India Midcaps

COMPANY UPDATE

WELSPUN INDIA
A blip, not a fall of the cliff
India Equity Research| Midcap Textiles

Welspun Indias (WLSI) second biggest customer, Target (10% of revenues),

has cancelled its contract because of the origin/provenance issue related to
the Egyptian cotton used for its bed sheets. As an immediate rectification,
WLSI has initiated an external audit (by one of the Big 4 auditors) of its
supply systems and the process is expected to be completed over next 6-8
weeks. While this issue is a blemish and the loss of this contract will lead to
a fall in FY17/18E EPS by 11%/14%, we believe this will not impact WLSIs
core business and key customers, given its long standing relationships and
strong execution track record. We retain our FY18E EV/EBITDA target
multiple of 7.0x and maintain BUY with TP of INR101 (INR116 earlier)

EDELWEISS RATINGS
Absolute Rating

BUY

Investment Characteristics

Growth

MARKET DATA (R: WLSP.BO, B: WLSI IN)

CMP

: INR 83

Target Price

: INR 101

52-week range (INR)

: 120 / 67

Share in issue (mn)

: 1,004.7

M cap (INR bn/USD mn)

: 83 / 1,235

Avg. Daily Vol. BSE/NSE (000) : 1,863.3

The issue: Origin of Egyptian cotton, not bed sheet quality

WLSI was one of the producers of Targets 500-thread count Egyptian Cotton bed sheet
under the Fieldcrest label. Post an audit by Target, it came to light that WLSI had
substituted another type of non-Egyptian cotton when producing these sheets between
Aug14 - Jul16. As a result, Target has pulled out the remaining products from its stores
and web-site. It has also gone ahead and entirely terminated its relationship with WLSI. In
FY16, WLSIs sales to Target were USD90mn (~10% of total revenues). Overall, Egyptian
cotton sheets contributed ~3-6% of revenues in past 2 years.

SHARE HOLDING PATTERN (%)

Current

Q3FY16

Q2FY16

MF's, FI's & BKs

73.5
2.3

73.5
2.8

73.5
8.7

FII's

13.6

12.7

5.0

Others

10.7

11.0

12.8

Promoters *

NIL

BSE Midcap
Stock
Index

Stock over
Index

* Promoters pledged shares

(% of share in issue)

Issue related to internal processes; audit initiated

WLSI has communicated that the issue mainly related to provenance/origin of the cotton
and not the quality as this product has been highly rated by customers. As an immediate
rectification, it has already initiated an external audit (by one of the Big 4 auditors) of its
supply systems and the process would be completed in next 6-8 weeks. The company is
also engaging with its other customers.

PRICE PERFORMANCE (%)

1 month

5.7

(22.7)

(28.4)

3 months

17.8

(17.3)

(35.0)

12 months

15.7

(2.5)

(18.3)

Outlook and valuations: Credentials still intact; maintain BUY

WLSI has consistently been the highest exporter of cotton home textiles from India. Given
its longstanding relationships and strong execution, we do not expect the current
imbroglio to impact its core business and key customers. However, we incorporate impact
of loss of business and cut our FY17/18E EPS by 11%/14%. Our FY18E EV/EBITDA target
multiple of 7.0x remains unchanged, giving us TP of INR101. Maintain BUY.

Financials
Year to March
Net revenue (INR mn)
Revenue growth (%)
EBITDA (INR mn)
Adjusted Profit (INR mn)
Adjusted Diluted EPS (INR)
EPS growth (%)
Diluted P/E (x)
EV/EBITDA (x)
ROAE (%)

FY15
53,025
21.3
12,742
5,398
53.7
485.6
15.3
8.6
41.7

FY16
59,371
12.0
15,899
7,400
7.4
37.1
11.2
6.8
42.9

Edelweiss Research is also available on www.edelresearch.com,

Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

FY17E
64,356
8.4
16,761
7,652
7.6
3.4
10.8
6.4
33.3

FY18E
70,384
9.4
17,977
8,097
8.1
5.8
10.2
5.6
27.9

Nihal Mahesh Jham

+91 22 6623 3352
nihal.jham@edelweissfin.com

August 22, 2016

Edelweiss Securities Limited

Midcap Textiles
Concall: Key highlights

The issue related to one client programme for Target.

