Welspun India: Rs 4,400 cr investor wealth wiped out as more cos join probe
After Wal-Mart, JCPenney is also conducting a thorough investigation of its Welspun textiles
Welspun India's shares were locked in the lower circuit limit for the third day in a row on Wednesday, after investors dumped the stock on fears that there is more bad news in store for the company, one of the world's largest textile manufacturers. In early trades on Thursday, the stock was down more than 1 percent.
The stock has fallen about 42 percent in the last four days after Target Corp's decision to terminate business with the firm for passing off cheap sheets as premium Egyptian cotton.
Welspun India's market capitalisation as of Wednesday eroded by a whopping Rs 4,376 crore from Rs 10,335 crore on 21 August to Rs 5958 crore on 24 August.
Target said on Friday that it was severing ties with Welspun after its extensive investigation had confirmed that the Indian company, which purportedly used Egyptian cottons to make sheets and pillowcases sold to the retailer, substituted non-Egyptian cotton instead.
Target is Welspun India's biggest customer after Bed Bath and Beyond. It accounted for about $90 million, or 10 percent of the company's total business in the financial year through March, Welspun executives said on a conference call on Monday.
Welspun said on the call that it was investigating the product specification issue and would hire one of the Big Four accountancy firms to review its supply processes.
Wal-Mart Stores Inc, Welspun's third-biggest customer, is also reviewing the company's cotton certification records, a report in the Wall Street Journal said.
"We are currently reviewing Welspun cotton certification records and plan to have additional conversations with Welspun. If we discover an issue, we will handle it appropriately," a PTI report quoted a Walmart spokesperson as saying.
A spokesman for Welspun said the company did not wish to comment on the reported Wal-Mart review.
The US retail giant accounts for about 8-9 percent of Welspun's revenues, according to Elara Capital analyst Sumant Kumar.
"The risk is there as these are still early stages, so we need to wait and see," Kumar said.
Sales of Egyptian cotton bedding account for only about 6 percent of Welspun's total sales, according to Kumar, but the loss to the company's credibility means other customers could withdraw all their business as Target has done.
According to a report in the Fortune magazine, retail giant JC Penny too is conducting a probe into the company's products.
“JCPenney is conducting a thorough investigation of its Welspun textiles to ensure the integrity of its product claims. It is too early in our review process to determine what actions may be necessary,” a company has been quoted as saying in the Fortune report.
A PTI report, meanwhile, quoted JCPenney spokesperson as saying that suppliers of private and exclusive brand products to the company are required to certify the quality compliance of any raw materials used. When sourcing Egyptian cotton, manufacturers must provide a certificate issued by the Cotton Egyptian Association as an additional measure of authenticity, the report said.
Swedish furniture retailer Ikea, however, has said that it will continue its ties with Welspun but is keenly watching the outcome of the investigations of other companies.
Even as Welspun is reeling under a "domino effect", as the Fortune puts it, after Target's decision, analysts have said Welspun did not provide clear answers during Monday's conference call, when asked whether other customers could follow Target's move to cut ties.
"We are actively engaged with our clients," Welspun's Managing Director Rajesh Mandawewala said, in response to that query on the call.
Kumar, in his note, said Welspun executives were vague on facts during the call, which threw up more questions than answers.
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