Welspun India's stock and reputation will need more time to recover

The termination of its contract with US retailer Target Corp has dented its reputation, along with its stock price

By Samar Srivastava Forbes India Staff
Published: Sep 16, 2016

After studying law I vectored towards journalism by accident and it's the only job I've done since. It's a job that has taken me on a private jet to Jaisalmer - where I wrote India's first feature on fractional ownership of business jets - to the badlands of west UP where India's sugar economy is inextricably now tied to politics. I'm a big fan of new business models and crafty entrepreneurs. Fortunately for me, there are plenty of those in Asia at the moment.

Welspun’s declared aim of becoming a zero-debt-$2 billion company by 2020 is likely to be delayed owing to the recent setback
Welspun’s declared aim of becoming a zero-debt-$2 billion company by 2020 is likely to be delayed owing to the recent setback

Shareholders at Welspun India were in for a shock on Monday, August 22: Within minutes of the market opening, the company’s stock fell 20 percent on news that US-based retailer Target Corp had terminated its business with the company. The story was repeated over the next two days, with the stock declining a further 20 percent each day.

Target had, on August 19, issued a statement informing buyers of a full refund on its Fieldcrest label of Egyptian cotton 500-thread count sheets.  After an extensive investigation, the company had discovered that Welspun Global Brands had substituted Egyptian cotton with the non-Egyptian variety. The sheets in question were manufactured between August 2014 and July 2016.

In a conference call with investors, Welspun unequivocally took the blame. “So there has been, let’s say, a failure on our part, so without any ambiguity the fault is on our side,” said Rajesh Mandawewala, managing director, Welspun India. Although he did not explicitly say so, he suggested that the problem was due to inadequate systems and processes. Within days, EY was appointed to review Welspun’s processes.

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Indian textile companies—such as Welspun, Indo Count, Trident, Himatsingka Seide, and Alok Industries—have carved out a 47 percent market share in the bed linen segment in the US market, following the abolition of international textile quotas in 2005. Since the crisis, the only statement Welspun has made is to say that it intends to continue serving Target (which accounted for about 10 percent of its business), even as Target looks for alternate suppliers.
 
While it is too early to gauge the final impact of this setback, market watchers expect the company to come out of this with most of its business intact. Edelweiss retained its ‘buy’ rating on the stock and said it does not expect the current imbroglio to impact Welspun’s other key customers. Edelweiss did, however, scale down the company’s profit growth by 11 percent. Welspun’s declared aim of becoming a zero-debt-$2 billion company by 2020 is also likely to get delayed.

Although Welspun hasn’t lost any more clients, the damage to its reputation and stock price will take much longer to recover from.

In the fortnight since the news broke, Welspun’s stock price has recovered from the low of Rs 46.75 (on August 30) to Rs 58.90 (as on September 7) on the BSE. However, it is still 40 percent below what it traded at before Target’s announcement.

The news also comes at an inopportune time for the home textile business in India, where rising cotton prices have resulted in lower margins.

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(This article is excerpted from the Forbes India 30 September, 2016 issue. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)

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  • Nimalan

    If India wants to become a sizeable player in manufacturing, it needs to sharpen its quality assurance and it needs to be more proactive in moving away from family managed business. Clearly at Welspun India, there was a lack of accountability. An auditor probe is not required to let you know the obvious, that someone in the manufacturing management arm was taking their responsibilities too lightly and not ensuring due care and diligence. The board's inability in sacking top management (partly due to the management owning shares in the company or holding company), leaves much to be desired.

    on Sep 30, 2016
  • Gravity Fashion

    This was about stock market sufferings! What impact will it have on online e-commerce stores? Will people trust Indian textile products? India has been one of the biggest textile resource since ages. This case really made me worry.

    on Sep 23, 2016
  • Bhimesh

    The subject stock is likely to gain once the problem gets resolved. It is a matter of concern for the shareholders once the price got reduced at about 40%. It becomes very necessary and it shall be treated as buying opportunity.

    on Sep 17, 2016
  • Gordhan Gelot

    When Egyptian cotton represents just 1.5 per cent of world production, USA retailers must know this and therefore must accept cotton of equivalent quality & so why they should go after the name? Quality is important and not the name.

    on Sep 16, 2016
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