Today I will be sharing my analysis on ‘Welspun India Ltd’. The company is a home textile manufacturer and exporter catering mainly to the US markets. I have covered one more company in the same space called ‘Himatsingka Seide Ltd‘. In the current blog ‘ Welspun India Ltd- Analysis ‘, I will be talking about the industry, the company background, existing products & new product launches, Egyptian cotton fiasco & the financial analysis.
Welspun India exports home textile products to US & Europe but the growth there now have started to slow down. To continue the growth trajectory, the company has invested close to ₹900cr in one of a kind innovative flooring solution. I will be talking more about that later in the blog.
Industry: Export oriented Home textile companies
Coming to the sector, textiles can be either made by polyester(obtained from crude oil) or through cotton. As of today the market is dominated by polyester (65% share) because of the low cost and ease of manufacturing. Synthetic fabric making is quite straightforward with not much differentiation, hence have lower margins. Whereas its counterpart Cotton fabric has much better margins.
US is the largest consumer of cotton based home textiles in the world & India is the largest exporter of home textile products to US with a market share of 50% in Bed Linen followed by China at 19% and India as 39% market share in Towel followed by China at 24% as of 2019. (Source: 2019-20 annual report Welspun India Ltd).
Global Home textile industry is at $52bn in FY20, of which India’s share stands at 15%.
Indian cotton home textile manufacturers get orders from US based big box retailers such as Wal-Mart, Macy’s, Target etc. The contract with the US retailers is decided on a pre-determined rates.The home textile exporters do not have much capacity to pass on a sudden increase in costs. Only if there is some sustained increase in raw material or too much of continued forex fluctuations, they can try to renegotiate the prices.
The products get manufactured mostly in India for distribution by US based retailers. In general Indian companies cater to mid to high-end segment of the US home textile market.
Since almost all of the company’s revenue comes from exports, they need to do currency hedging. Any adverse movement may cause forex loss.
Cotton Home textiles are consumed equally in Europe and US i.e. market size is similar in both Europe and US. But because of the import duty imposed by European Union on India to the tune of 9-10% render the Indian products noncompetitive to the imports from Pakistan, Bangladesh & Turkey which enjoys 0% import duty due to the free trade agreement with these countries. Also, US is a homogeneous market compared to a fragmented markets in Europe.
There are 3 types of cotton produced:
1. Upland Cotton- 90% market share
2. Egyptian cotton
3. Pima Cotton
The consumer of developed countries prefer longer cotton fiber such as Egyptian & Pima cotton because of which they are luxuriously soft and immensely strong. Also, they prefer fabric with higher thread count.Thread count is basically the number of threads in one inch of fabric. Higher the thread count, the finer is the fabric.
India has the benefit of being the world’s largest producer of cotton and also being a net exporter of cotton. Since a large percentage of cotton home textile products are exported, rupee depreciation is beneficial for these companies and so does for the cotton growers/traders. With rupee depreciation the cost of domestically sourced cotton also increases in line with the price fetched in the export market.
Textile industry in general is one of the largest employer that is visible from the fact that Welspun India has about 22,000 employees while in other industry of a business of similar size, the number of employees would be hardly 5000. Also, the industry is highly capital intensive which can be seen from the low Net Sales to Fixed Asset ratio.
You can read more about the polyester yarn manufacturing in the blog: Filatex India Analysis
Welspun India Ltd- Analysis
The company was setup in 1985 and got the current name of Welspun India Limited(WIL) in 1995.
Welspun is largely a export-oriented company generating 95% of revenue from overseas. The company derives about 67-68% revenue from the US, 18% from Europe, 10% from Rest of the world and about 5% from India.
Since, Indian companies has already captured a large market share in the home textile space in the US, the further growth is likely be slow and limited. European market can offer an opportunity only if the import duty is withdrawn. Still, the company is able to generate 18% revenue from Europe which is quite commendable(most likely from the brand Christy’s). In 2006, the Welspun India acquired UK’s largest terry towel brand ‘Christy’s’ for 15 Mn pound. Christy’s product are high thread count product and considered in its premium offering.
While supplying to big box retailers is the core operation from where the company derives the maximum revenue, but this is more of a steady state business now. It used to be high growth in the past.
To continue the growth momentum, the company is trying out several new initiatives such as technical textiles, healthcare products and biggest among them is the flooring solution. And the focus going forward will be the domestic market in the B2C space. The company undertook a massive project investing ₹880 cr at Hyderabad in Telangana towards flooring solution. Going forward, the total investment will increase to ₹1100 cr as per management estimates.
The co. roped in Amitabh Bachchan as the brand ambassador in FY20 for their ‘Welspun’ brand for both towels and flooring solution mainly to increase awareness of their brand in the domestic market(their current key focus market). In the value home textile segment, the brand promoted will be “Welspun” whereas in the premium segment it will be “Spaces”, flooring will be sold in the brand name “Welspun flooring”.
