the BSE from Rs 10,335 crore (Rs 103.35 billion) on August 21 to Rs 5,465 crore (Rs 54.65 billion) on August 25.
On Friday, Target Corp, Welspun’s second biggest US-based client, had said it was severing business ties with the Indian company after it was found that some 750,000 sheets and pillowcases labelled as superior quality Egyptian cotton were made with inferior material.
A textile industry veteran and Welspun competitor said once the bedsheets were made, there was no way to detect whether there has been any blending of cotton.
“Egyptian cotton is long staple. It’s the length of the fibre that results in finer, more durable fabric. If one has compromised on quality, the buyer would know when he receives the first consignment, as the length of the fibre won’t be the same.”
Rumours are afloat that some Welspun insider could have informed Target Corp about blending of fibres. Analysts also don’t rule out the possibility. They said the production of Egyptian cotton has gone down, from 1.4 million 480-lb bales a decade ago to 160,000 bales in FY16.
“Egyptian cotton is often blended with US or Australian high-grade cotton,” said an analyst.
More than the erosion in market capitalisation, vendors and suppliers are worried about the impact on the company’s financials. According to analysts, Welspun’s topline is expected to take a hit of 10-22 per cent. Interestingly, Welspun had posted an ebitda margin of 30.5 per cent in the June quarter, the highest in four years.
However, thousands of workers at the plant appeared oblivious to the crisis. They went about their routine, listening to popular Hindi film songs. The daily capacity of Anjar plant, one of Welspun’s biggest, is about 140 tonnes of towels and 300,000 metres of bedsheets.
The company has another textile unit at Vapi where it produces 75 tonnes of towels and up to 500,000 metres or rugs every day. However, the company did not verify the plant’s production capacity.
With its manicured lawns and landscaped gardens, Welspun City at Anjar is like an oasis in the arid region of Kutch. Apart from the textile plant, the Anjar unit houses Welspun’s pipes and plates division.
The company was drawn to Anjar after the Gujarat government had announced tax benefits for investors after the 2001 earthquake. In a town of about 40,000 people, every third person works for Welspun. Interestingly, workers say there is no labour union at the site.
Locals are also a happy lot. From about Rs 2,000-2,500 per acre two decades ago, land prices have shot up to Rs 20-25 lakh per acre. A two bedroom-hall-kitchen apartment in the 10-km radius of Welspun City is being sold for Rs 12-15 lakh, something unimaginable before the Welspun plant came up.
No wonder, some of the local developers are worried about the future of their business.
Much is at stake. US accounts for nearly two-thirds of Welspun’s sales. Even if other buyers remain with the company, they would negotiate hard, severely affecting margins.
While Welspun said the product in question accounted for just about 1 per cent of its overall sales and about 10 per cent of its business with Target Corp, the latter has announced severing of all business ties with the textile major. In FY16, Welspun got business worth $90 million, about 10 per cent of its total business, from Target Corp. In FY16, the company had reported sales of Rs 5,387.66 crore (Rs 53.88 billion).
According to analysts, Target Corp could impose a penalty on Welspun for breach of contract.
“What will be the extent of the penalty is anybody’s guess. Also, other buyers like Walmart, J C Penney & Co and Bed Bath & Beyond have already said they would review the products supplied by Welspun. The overall medium-to-long term impact could be much more,” said a Mumbai-based analyst. Responding to a Business Standard query, a Walmart US spokesperson said, “We are currently reviewing Welspun cotton certification records and plan to have additional conversations with Welspun. If we discover an issue, we will handle it appropriately.”
Welspun is among the few companies that are allowed by Cotton Egypt Association to label its products with the association’s “Gold Seal”. A recent report by Bloomberg pointed out, “Welspun’s most recent earnings report proudly declares an award for responsible sourcing it received from none other than Target.”
Is it about time for Welspun to focus on domestic business to de-risk its business model? Analysts do not agree.
“Exports and domestic business are two very different ball games. Welspun has already burnt its fingers when it dabbled with retail outlets under the Welhome brand. It has the Spaces brand for India. But its exports business had been giving a healthy ebitda, and the company might not want to refocus its energies on the Indian market,” said an analyst. With over 95-97 per cent of its revenues coming from exports, it sure seems an uphill climb from here.
They have started taking steps to bounce back. “This matter is very important for us and we are reviewing all our supply systems and processes. We have already appointed EY to audit and review our systems,” a company spokesperson said.
Analysts said when a company does not wish to confront a buyer, the best way is to appoint a neutral auditor and show the results to the client. “While companies like Trident are likely to benefit in short term, in the long run, Welspun is unlikely to lose its US business where it accounts for one towel in every six that are sold,” said a senior analyst.
Photograph: Pawel Kopczynski/Reuters