Welspun India’s (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 WLSI’s 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 `101 (`116 earlier).
WLSI was one of the producers of Target’s 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 Aug’14 – Jul’16. 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, WLSI’s sales to Target were $ 90 million (10% of total revenues). Overall, Egyptian cotton sheets contributed 3-6% of revenues in past 2 years.
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.