Can Welspun India survive Target supply crisis?

The stock of Welspun India, India’s largest supplier of textiles to retailers abroad, fell by 20 per cent on Tuesday for the second consecutive day following reports that US-based retailer, Target Corporation has terminated its supply contracts after it detected quality irregularities in supplies. In the last two days of trading, the company has lost Rs 3,700-crore of market value after Target made the announcement during the weekend.

Target is Welspun's second-biggest customer after Bed Bath & Beyond Inc. The BK Goenka owned company makes towels, sheets, rugs and carpets for 18 of the top 30 global retailers like Walmart, JC Penney Co and Macy's Inc. It also supplies towels to marquee clients like Manchester United, Wimbledon tennis championships and the Rugby World Cup and ICC cricket tournaments.

As per Target, it found that Egyptian cotton bedsheets and pillow cases supplied by Welspun were phony and were actually made from lower quality cotton. Customers usually pay higher price for Egyptian cotton and hence Target offered to refund its customers on its website. These products were supplied to Target between August 2014 and July 2016 and sold for as much as $75.  Target currently is the second largest client of Welspun with 10 per cent revenue contribution.

The termination of contracts by Target is a big setback to Welspun which touted itself as the biggest supplier to western retailers. Analysts say they are recommending their clients to  reduce their exposure to the company's stock. In a report on Tuesday, Elara Capital said in the near term, investors should reduce their positions, given lower visibility of earnings. “In the medium to long term, we expect earnings to recover as the company focuses on improving its quality control processes and better sourcing of cotton,” it said.  Edelweiss said Welspun will not be impacted much due to the Target cancellation of the deal.

Centrum Capital said until further clarity emerges on the matter, Welspun's stock could see some more pressure. "Till then, we are putting our rating under review. The financial projections worked out post first quarter numbers will have to be changed once there is enough clarity on the impact of this matter," it said.

When contacted, Welspun said it has initiated immediate action to investigate the root cause of the problem. “We are appointing an external auditor (one of the Big Four) to audit our supply systems and processes. This is an issue of highest priority for us and we will take all necessary steps to address it. We have an impeccable record of supplying quality products to our customers globally tor over two decades. We reiterate our commitment to the highest standards of customer service and compliance,” the company said.

On Tuesday morning, Welspun India was trading at its 52-week low of Rs 66 a share with a total market value of Rs 6,616 crore.

Earlier, the company had said it was looking at local markets by aiming 25 per cent share in revenue to come from its domestic home textiles business by 2020 as against the current 5 per cent.