Company has always been particular about quality standards and the final product is
rigourously tested.

The issue is about provenance/origin of the fibre. Infact, the products have been highly
rated by customers.

For WLSI, it is mainly process related and it plans to reinforce/refurbish its systems.

In its manufacturing process, the company sources a lot of intermediaries from various
vendors.

Business with Target: Sales stood at USD90mn in FY16 (10% of business).

Product sales (Egyptian cotton) in value terms stood at USD8.5mn in FY16, 1% of overall
business and 10% of business with Target.

Egyptian cotton products have contributed ~3-6% of revenues in past 2 years across
customers.

Steps taken/initiated:
o

WLSI has already initiated dialogue with key customers and shared with them all
the data.

The entire audit process (to be conducted by one of the Big 4) will take 6-8 weeks
to complete.

Continuing to engage with key customers.

At current juncture, Target is in the process of putting its business down.

Instituting an audit, the purpose being to look at supply systems and processes.

WLSI has agreed it has been a failure on it part, and the company entirely the
responsibility for this event.

As for penalty, WLSI is already working with Target.

WLSI could not give further details on Targets audit process and why the issue came up
after 2 years.

Change in Estimates

Net Revenue

New
64,356

FY17E
Old
69,266

% change
(7.1)

New
70,384

FY18E
Old
77,573

EBITDA

16,761

18,238

(8.1)

17,977

20,037

26.0

26.3

25.5

25.8

7,652

8,582

8,097

9,444

12.1

12.6

11.7

12.4

8,785

8,788

4,329

4,332

EBITDA Margin
Adjusted PAT
Net Profit Margin
Capex

(10.8)
0.0

% change Comments
(9.3) Loss of contract from Target Corp
(10.3)
(14.3)
(0.1)

Edelweiss Securities Limited

Welspun India
Company Description
Established in 1985, Welspun India today, it is one of the top three home textile
manufacturers globally and the largest home textile company in Asia. It has modern
manufacturing facilities at Anjar and Vapi in Gujarat where it produces an entire range of
home textiles for bed & bath category. The company has state-of-the-art completely
vertically integrated plants, right from spinning to confectioning.
Welspun has been ranked No.1 among home textile suppliers in the US (Source: Home
Textile Today). It has a distribution network in over 32 countries including US, UK, Europe,
Canada and Australia.
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.

Investment Theme
Innovation, diversified client and product base cement dominance: Welspun enjoys long
standing relationships with top retailers in the US and Europe and supplies to 14 of the top
30 global retailers. It commands a lions share of home textiles exported out of India.
Increasing geographical and client diversification is improving the companys risk metrics. It
has seven trademarks and has applied for six patents till date. Welspun derives ~30% of
sales from innovative products.
Margin sustainability: WLSI 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. Driven by its confidence in sustaining these margins, it has upgraded its margin
guidance from 20-22% to 23-24%.
Robust free cash flow & consistently lowering leverage: WLSI is at the end of its massive
INR25bn capex programme it had undertaken in FY14, with only INR8bn to be spent in FY17.
The companys confidence in generating free cash is also evident from its recently
announced dividend policy of 25% payout ratio. Going forward, it is expected to generate
strong free cash flows and lower its leverage further. Gross debt/equity has fallen from 2.1x
at FY15 end to 1.3x as of FY16. We estimate this to fall below 1.0x by FY18E.

Key Risks
Raw material risk: Raw material costs, primarily cotton yarn, account for 50% of the overall
expenses and are a prime driver of profitability. Volatility in cotton prices can impact the
profitability adversely.
Leveraged balance sheet: Welspun ended FY16 with a net debt/equity of 1.2x. While it has
completed a major portion of its capex, leverage remains high.
Currency fluctuations: Welspun exports more than 90% of its production. With a network
spanning 50 countries, the company is exposed to currency fluctuations which can
significantly impact profitability.