Talking about the toughest period faced by the company was in Aug 2016 when the company was accused by its second largest client at that time, US based ‘Target Corporation” of exporting them cheaper, non Egyptian cotton in the name of Egyptian cotton. I will talk about this in detail later in the blog. It took more than 3 years for the company to settle the issue.
The home textile products sold in the US market can be broadly into 3 price points: Good-better-best. Welspun caters to higher end of good and better price point segments where the volume is higher.
The company has been trying to grow their retail or B2C business vertical mostly domestic which in FY20 stood at just ₹250cr which is still just 3.7% of total sales. Branded sales include Welspun & Spaces in India, Christy’s in US, and other license brand portfolio.
One of the largest cost for the company is raw material(cotton) cost which is totally driven by demand-supply equation. If the raw material cost increases the margins for the company decreases.
Clients: WalMart, Bed Bath & Beyond, Costco, Macy’s, Carrefour, IKEA
License Brands: Royal Ascot, Manchester City, F C Barcelona, Disney, Staywell, Martha Stewart.
Companies own brand: Welspun, Christy’s, Spaces, Tilt
Ingredient brand: Hygrocotton( It is an ingredient brand where the fabric is made via a patented fabric manufacturing process ). Product using hygrocotton is expensive than other products.
The company was founded by the current Chairman Mr B K Goenka and his cousin Rajesh R. Mandawewala, the current M.D. in the year in the year 1985.
Promoters hold 68.89% shares of the company. They increased the shareholding from 68.48% to 68.89% during Q4FY20 and none of the shares are pledged.
The current M.D. Rajesh R. Mandawewala and the Jt M.D. & CEO ‘Dipali Goenka’ withdraws a salary of just ₹3.22 cr each. This is quite conservative given the size of company(almost a $1bn).
The company is promoter driven. The best thing I liked about the management is that they are very proactive in trying various new initiatives much ahead of time & always try to remain ahead with respect to competition.
Welspun India Ltd- Analysis
1. Bed & Bath
The company is the largest Bed & Bath linen exporter from India to US. Bath products include towels, bath robes & bath rugs whereas in Beddings, they have bed sheet, top of bed, basic and fashion bedding. Every 5th towel and every 9th bed sheet sold in the US is made by Welspun, the company has increased its market share in the US towels market from 15% in CY13 to 19% in CY19 and in US sheets market from 7% in CY13 to 11% in CY19.
In terms of category, this is the largest with over 90% of sales coming from bed & bath textile. But now the growth has slowed down compared to earlier levels.
2. Advanced Textiles
The company ventured into technical or advanced textiles in the year FY17.
Advanced Textiles is used into making of disposable towels and wet wipes.
In recent months the company forayed into manufacturing of disinfectant wipes and surgical masks. The other applications of non-woven textiles that the company addresses is in automobiles and aviation industry. They primarily supply several application filters in the automobile industry. The business achieved annual revenues of ₹250 crores in FY20. Other products include features such as fire retardants, stain resistants, anti-bacterials, and soil resistants.
With the plant catering to advanced textile reaching full capacity, the company has announced an investment of ₹495 cr spread over 2 years. This will be at their Hyderabad facility and will cater to health & hygiene segment.
Welspun India introduced its flooring solution in FY19 through its subsidiary Welspun Flooring Ltd. This is something unique to Indian market. The plant was commissioned in September 2019 with an investment of ₹880 cr in Hyderabad, Telangana. The plant has a capacity of 27 million square metres per annum. Flooring will be altogether different venture than the home textile one and the company has been creating the supply chain for distributing its product in India. As of Q1FY21 the company had a presence in 475 outlets including 100 plazas. At full capacity, the plant will have sales with asset turnover of 1.5x.
The product in this category include Luxury vinyl tiles(LVT)(hard flooring) as well as soft flooring(Carpet Tile flooring , Wall to wall carpets, Artificial Grass).
Let me give you a brief about these products.
LVT & Carpet flooring is quite popular in the US. Vinyl flooring itself is about $20bn market in the US and soft/carpet flooring is much larger at about $50bn. Vinyl flooring market is growing at about 10% compared to 5% of that of soft flooring solution. Among vinyl flooring types, LVT or hard tiles are the fastest growing category even in the US. This is the product where Welspun Flooring has set its eye on. All major US flooring companies Shaw Industries, Mohawak Industries have been rapidly expanding their manufacturing capacity of Luxury Vinyl Tiles. Over the years, China has become the largest market for these products both in terms of production & consumption. If it is happening globally, it will definitely come to India. Hard flooring find application in residential houses whereas soft carpet tiles are used in commercial spaces.
