Welspun is on a high growth path

SMART TALK/ B K Goenka, vice-chairman & MD, Welspun group

Welspun Group comprising Welspun India and Welspun Gujarat Stahl Rohren is likely to remain on a higher growth trajectory in the coming years. The companies are investing and expanding to tap the growing industry opportunities and further strengthen their presence. The group plans to focus on both its businesses despite challenges like a rising rupee in its textile business.

B K Goenka, shares the group companies' future growth plans and prospects, competitive position in the industry and impact of rising rupee with Priya Kansara.
Excerpts

Welspun India is among the top four global terry towel producer and exporter with one of the top retailers of the world like Wal-Mart, Kmart, Sears and Target as its customers. Over the years, the company has added new products and markets, partly due to the acquisition of UK's largest terry towel brand Christy and Portugal-based Sorema. In order to de-risk its business model and cash in on the growing retail opportunities in India, the company is now expanding its retail operations under the two formats--Spaces and Welhome.

Where is the rupee vs dollar headed ?

Our expectation is that the rupee is only going to appreciate in the long term due to one of the strongest economic growth of India. However, we are in negotiations with our key customers (which have been there with us for over five years) for the price increases on our high-end products.

What will be the impact on margins?

Our operating margins have come down by 250 basis points y-o-y to 15 per cent in 9MFY08 due to rising rupee and higher oil prices (leading to higher power costs). Margin pressure will continue for one to two more quarters and profitability in FY08 will be subdued.

However, our profitability will improve from FY09 onwards, as we are adding new products, changing the product mix, increasing efficiency and focusing on branded retailing. Also, our capacity expansion and acquisitions (Christy in 2006 and Sorema recently) will also help to boost the turnover, which we expect to increase by 30-40 per cent in the next three years.

Will there be a change the revenue mix?

The contribution of terry towels (55 per cent) and bed linen (40 per cent) in our total revenues is expected to remain more or less the same with increasing contribution from the decorative beddings and bath rugs. We intend to decrease the share of US in our revenues from 60 per cent to 50 per cent and increase the share of Europe from 30 to 40 per cent.

What benefits will Sorema bring?

Sorema is a leading player in bath rugs and has more than three decades of experience. With this acquisition, we will have bath rugs in our portfolio, more branded business and enhanced presence in the European market due to Sorema's network across 44 countries including USA, England, Spain and Germany. We want to expand the bath rugs business and plan to invest Rs 50 crore in Vapi to achieve a turnover of Rs 300-400 crore in next 2-3 years.

What are the company's expansion plans?

We are increasing our terry towel capacity from 36,000 tonnes to 41,000 tonnes and bed linen capacity from 35 to 45 million meters. Further, we are increasing our spindleage from 75,000 to 1,06,000.These capacities will be fully operational by first two quarters of FY09 respectively. We have spent Rs 200 crore on the project.

What are your retail plans?

We plan to take our current 207 stores to about 300 by the middle of this year and to 600 by the end of 2009. Thus, we will have presence in over 250 cities with an area of over half a million square feet. We plan to bring the contribution of retail to total revenues from the current 10 per cent to 20-25 per cent in next three years. Most of retail expansion will be for Welhome, which offers value-for-money products and contributes 90 per cent of the total retail sales. Spaces catering to the higher end of the market contribute the rest.

Welspun Gujarat Stahl Rohren is one the top three pipe companies in India manufacturing pipes like longitudinal submerged arc welded pipes (LSAW) and Helical Submerged Arc Welded (HSAW) used in oil, gas and water transportation. TransCanada, Kinder Morgan, Saudi Aramco, Exxon Mobil, Chevron and Reliance Industries are one some of its key customers. The company is a key beneficiary of the robust industry outlook led by high oil prices and substantial investment in exploration and production (E&P) activities.

What is the macro scenario?

There is a robust investment plan for pipelines globally and strong replacement demand in the US, Canada and Europe. Approximately $88 billion investment in the pipeline infrastructure is planned for the next five to seven years. Also, about one million miles of pipelines are due for replacement alone over the next two to three decades, which translates into an opportunity of $ 400 billion.

Further, there is going to be strong demand for pipes in India given the plans of Reliance, GAIL and Gujarat State Petroleum Corporation.

Are you geared to meet this demand?

By March 2009, we would have increased the capacities of LSAW from 3.5 lakh tonnes to 6.5 lakh tonnes and HSAW from 4 lakh tonnes to 8.5 lakh with an investment of $200 million. Our plate cum coil mill plant of 1.5 million capacity, one of the largest in the world, will be fully commissioned by March 2008.

It will not just financially, but also, operationally make us strong and among the top three pipe companies in the world. Thus, not only volumes will be robust, but margins will also improve. However, this will happen only in FY10, which is the first full year of operations.

What will be the share of exports?

Exports contribute about 90 per cent of our current order book of Rs 4,500 crore while the rest by the domestic market. US and Canada has a major share of 50 per cent and 30 per cent respectively in our exports, with the rest contributed by Latin America, Middle East and other regions. Contribution of exports is likely to decline to 80 per cent.

Is the company's high growth sustainable?

Our net sales have grown at a CAGR of 60.85 per cent between FY03-07 while our net profit has grown manifold from around Rs 2 crore to Rs 143 crore in the same period. We achieved the highest ever realisation of $ 1600 in the December 2007 quarter.

Thus, going ahead, we expect to maintain the current pace of growth in sales and profitability. We expect realisation to be maintained followed by a robust volume growth of 30-40 per cent. More importantly we should see a larger bottom line growth on account of plate mill expansion.

How has the company coped with the rising rupee?

We have a natural hedge against rising rupee as imports of raw material form about 70 per cent of total raw material costs. Also, most of contracts have a back-to-back arrangement for foreign exchange-just like we have for raw material. Moreover, our Japanese and European competitors have also faced the similar situation of appreciating currency. Finally, our customers are not price sensitive as they are more focussed on quality.

What will be the impact of slowing US economy and softening of oil prices?

There is a strong replacement demand and the company's oil producing customers are cash rich (with positive large cash flows due to a high oil price for so long) to spend on the pipeline infrastructure. Softening of oil prices does not affect the company immediately, as there is a time lag of about three years in slowing down of exploration activities and investment in pipeline infrastructure.