Edelweiss Securities Limited

Midcap Textiles

Financial Statements
Key Assumptions
Year to March

Income statement
FY15

FY16

FY17E

FY18E

Macro

(INR mn)

Year to March

FY15

FY16

FY17E

FY18E

Net revenue
Materials costs

53,025
25,443

59,371
26,589

64,356
29,547

70,384
32,824

Gross profit

37,560

GDP(Y-o-Y %)
Inflation (Avg)

7.2
5.9

7.4
4.8

7.9
5.0

8.3
5.2

27,582

32,782

34,810

Repo rate (exit rate)

7.5

6.8

6.0

6.0

Employee costs

4,460

5,364

5,917

6,469

61.1

65.0

67.5

67.0

Other Expenses

10,380

11,518

12,132

13,113

EBITDA

12,742

15,899

16,761

17,977

Towel cap. (MT)

50,000

55,000

60,000

72,000

Depreciation

3,329

3,718

4,771

5,377

Bed-linen cap. (000 mts)

60,000

66,000

72,000

90,000

EBIT

9,412

12,181

11,991

12,601

Rugs/carpets cap. (MT)

15,000

15,000

17,500

25,000

Add: Other income

949

950

878

767

102

101

99

89

Less: Interest Expense

2,829

2,368

1,486

1,306

Bed-linen utilis. (%)

97

101

99

87

Profit Before Tax

7,533

10,763

11,383

12,062

Rugs/carpets utilis. (%)

58

76

80

68

Less: Provision for Tax

2,090

3,238

3,586

3,799

Raw Material (% net rev)

48.0

44.8

46.2

47.1

Less: Minority Interest

45

125

145

165

Other exp (% net rev)

19.6

19.4

18.6

18.4

Reported Profit

5,398

7,400

7,652

8,097

USD/INR (Avg)
Company

Towel utilis. (%)

Depreciation rate (%)

7.6

7.1

7.8

8.0

Adjusted Profit

5,398

7,400

7,652

8,097

10.5

1.3

1.6

1.8

Shares o /s (mn)

100

1,005

1,005

1,005

5,795

10,597

8,788

4,332

Adjusted Basic EPS

53.7

7.4

7.6

8.1

43.3

41.5

41.0

41.0

Diluted shares o/s (mn)

100

1,005

1,005

1,005

Debtors % of revenues

8.4

10.3

10.3

10.3

Adjusted Diluted EPS

53.7

7.4

7.6

8.1

OCA % of revenues

2.8

2.8

2.8

2.8

Adjusted Cash EPS

89.3

11.1

12.4

13.4

Dividend per share

Capex (INR mn)
Inventory % of costs

Loans & adv (% net rev)

14.1

10.8

10.8

10.8

Dividend per share (DPS)

10.5

1.3

1.5

1.5

Incremental debt

558

(4,219)

(323)

(4,115)

Dividend Payout Ratio(%)

23.5

21.1

23.0

23.0

Year to March

FY15

FY16

FY17E

FY18E

Operating expenses
Materials costs

76.0
48.0

73.2
44.8

74.0
45.9

74.5
46.6

8.4

9.0

9.2

9.2

Common size metrics

Staff costs
S G & A expenses

19.6

19.4

18.9

18.6

Depreciation

6.3

6.3

7.4

7.6

Interest Expense

5.3

4.0

2.3

1.9

EBITDA margins

24.0

26.8

26.0

25.5

Net Profit margins

10.3

12.7

12.1

11.7

Year to March

FY15

FY16

FY17E

FY18E

Revenues
EBITDA

21.3
38.3

12.0
24.8

8.4
5.4

9.4
7.3

PBT

626.3

42.9

5.8

6.0

Adjusted Profit

486.3

37.1

3.4

5.8

EPS

485.6

37.1

3.4

5.8

Growth ratios (%)

