As per notes given by gaurang above…same product is supplied to multiple clients over pasr few yrs. I doubt how it can be a one off prod issue. Even if it is…ideally a credible management is not supposed to it. And it wont be paltry money i guess…cost of raw material is significant in these companies…n saving on tht will add significant amounts directly to bottomline.
This was a clear violation of both Target’s Code of Conduct and our Standards of Vendor Engagement, and was contrary to the high ethical standards to which we hold ourselves, and our vendors.
A prudent management would/should have not allowed this issue spiralling out of control into a crisis like this and here the biggest risk IMO is a reputational risk.
Hope you are right.Today watched so.tulsiyan on CNBC on this matter.He was
suggesting that it may be case with other manufacturers like Indocount.Lets
hope it’s one off mistake n stop here.I am not invested though but watch
proceeding as recently Treehouse,Ricoh India cases,shoud have to be
watchful.I appreciate your view.
shriharsh shriharsh
August 22I am not sure any management (however dumb it may be) will take a
conscious decision to do something like this, especially to make paltry
additional money by using a cheaper raw material. Quite possible that due
to production target pressure a material that was available was used
instead of waiting for the right raw material to be available. This happens
quite often in manufacturing, while the intent is not to cheat but to meet
the production targets. Of course it has now impacted the credibility
however personally I think this is a one off event specific to welspun and
should not impact other companies.
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In Reply To
valuseek
August 22
Sheer greed by mgmt. or what else?Now other big clients will be
suspicious too!May go into deeper crisis n other Companies also come under
review too!!!
This group was always a complete avoid for me. Just do some google and find out so many issues including run-ins with the authorities. I remember they had supplied sub-standard pipes. Adverse opinions from SEBI etc etc. Why folks forget these or lazy enough to google? Additionally, many of these textile players have poor past so it takes a lot to assume that they would behave properly going forward.
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It’s due to such gross generalization that textile sector has been the biggest wealth creator in the current bull run. People very conveniently forget that textile sector is the 2nd largest employer in the country only after agriculture and if India has any global competitive advantage it’s in commodity businesses like this not in any high tech industry. If there are any ripple effects and over reactions due to such one-off incidents it will only be opportunities in disguise for the prepared and informed.
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Any lesson learned here? Anything which could have prompted investor to avoid investing in Welspun?
As I initiated the thread, believe its my duty to post update after the event.
Whatever happened is really unfortunate and a complete black swan event. Going by the looks of it Welspun really messed up its supply chain somewhere.
Am assuming they had no bad intent because they have way more downside than upside by indulging in such stuff. Now that such event have happened, people from all corners will say negative stuff for promoter background, history, corp governance (and rightly so possibly). But if we look back at the Welspun Group as a whole, Welspun India was and still is their bread & butter and they still own ~73% of it. They are at loss more than anyone else around. If one look at the history (in term of supplying to US and being top supplier in home textiles globally) they are second to none. At their level & scale - it would be foolish to think they will do something intentionally.
Coming back to impact - it can escalate to other customers (who knows!!) Reputation & brand will take a hit. So, things wont be rosy going ahead.
Only comfort is that the valuations are not demanding. Assuming only Target as customer is lost and nothing happens further (and they come out clean from the audit process), it can still do ~15% earnings CAGR minimum in medium term.
Disc - Welspun still forms my largest position, hence my views may well be biased.
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These old promoters don’t do it deliberately. It is part of our ‘chalta hai’ attitude. I look at this way, despite huge govt. support in terms of subsidies etc, political connections, ready raw material and abundant labour these textile companies have remained minnows on the global scale. We get to know about wrongdoings only because they are listed companies. Why should investors care if the promoters themselves don’t add value? regarding red flags please see the links below. I believe nothing has changed.
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What sort of framework should one use to analyse such situations? Here are some thoughts:
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If you own a position, you have to try to be dispassionate. You have to ask, knowing what I now know, would I buy the stock? If the answer is overwhelmingly no, then please don’t fall for the “averaging down” trap.
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Think about worst-case scenario just like Warren Buffett did when he invested in American Express stock after the salad oil scandal. After careful research, he came to the conclusion that there is no way Americans will stop using their Amex cards and so the “trust” in the Amex brand was not impaired. Thinking about “remote loss” scenarios is very important. In the case of Welspun, what’s the worst-case scenario? The worst case scenario in my view is that (1) DNA tests show that cotton was not Egyptian (cotton being an agricultural commodity, DNA tests can quickly establish the truth); (2) this problem is not contained to just one customer; and (3) there will be lawsuits by American customers - so the potential for large contingent liabilities should not be ignored.