This kind of flooring solution is at a very nascent stage in India and most or entirety of the products available in the domestic market is imported from China. Welspun’s plant will be the first of its kind in India with the only manufacturer of all these products. The company has priced its product at par with imports at around ₹175-200 per sq/feet.
Benefits of these alternate form of flooring:
1. Can be done in a few hours compared to weeks or months for traditional flooring
2. Lot of variety & design
3. Easily replaceable, even a single piece
4. Done over the existing surface
5. No need of glue/adhesives
Vinyl & Carpet tile flooring solution is targeted at the replacement market. Renovation and floor replacement activities in a residential and commercial application will be a growth driver.
The market is still very small in India & highly fragmented with a very small market size. Most likely it will be around 2000-3000 cr. The management of Welspun India expects it to grow very fast.
I PERSONALLY FEEL THE BIGGEST CHALLENGE FACED BY THESE SEGMENT(IN PARTICULAR LVT) IS OF AWARENESS THAT SUCH PRODUCTS EVEN EXIST IN THE MARKET followed by the spending capability of residential houses for these products. I guess with time, the cost will come down.
In terms of Commercial space such as offices, retail spaces, hospitals, warehouses, industrial flooring, schools, sports offer greater opportunity.
NOW IN ORDER TO CREATE THE SEGMENT OR BRING AWARENESS, requires a lot of marketing and advertisement. Given the size of Welspun India, I am pretty sure they will start doing the advertisement aggressively (Guess roping in Mr. Amitabh Bachchan is a part of the process).
Also, to win over the customer, they are providing product warranty upto 5 years. Given the reputation of the company, it gives assurance of quality to compete with imports and unorganized sector.
I am assuming that the company is trying to gauge the market before launching the advertisement campaign.
The plant is ready and they have large unused capacity. So, they are using them for exports and the management expects 50% of flooring revenue to come from exports for the year FY21. China+ strategy for importers from developed countries will help the company. Icing to the cake: US reimposed a tariff of 25% on China-made LVT products on August 7th, 2020. This would be a big positive for Welspun’s hard flooring manufacturing solution. Already, the company has entered into long term arrangement with a US based large distributor for its 50% of hard flooring capacity.
Welspun Flooring Ltd had a revenue of ₹13 cr and EBITDA loss of 27.5 cr in FY19 and Revenue of 87.2cr and EBITDA loss of ₹142.3cr in FY20.
In the listed space, Responsive Industry is another company who is trying to gain advantage of being an early mover in vinyl tiles space.
In order to understand how vinyl carpet & carpet tiles work, I came across a few videos on Youtube.
Welspun India Ltd- Analysis
Egyptian cotton issue of 2016
Please read the last section of the blog regarding my updates on the group’s corporate governance track record.
Welspun India saw its darkest period when the Egyptian cotton scandal hit the company in August 19th, 2016. One of its largest clients, Target Corporation(10% of total revenue) severed all its ties accusing Welspun of substituting cheaper, non-Egyptian cotton into sheets and pillowcases for a period of 2 years. The company lost 42% of its market capitalization in a matter of just 3 days post the accusation. More importantly, the incident put a big dent on the credibility of the products of the company. Welspun is a export oriented company catering to the developed market where quality is of prime importance as the customers pay much higher compared to developing world.
The prime point of contention during this episode was that Welspun India was not able to prove the traceability of Egyptian Cotton.
While Target severed its ties to Welspun in August 2016 completely. Other big-box retailers such as Walmart and Bed Bath & Beyond stopped selling Welspun’s Egyptian cotton products.
To take care of the several lawsuits filed against the company in US, the company created a provision of ₹501 cr. The company strengthen its procurement processes. Earlier they were procuring cotton, yarn and fabric from different suppliers but post the incident, the company now procures cotton from reputed sources and manufacturers yarn and fabric in house. Also, they have setup patented Wel-Trak system to trace the product backward on each step of development.
Whether it was intentional on the company’s part or there were some missing quality checks on the procurement process which was taken advantage by the suppliers, I do not know. Personally, I would think that company of such scale will not take chances with these stuff knowing the importance & seriousness about quality standards in the US for just 6% of its sales (Egyptian cotton product share of total sales).
Why it has not happened with other Indian textile importers? A couple of company that I have seen do not sell Egyptian cotton products. I would doubt other Indian companies were selling Egyptian cotton at that point of time.
While clarifying the management mentioned the complexity associated with with supply chain, they hired to E&Y to check and suggest recommendation to strengthen the processes. It took almost 3 years for the company to settle the entire issue.
