As we were hoping more scrutiny of this issue by other clients of welspun…
Good point on the feel for Egyptian vs. other cotton. The I feel issue is more about management integrity.
There are two potential scenarios that can play out:
- Collateral Damage: Other large customers find similar issue (confirmation bias) and sever ties (social proof)
- Survival Jugaad: Welspun jugaads and manages to weather the storm. Issue blows over, problem is defined as a “one off” and is diluted away and life goes on. A key metric here would be some “bakras”
That said, my view remains that such issues can rarely happen without knowledge/ approval of management. Especially in a strong promoter based company like Welspun. Better opportunities out there to hitch our wagons to strong compounding machines than try and bottom fish…
Humble regards
VD75
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Does anybody remember the Oil Salad Case?
American Express was wiped out by the amount $150 million which is a large amount of money in 1964.
The stock dropped by almost 40% of its value from 60 to 35.
Consider reading this presentation by Prof. Sanjay Bakshi for more information - http://bit.ly/2bHZiVZ
For now, I just want to draw your attention on - Warren Buffett found this as a good opportunity and invested $13 million into the stock for a 5% stake in Amex. That’s 40% of his partnership’s money.
40% is a large part of any portfolio and until now he retains that part of portfolio with him.
The only reason he invested in the stock is because, as stated in the power point presentation, is -
Risk of run on Amex. Consequences of a run are severe but what’s the probability? Buffett finds out by going shopping. He finds out that customers don’t care. The tarnish on Wall Street has not spread to Main Street.
Opportunity comes out at the time adversities only. Like again, Mr. Buffett aggressively invested at the time of 2008 financial crisis.
Below are 2 points which I think, makes Welspun a good investment at its current price -
- People don’t care what type of cotton is used in the towel they use. They just need Quality.
Frankly speaking, as my father use to work in Welspun so my family uses their towel (Yes, the same towel which is imported to Wimbledon) and we are not planning to throw them out just because it was found that it was not made from Egyptian cotton.
What matters to people is the quality and of course, their quality is far much better than any other towel brand, at least in India.
Okay, let’s assume that the world went opposite and started throwing out the towel that found defective (not made of Egyptian towel).
Here comes the second point.
- Egyptian cotton sheets contributed 3-6 per cent of revenues in last 2 years.
It doesn’t make sense if the stock dropped by almost 44% from 103 to 59 (as of today) just because of 3-6% sales get affected.
However, the stock will remain deflated for coming few months but in long run, it looks like a great opportunity. The issue will get settle down soon.
Isn’t it looks great? Rectify me, if somewhere I went wrong.
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Agree with above post but dont you think that thier business is B2B not B2C. They are supplying to other business houses and companies. So the end consumer is not in the picture here, And since thier large amount of revenue is coming from Big companies it may affect the sales , because ultimately these companies are selling to end consumers , so they will not like to take risks and anyways can purchase from some other B2B suppliers.
I dont track this company , just wrote this on the basis of current news. They might have direct relationship with consumers also , but I am not much aware of this.
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Yes! It’s mostly B2B and that is why I put the second point, which is alone a strong point:
It doesn’t make sense if the stock dropped by almost 44% from 103 to 59 (as of today) just because of 3-6% sales get affected.
Uploading my highlighted version of the 22nd August ConCall Transcript. I have not researched the textile sector at all and this being a transcript I maybe reading between the lines here. Sharing my views of what I derive from the concall.
I do not know if an audit process from an outside firm is the norm in checking your own manufacturing or sourcing processes, but I feel it is an attempt to buy time (6 - 8 weeks). Too much emphasis in the concall has been given to the audit, as if all the details will be revealed only after an audit.
When Mr. Rajesh is specifically asked by Mr. Ajay about the conversation with Target, he side steps the questions and gives a generic response of how they are taking it very very seriously and the audit will make their processes extremely robust.
For majority of questions asked the answers were very generic, opaque and an attempt to side step the issue at hand. On page 5, para 6, I have never seen anyone use so many “so” in a sentence. I am just speculating here, but maybe he was flustered.
Overall, the feel I get from the concall is an air to sweep the issues under the rug for now while we look for our patsy.
August 22nd Con Call.pdf (455.8 KB)
Not Invested.
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Hi @Sowmay
There is a fundamental difference between the two cases…in case of American express Buffett saw value in their credit card and travellers cheque business…the oil scandal was in the warehouse receipt business which wasnt the core business of American Express…What would have happened had the fraud been in the travellers cheque business? People would have stopped using them. Period
Supplying quality material is the bread and butter of Welspun…the fact that other players like Walmart and JC Penny are scruitinising the products supplied by Welspun does not bode well for them…
Disc: not invested but watching the progress
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If this becomes an integrity issue, then more than 3 - 6% of revenue will be affected. Target was 10% of revenues and the product in question was 10% of that. Welspun India lost 10% of revenue because of 1% of product. That being said I am neither accepting nor refuting that there will or will not be a contagion effect.
As for your Amex example, warehousing was not their core business. And WB saw value in the core business and little contagion effect from the warehousing front. We can all give examples from the benefit of hindsight but it would have been really difficult at that time to ascertain that Amex were being scammed and that they were not the actual scammers. The Amex example is not analogous to the Welspun situation. The problem is in their core business operation, however small maybe the percentage of revenue.
