Welspun faces Walmart review after Target pulls sheets

The road ahead for Asia's largest home textile maker, Welspun India looks rocky with US-based retailer, Wal-Mart saying that it would review the supply chain and cotton certification records of the company and take suitable action - if any quality issues are found in Welspun's supplies.

Welspun India has already lost Rs 3,700 crore of market value in the last two trading sessions after Target Corporation, a US-based retailer, terminated its supply contracts due to quality issues. Any action by Walmart would be a big setback to the company, analysts said.

"The examination is underway and Walmart plans to hold additional conversations with the supplier," said Walmart's spokeswoman Marilee McInnis. "If any issues are discovered, we will handle it appropriately. Welspun currently supplies a number of products, including bed sheets to Walmart," McInnis told Bloomberg.

Investors of Welspun - one of the top three home textile makers globally -- are jittery as analysts have given "sell" recommendation to the stock till these quality issues are resolved. The company's share crash started after Target Corporation terminated Welspun's contracts after it detected irregularities in supplies. In the last two days, Welspun India's shares have lost 36 per cent of its value to close at Rs 66 a share on Tuesday.

The crisis for the company started after Target said during the weekend that the Egyptian cotton bedsheets and pillow cases supplied by Welspun were made from lower quality cotton. Customers usually pay higher price for Egyptian cotton made products and hence Target offered to refund its customers. The termination of contracts by Target is a big setback to the company which touted itself as the biggest supplier to Western retailers.

In a report, Elara Capital said in the near term, investors should reduce their positions, given lower visibility of earnings. "In the medium to long term, we expect earnings to recover as the company focuses on improving its quality control processes and better sourcing of cotton," it said. Edelweiss said Welspun will not be impacted much due to the cancellation of the supply contract by Target. "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 fiscal 2017 and fiscal 2018 earnings per share (EPS) by 11% and 14% respectively," Edelweiss said.

When contacted, Welspun said it has initiated immediate actions to investigate the root cause of the problem. "We are appointing an external auditor (one of the Big Four) to audit our supply systems and processes. This is an issue of highest priority for us and we will take all necessary steps to address it. We have an impeccable record of supplying quality products to our customers globally tor over two decades. We reiterate our commitment to the highest standards of customer service and compliance," the company said.

A K Prabhakar, head of research at IDBI Capital said the markets have given a sharp reaction to the development over the past two sessions as the management has not yet given much clarity on the issue. "As a result, the 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 levels," he said.

(With inputs from Puneet Wadhwa)