New review knot for Welspun, investors

US-based JCPenney probing cotton supplies

Textile maker Welspun India is facing a big financial and reputational crisis with a prominent US-based retailer, JCPenney.

The latter is conducting an investigation into the cotton supplied by Mumbai-based Welspun, a day after the world’s largest retailer, Walmart Corporation, started a similar probe. The investigations were triggered after another retailer, Target Corporation, announced on Friday that it was terminating its contract with Welspun after it found textiles supplied by the company were made from inferior cotton, instead of more-expensive Egyptian cotton.

Welspun is already working with Target Corporation on a possible penalty, for not conforming to quality standards for the past two years. It will cover the recall of products by Target from its customers.

On Wednesday, the Welspun stock crashed for a third day, by another 10 per cent to Rs 59 a share. It has lost Rs 4,375 crore of market capitalisation in three days. The stock exchanges revised the daily circuit breaker from 20 per cent to 10 per cent to stem the slide in the company’s shares. Welspun India’s total market value was Rs 5,958 crore, from Rs 10,333 crore last Friday.

Welspun has promised to hire one of the global 'big four' audit entities to go into its supply chain, to find how the company supplied inferior cotton to clients abroad. Welspun is the largest textile exporter from India to retailers based abroad.

The company’s foreign retailers are all conducting their own investigations and a domino impact and cancellation of contracts could hurt it badly, say analysts. Walmart and JCPenney sell similar products to their customers and might end their contracts if violations of quality standards are found.

On August 19, Minneapolis-based Target Corporation said Welspun was one of the producers of Egyptian cotton 500-thread count sheets under the Fieldcrest label. “After an extensive investigation, we recently confirmed that Welspun substituted another type of non-Egyptian cotton when producing these sheets between August 2014 and July 2016. Neither Target nor Fieldcrest had any knowledge of this substitution. This was a clear violation of both Target’s code of conduct and was contrary to the high ethical standards to which we hold ourselves, and our vendors,” it said while terminating its contract with Welspun.

A K Prabhakar, head of research at IDBI Capital, said the stock markets had given a sharp negative reaction to the development as Welspun’s management has not given much clarity on the issue.

“As a result, investors are a worried lot and are dumping the stock. However, after such a steep fall from around Rs 100 levels, the bottom should not be far away. I think there could be a bounce-back in the stock from around Rs 45-50,” he said.