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I felt the same reading the transcript and can’t really make out as to why the concall was held if the mgmt is to only beat about the bush and not to answer concretely. Why can’t they follow CM’s advice and say nothing when they have nothing to say? Institutional pressure?
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@Sowmay - Good points. Please consider though that 10% of topline for Welspun comes from Target. The US market accounts for 60% of Welspun’s business. If you see the news most of the top US retailers are starting to dig around - WalMart, JCP, Bed Bath and Beyond…
If we invert for a second and use some models to simulate alternate realities:
- Doubt avoidance tendency: Many end customers may want to switch to another brand because of this event. From a retailer standpoint they might decide to buy their towels elsewhere
- Social Proof, Herding: The door is now open and we will see more and more of Welspun customers start audits/ investigations. Regardless of the results it will put significant pressure on their US business and ultimately sales/ margins
- Authority: If say a WalMart ends the relationship it will open the floodgates and could cause irreversible damage to Welspun reputation
- Switching Costs: The products supplied by Welspun are not what I would consider sticky. So easy for retailers to switch
There is a potential for a sustaining negative feedback loop which may damage the business model. How long this will take to come to equilibrium cannot be predicted. That said, we can assume that it will take at least a couple of quarters to play out. So while there may be some upside in the immediate near term due to bottom fishing the actual downside might not be seen till longer.
Not to beat a dead horse (or use too much cricketing analogies): Welspun has bowled a NO BALL. So we will see the FREE HITS 
Humbly yours,
VD75
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Point is not that who will buy from Target inferior Egyptian cotton sheets, they can always sell it cheaper tag but point in case is of integrity and you normally can’t put a exact $value impact on current revenue or future revenue. Hit in such scenarios is mostly sentimental than exact $value impact driven and that’s what Welspun is going through.
Will have to wait for air to clear and stabilize post investigation by others are done and then take a long term call.
Disc : Not invested by watching it play out. Invested in Indocount last year with 8% of portfolio.
@Yogesh_s excellent out of the box thinking.
On the same lines: what do you do in real life when you have problem with small portion (10% in this case) of your vendor’s supplies. Surely you will not terminate long relationship just on the basis of this issue. I am sure there’s more to this situation than meets the eye.
There is no doubt that Welspun as a business group not a clean one. But there is a price for everything and at a right price there is an opportunity to earn in many situations including this one. I have two quick recent examples where money was made: Nestle and Volkswagon.
Now what is the right price can be debated. I tried to find Welspun’s total export sale as % of total sale and could not get conclusive number and deduced that worst case number is 2/3 sales are export sales. So can we do revised 5 years EPS calculation assuming half of their customers will go away? And assign a price to stock based of DCF model. My answer is yes.
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Are you certain Welspun is in the league of Nestle or VW? If there are a lot of worms in Welspun’s cabinet, it may be a long time before they can turn around, though the stock price can see some relief post this large drop.
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There is lot of uncertainty with other retailers also now reviewing the WelSpun products. We have to consider this factor to decide whether to stay invested or exit. Unless the share price drops by another 40% to 50%, its not worth taking the risk. This is B2B, customers may not care but retail chains do care about the quality/trust issue.
The home-textile market in US is only growing between 1% to 3%.Welspun was able to grow all these years by eating market share from Chinese companies. Retailers have hundreds of vendors to choose from…
I am out - Was able to sell shares at 58 today 
@basumallick I always intended to say management quality is not of high standard. And I thank you very much for pointing it out. However, I will maintain my point that there is a price for every thing. And this stock may not be a wealth compounder from this point. But it can surely be a situational play.
Regarding certainty around worms and cockroaches …its all matter of speculation and it can be played in either direction. As an investor my take is we will never have full + perfect information. And should try to take best decision based on what information is available.
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If Welspun indeed used non Egyptian cotton willingly, then that would make it’s crime as bad as VW. However, by league if you meant brand value of VW, I agree.
There are around 5000 stocks listed in BSE & NSE. Why run after Welspun when the unknowns are too many at this time. For a company to cancel its order means it had completed its complaint / negotiation process with Welspun and then made this decision. There is a serious loss of credibility, which means that if they have to sell their products now to others, they will have to compromise on margins.
Also, this is a very serious case - here the customer is complaining and pulling out. In most other such cases, the complainant is NOT the customer, usually a regulatory authority. Hence, if you can fix the problem, you can get back into the market. If the customer is complaining and accusing once of cheating and poor product quality, then it is a different ball game altogether. They may not actually have a business (that is a very extreme situation, but something worth thinking about), so the right price may be zero. (although I don’t think it will get that bad). But, another 1 or 2 large cancellations and the stock can easily tank another 30-40% from here.
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I was talking about staying power.
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As per the author, the Big Box Retailers may be aware of this. There is no correlation of finished products sold with Egyptian cotton vs. Raw material produced.
So a lot of retailers are just using Egyptian cotton for branding and very well the case may be Target before getting caught from regulators is trying to save itself by making Welspun as Scapegoat
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IMO, In investing, as in life in general, nothing is certain. 
As for taking an exposure in Welspun at this stage is concerned, there is no hurry and a plenty of time to decide on it esp. when market seems to be hellbent on throwing it at lower price, if anybody is at all interested in taking a plunge on it. I agree that there are just too many variables to consider here.
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