The Weaver Welspun India

Established in 1985, Welspun India is one of the top three home textile manufacturers globally and the largest home textile company in Asia. It is the second largest Terry Towel producer in the world and exports more than 94 per cent of its towels to more than 34 countries, with US taking the maximum share of more than 68 per cent of its production, followed by 23 per cent share to Europe and the rest among Middle East, Australia, Mauritius.

It has modern manufacturing facilities at Anjar and Vapi in Gujarat where it produces an entire range of home textiles for bed and bath category. The company has state-of-the-art, completely vertically integrated plants, right from spinning to confectioning.

In relation to setting up manufacturing in other countries, the company has mentioned it doesn’t make sense to shift manufacturing to other duty-free export zones as India still remains the best manufacturing location for Welspun. Although, the duty differential is not high for the company, however it is enough to warrant the shift of manufacturing.

In addition to manufacturing facilities, which predominantly supply to private labels, the company also maintains its own brands – Christy, Hygrocotton, Welhome and Spaces - Home and Beyond; it also has a tie up with Nautica for North American markets. The company has a distribution network in over 32 countries including US, UK, Europe, Canada and Australia.

Welspun has been ranked No.1 among home textile suppliers in the US (Source: Home Textile Today). The textile manufacturer has received the global license for 2018 FIFA World Cup to be held in Russia. It is gaining critical mass in sports vertical. The company will soon begin discussion with UK for Free Trade Agreement (FTA).

Innovation, diversified client and product base cement dominance grants Welspun to enjoy long standing relationships with top retailers in the US and Europe and supplies to 14 of the top 30 global retailers. It commands a lion’s share of home textiles exported out of India. Increasing geographical and client diversification is improving the company’s risk metrics. It has seven trademarks and has applied for six patents till date and has filed around 27 patents of which 12 have been approved.  Welspun derives 30 per cent of sales from innovative products.

Revenue growth muted on currency and target impact

During the April-June’17 quarter, Welspun India’s top-line stood at Rs 1,540 crore declining three per cent year on year. It was impacted by the fall in currency and loss of orders from Target Corp, US retailer. On like-to-like basis, excluding Target, the growth for the company was stable.

However, growth in brand business remained strong with Spacesrange jumping 43 per cent year on year (YoY) and Christy growing 24 per cent YoY. The hospitality segment also continued to gain traction with addition of a major client. The company has also added a major client in the hospitality segment.

Though still nascent, Welspun is looking at enhancing focus on domestic segment and expects GST to lend fillip to sector. However, considering that company will still have to pay GST on its inputs, it is expected to have a negative one per cent impact on the margins in the second quarter of 2018.

In the US market, the pressure on the retail industry is felt. Although, price cut requests are not coming, however frequent promotion requests are continuing. In case of duty drawback and other export benefits, existing benefits will continue till September.

Margin sustainability

The Mumbai-based textile manufacturer has consistently improved its margin. While the rise is partially attributed to currency, it has been primarily driven by increase in share of innovative products. The higher raw material costs continued to mar margins, however the intensity was tapering.

Gross margin corrected by 2.84 per cent YoY to 51.7 per cent, impacted by higher cotton costs and fall in realisations due to currency appreciation. On quarter to quarter basis, gross margin improved by 1.10 per cent, similar to the trend seen in other textile companies and pointing at moderating impact of cotton.  Nonetheless, pressure on margins persisted; the QoQ improvement in margins indicates moderating intensity led by fall in cotton prices.

Stance: Margin guidance maintained

Despite headwinds of higher cotton costs (raw material) and currency, Welspun has maintained its margin guidance of 21 to 22 per cent. The EBITDA margin plunged by 550 basis points to 21.1 per cent, impacted by the spurt in power costs. However, the company mentioned about postponing its Vision 2020target, which is the expectation of revenue of USD two billion by fiscal 2020, by a year or two. Driven by the company’s confidence in sustaining these margins, it has upgraded its margin guidance to 23 to 24 per cent.

The stock is at the current market price of Rs 101. The earnings per share estimates for 2018 and 2019 year are increased by 3 per cent and 4 per cent respectively on account of lower interest cost expectations. Any modifications in export benefits post GST remains a key monitorable in ensuing months.

Robust free cash flow and consistently lowering leverage; Capex

Welspun is at the end of its massive Rs 2500 crore Capex program it had undertaken in 2014, with only Rs 800 crore to be spent in 2017. The company is confident in generating free cash which is evident from its recently announced dividend policy of 25 per cent payout ratio.

Going ahead, it is expected to generate strong free cash flows and lower its leverage further. Gross debt to equity ratio fell from 2.1 times in 2015 end to 1.3 times as of fiscal 2016.  It is estimated that this ratio will fall below 1.0 by the end of current fiscal year, 2018.  The debt is expected to increase, driven by Rs 600 crore capital expenditure in flooring.

For textile, the capital investments required will be Rs 200 to Rs 250 crore and rest of the investment will be for carpet. In the next few months, towel capacity will be ramped up to 80,000 tonnes.

Major risks

The major risks faced by the textile weaver are:

Raw material risk: Raw material costs, primarily cotton yarn, account for 50 per cent of the overall expenses and are a prime driver of profitability. Volatility in cotton prices can impact the profitability adversely.

Currency fluctuations: Welspun exports more than 90 per cent of its production. With a network spanning 50 countries, the company is exposed to currency fluctuations which can significantly impact profitability.

Egyptian cotton issue: The Egyptian cotton products manufactured by the company came under the scanner when Target Corp, an US retailer, cut down alliance with Welspun for mislabeling its bed sheets and pillow cases as Egyptian cotton.

However, post the event, other major customers have continued their regular sourcing of other products from Welspun. However, any further consumers issues will be a negative for the company.

neha.seth@outlookindia.com