Edelweiss Securities Limited

Welspun India
Balance sheet
As on 31st March

(INR mn)

Cash flow metrics

FY15

FY16

FY17E

FY18E

FY15

FY16

FY17E

FY18E

Share capital
Reserves & Surplus

1,005
13,314

1,005
18,872

1,005
24,764

1,005
30,999

Operating cash flow

Investing cash flow

9,391
(6,071)

16,538
(8,012)

12,585
(7,917)

12,799
(3,572)

Shareholders' funds

14,318

19,877

25,769

32,004

Financing cash flow

(3,249)

(9,455)

(3,838)

(6,987)

378

503

648

813

71

(929)

830

2,240

Short term borrowings

14,905

8,755

9,895

6,911

(5,795)

(10,597)

(8,785)

(4,329)

Long term borrowings

15,946

17,877

16,000

15,000

(711)

(2,443)

(1,760)

(1,862)

Total Borrowings

30,851

26,632

25,895

21,911

1,020

1,296

1,411

1,546

Profitability and efficiency ratios

Year to March

FY15

FY16

FY17E

FY18E

ROAE (%)
ROACE (%)

41.7
23.8

42.9
28.4

33.3
25.9

27.9
25.0

Inventory Days

115

Minority Interest

Long Term Liabilities

Def. Tax Liability (net)

Year to March

Net cash Flow

Capex
Dividend paid

641

1,178

1,178

1,178

Sources of funds

47,208

49,486

54,900

57,451

Gross Block
Net Block

42,980
24,442

53,110
31,487

61,465
35,073

66,516
34,750

122

122

116

Capital work in progress

1,564

1,832

2,262

1,540

Debtors Days

30

33

36

36

Intangible Assets

1,828

1,892

1,900

1,908

Payable Days

94

117

130

128

Total Fixed Assets

27,834

35,211

39,235

38,197

15

30

30

30

Non current investments

Cash and Equivalents

Cash Conversion Cycle

58

37

22

24

Current Ratio

3.0

2.1

2.1

2.2

4,657

1,777

2,606

4,847

Gross Debt/EBITDA

2.4

1.7

1.5

1.2

11,006

11,046

12,114

13,458

Gross Debt/Equity

2.1

1.3

1.0

0.7

Sundry Debtors

4,467

6,114

6,627

7,248

Adjusted Debt/Equity

2.1

1.3

1.0

0.7

Loans & Advances

7,474

6,419

6,958

7,610

Net Debt/Equity

1.8

1.2

0.9

0.5

Other Current Assets

1,500

1,676

1,816

1,987

Interest Coverage Ratio

3.3

5.1

8.1

9.6

24,447

25,255

27,516

30,303

Trade payable

6,910

10,080

10,947

12,054

Other Current Liab

2,835

2,706

3,540

3,871

Total Current Liab

9,745

12,786

14,487

15,925

Net Curr Assets-ex cash

14,702

12,470

13,030

Uses of funds

47,208

49,486

142.5

19.8

Inventories

Current Assets (ex cash)

BVPS (INR)

Operating ratios
Year to March

FY15

FY16

FY17E

FY18E

14,378

Total Asset Turnover

Fixed Asset Turnover

1.2
2.3

1.2
2.0

1.2
1.8

1.3
1.9

54,900

57,451

Equity Turnover

4.1

3.4

2.8

2.4

25.6

31.9
Year to March

FY15

FY16

FY17E

FY18E

Adj. Diluted EPS (INR)

Y-o-Y growth (%)

53.7
485.6

7.4
37.1

7.6
3.4

8.1
5.8

Valuation parameters
Free cash flow

(INR mn)

Year to March

FY15

FY16

FY17E

FY18E

Reported Profit
Add: Depreciation

5,398
3,329

7,400
3,718

7,652
4,771

8,097
5,377

Interest (Net of Tax)

2,044

1,656

1,018

895

871

1,010

(410)

Less: Changes in WC

2,252

(2,754)

