The stock of Welspun India witnessed severe drubbing for the fourth day in a row as it touched a 52-week low to close at `54.40, down 8.26 %, after US-based retail chain Target Corporation decided to terminate its contract with Welspun over quality of the cotton used in bed sheets. The stock has lost close to 47% in the last four days. The textile firm’s market capitalisation has been reduced to `5,466 crore from `10,334 crore on August 19, a decline of `4,868 crore.
Other big US retailers such as Walmart, JC Penny and Bed Bath & Beyond have also ordered an external audit of the textile company after news broke that Target Corporation is terminating business ties with the Gujarat-based firm over the use of low quality cotton. The US market comprises about two-thirds of the company’s total business.
In FY16, the sales with Target Corporation accounted to approximately $90 million, about 10% of the overall business. The product in question with Target accounted for about 1% of the overall sales and about 10% of the business with Target, roughly about $ 8.5 million.
The company in a conference call said it is in the process of appointing an external independent ‘big four auditor’, to audit the supply systems and processes to understand the root cause. “The audit will give us clarity on a number of questions, including where and how the issue occurred and what steps we will need to take to tighten our processes,” said Rajesh Mandawewala, managing director, Welspun India.
However, analysts at Edelweiss are of the view that 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 Welspun’s core business and key customers, given its long standing relationships and strong execution track record.