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Given the company’s fixed cost structure (power and fuel, payroll, SGA totaling to about 26% of revenue) and balance sheet quality (in FY16 it paid interest on debt totalling to Rs 257 cr. as compared to Rs 1,500 cr. of operating profit.), it simply cannot afford to lose any more large customers. If it did, then the company’s earnings will decline very substantially and so this is not just a problem of a customer loss representing less than 10% of revenue.
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You also have to think about the wider implications of this on the industry. If Welspun is found to have mis-represented, how likely is it that it’s the only one? And what if there are others? How likely is that they would be found out? How will that affect the industry?
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This is an evolving situation and new information is likely to come to light and one should not be hasty in buying this stock or start assuming that bad news for Welspun is automatically good news for xyz… it may be good news. It could also be bad news. It’s just too early to tell.
Disclosure: No positon.
30 Likes
Very well said @Mrs_Silence_Dogood. My concern is points 4 and 5 as i hold indo count.
“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.”
If i understand correctly and if this is happening for 2 years then what is QC doing?
@Mrs_Silence_Dogood rightly said.
few of the articles i found about welspun
http://archive.indianexpress.com/news/anjar-land-scam-ngo-demands-to-probe--role--of-revenue-secy/755743/
the warning was there from a long time but public ignored it.
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Edelweiss View:
Welspun India - A Blip, Not A Fall Of The Cliff;
Disc: No investment ( Just tracking the situation closely for my own case study )
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The potential negative fall outs of this event are:
- Loss of further business from additional top customers.
- Payments withheld by Target for refunds to customers. Similar actions initiated by other large clients.
- Potential lawsuits by large customers in the US - if loss of reputation is cited, damages can be huge.
One should undertake detailed due diligence instead of jumping in to catch a falling knife.
Disc: No positions.
3 Likes
Does the 40% fall(potentially more) in two days justify only a 10% loss of revenue.
Indian textile sector still hasn’t peaked out. Indian textile sector is still expected to double by 2020.
Disc: still holding
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@ishandutta2007 It is not just the matter of 10% sales. Company’s goodwill is affected a lot all over the world from this cotton row. Outcomes will soon reflect in their margins.
2.5 years back my father worked at the Vapi branch of the Welspun as a Deputy Manager of Prod dept. My father is not much interested with the share price but he was shocked with the news of Target Corp phasing out all of its products from Welspun. He still remembers Target as a long time customer of Welspun.
Apart from target corp, many other brand companies like Wal-Mart, Tesco, JC penney also import same product from Welspun. Which is why it is likely that other companies will also raise their concern over this row.
And TC had also made a statement that “they are phasing out all of its products from Welspun, which it has used as a supplier for more than a decade”
Long-term operations and revenue of Welspun will be highly affected which is reflected in the current market price.
Have a read of my quick analysis:
http://sowmayjain.com/2016/08/22/welspun-india-shares-plunges-20-target-severs-ties-cotton-row/
3 Likes
I don’t know how to exit this stock, for last couple of days whenever I come to market , I am seeing it has hit the circuit limits in premarket transactions.
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The much discussed “Spillover Effect” taking form…
IMHO the market is over-reacting. Should get another LC tomorrow.
DISC: Not invested; Watching like a hawk, ready to pounce!!
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All the US / Europe retailers will now fear customers suing them for selling low grade products. Safest option for them is to stop procuring from fraud firms like this and sue these frauds for damages caused. These retailers can find many sourcing vendors.
Expecting huge revenue loss and inventory pile up for Welspun.
Disc: Not invested. Feeling sad that this firm brought disrepute to brand India.
J.C. Penney is next to add to the chaos. 
Panic will surely build… Making it a valuepick, sometime in the near future…
DISC: Not invested; Watching like a hawk, ready to pounce!!
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Times like these remind me of the “Oracle” 
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You see a cockroach in the kitchen; as the days go by, you meet his relatives: Abhi picture baaki hai mere doston!
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It takes 20 years to build a reputation and five minutes to ruin it. If the promoters had thought about that, they would have done differently. Fact is they did not and chose to gamble with their most important asset (customer trust and reputation in the market)
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Avoid Second Order thinking! Running to enter due to correction (price anchoring) while everyone is dumping due to this negative event. Remember that there is sometimes wisdom to be found in crowds…
As for myself, I am not going to fish outside the off stump on this one. Better not do a deal with such management. Survive with a well left than fish and get caught behind 
Regards
VD75
Disclosure: Not invested, not interested
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