Operating cash flow

9,391

Less: Capex
Free Cash Flow

Others

Adjusted Cash EPS (INR)

89.3

11.1

12.4

13.4

Diluted P/E (x)

1.5

11.2

10.8

10.2

(356)

P/B (x)

0.6

4.2

3.2

2.6

446

1,213

EV / Sales (x)

2.1

1.8

1.7

1.4

16,538

12,585

12,799

5,795

10,597

8,785

4,329

2.7
12.7

6.8
1.6

6.4
1.8

5.6
1.9

3,596

5,940

3,800

8,470

EV / EBITDA (x)
Dividend Yield (%)

Peer comparison valuation

Market cap
(USD mn)

Name
Welspun India
Arvind
Himatsingka Seide

Diluted P/E (X)

FY17E
FY18E

EV / EBITDA (X)
FY17E
FY18E

ROAE (%)
FY17E

FY18E

1,235
1,205

10.8
15.0

10.2
12.2

6.4
8.8

5.6
7.9

33.3
17.0

27.9
18.0

385

13.8

11.8

9.9

7.7

17.5

17.5

Median

13.8

11.8

8.8

7.7

17.5

18.0

AVERAGE

13.2

11.4

8.4

7.1

22.6

21.1

Source: Edelweiss research

Edelweiss Securities Limited

Midcap Textiles

Additional Data
Directors Data
Mr. B K Goenka
Ms. Dipali Goenka
Mr. Arun Todarwal
Mr. Ajay Sharma

Chairman
Executive Director
Independent Director
Nominee Director

Mr. R. R. Mandawewala
Mr. A. K. Dasgupta
Mr. Ram Gopal Sharma
Mr. Arvind Kumar Singhal

Managing Director
Independent Director
Independent Director
Additional Director

Auditors - Price Waterhouse Chartered Accountants

*as per last available data

Holding Top10
Perc. Holding
2.77
0.93
0.59
0.42
0.28

Goldman Sachs Group

Reliance Capital
Dimensional Fund Advisors
Union Investment
Prudential ICICI Asset Mgmt

Wasatch Advisors
Vanguard Group
HSBC Asset Mgmt India
BNP Paribas Asset Mgmt
Capital Securities

Perc. Holding
1.33
0.75
0.53
0.31
0.28

*as per last available data

Bulk Deals
Data

Acquired / Seller

B/S

Qty Traded

Price

No Data Available

*as per last available data

Insider Trades
Reporting Data

Acquired / Seller

B/S

Qty Traded

No Data Available

*as per last available data

Edelweiss Securities Limited

Welspun India
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
Manoj Bahety
Deputy Head Research
manoj.bahety@edelweissfin.com

Coverage group(s) of stocks by primary analyst(s): Midcap Textiles

Arvind, Himatsingka Seide, Trident Ltd, Welspun India

`
Recent Research
Date

Company

Title

05-Aug-16

Arvind

26-Jul-16

Welspun
India

Price (INR)

Recos

Strong growth across

segments; Result Update

310

Hold

Performance sustains; margin

may temper;
Result Update

100

Buy

216

Buy

25-May-16 Himatsingka Margins uptick in retail;

Seide
Result Update

Distribution of Ratings / Market Cap

Rating Interpretation

Edelweiss Research Coverage Universe

Rating Distribution*
* - stocks under review

Buy

Hold

158

59

> 50bn

229

Between 10bn and 50 bn

< 10bn

62

Rating

Expected to

Buy

appreciate more than 15% over a 12-month period

Hold

appreciate up to 15% over a 12-month period

Reduce

depreciate more than 5% over a 12-month period

Total

12

156

11

One year price chart

125
110
95
80
65
Aug-16

Jul-16

Jun-16

May-16

Apr-16

Mar-16

Feb-16

Jan-16

Dec-15

Nov-15

Sep-15

Oct-15

50
Aug-15

(INR)

Market Cap (INR)

Reduce

Welspun India

Edelweiss Securities Limited

Midcap Textiles
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