Welspun India Ltd- Analysis
For home textile products, Welspun India has 2 plants in Gujarat at Vapi & Anjar. Since, the products are meant for exports the proximity of ports really help (Showed during the lockdown period)
For the flooring solution, the company has set up its plant at Hyderabad, Telangana. Even the investment towards health & hygiene in terms of advanced textile product will be coming up at Hyderabad, Telangana.
Welspun India Ltd- Analysis
Indo Count, Himatsingka Seide & Trident are the most similar companies to that of Welspun India. But in terms of scale, Welspun is much larger than any of its competitor with its size exceeding atleast 2.5X of in size of its nearest domestic competitor.
Welspun India Ltd- Analysis
1. New channels: They are trying to grow via increasing distribution in new channels such as Hospitality & E-commerce. E-commerce as well as their own brands such as Welspun, Spaces are growing very rapidly but on a very small base to make any significant contribution to the top line.
2. New markets: Focus will be Indian market.
3. New products: They already have setup the flooring capacity now, first of its kind in India. Once the product awareness grows in India, it is likely to grow the company’s size.
Welspun India Ltd- Financial Analysis
- Between 2013-16 the company had taken a major backward integration project investing $380mn similar to what Himatsingka has completed last year. Before 2014, power cost used to be 7-9% of sales for Welspun, but post the commissioning of 80 MW captive power plant at Anjar in 2014, the power cost now just stands between 2-3% thus helping to improve the margins.
- Backward integration which included its own spinning & weaving facility as well as the captive power plant helped the company to improve the margin between 2014 & 15 and post that it is more to do with the demand-supply & company performance but at an much elevated level.
- Revenue declined between 2017-18 mainly on account of losing its second largest customer (Target) which contributed about 10% of sales as well as sales of its Egyptian cotton products. Another factor was the retailers in general were destocking. For FY17, the company continued with its commitment of supplying to Target Corp. till the time they asked them to supply.
- Despite the huge losses in the flooring business, the improving profitability margin(Between FY18 – FY19) is a good sign for the company’s textile export business
- Also, the company has been able to maintain positive free cash flow even after doing the heavy Capital Expenditure(CAPEX).
- The industry as such is highly capital intensive as is visible from the low Net Sales to Fixed asset turnover. So, the company needs to regularly keep investing in assets to grow.
- Trade receivable, Cash Conversion ratios, Return ratios have declined from FY16 owning to several reasons such as Egyptian cotton one, Inventory destocking by big box retailers.
- The company exports 95% of its products and hence are vulnerable to currency fluctuations. Co. hedges 50-60% of its receivables.
- The company’s debt stand at a ₹2653cr as of Q1FY21. With the kind of free cash flow the company is generating, the company has been reducing debt and want to be debt-free in a few years. Although they have repeatedly mentioned to be debt free but that is long distance away.
Welspun India Ltd- Analysis
The losses in the flooring business is likely to continue for atleast a couple of years. That will keep the ratios muted. We need to keep a watch as to when the company starts promoting and advertising about it in a big way as their is very very limited awareness about the company’s product which in the other countries exists for like 3-4 decades. The 50% of hard tiles capacity contract for export will meanwhile keep driving the revenue growth here.
Also, as of today most of the revenue comes from Developed market of US & Europe. Although the US shares the import data of Home textiles but with a lag of 1-2 month, to determine the future prospects is a bit difficult.
Since, India is the largest exporter of cotton home textile to the US, there exists a number of players exporting from India and Welspun is the largest one. For any of the large US retailers to approve any new company, it would require lot of history and background for them to start supplying to them. Also, India being the largest cotton producer country mitigates the threat of cotton textile manufacturers from other countries. That act as an entry barrier for the core export business. But as mentioned earlier, in the last few years the growth as slowed.
The company also is increasing its distribution of bed & bath products in India under the brand Welspun as well as under Spaces. The management is well aware of shopping trend shifting more towards online channels and are aggressively adopting it.
So, the core US home export textile business remains as it is, further growth can come from increasing domestic distribution of bed & bath products and finally the increasing adoption & sales of flooring business.
Overall, a good company with an aggressive management.
Update 20.03.21 Corporate Governance
While searching for a research report by Ashika Group on Welspun India last week, I came across a number of old articles involving the brokerage involved in rigging the stock price of the Welspun group companies early on as well.
In Dec 2010, SEBI Barred the promoter groups of Murli Industries, Ackruti City, Welspun Corp & Brushman India from dealing in their shares till further notice, for colluding with share trader Sanjay Dangi and his associates, and the Ashika Group in rigging the stock price of their respective companies. Sanjay Dangi & his group of investment arms and the Ashika Group of firms too have been banned.
If this is the reputation of the promoter group in stock price manipulation, my earlier reasoning of the ‘Egyptian cotton issue of 2016′ is incorrect.
The company should NOT be considered for long term investment.