I keep on following the debate whether Welspun is now a good buy at this price. The following points should be kept in view while deciding this:
As late as April 14, the share was priced at Rs 10/- with a market cap of roughly Rs 1000 crs. For the preceding 14 years, the stock had not moved beyond that price.
The run up in the stock price has been led largely by improved operating margins which have moved from 12% at PBDT levels to 24%.
The market cap before the current meltdown was as high as Rs 12000 crs, implying a 12x jump in about 24 months.
Such a run up would imply that the improved operating margins are permanent and here to stay for the long term.
The debate assumes that the market cap of 12000 crs was justified and the current drop in price makes Welspun an extremely attractive investment, notwithstanding its lacklustre performance for 14 years preceding 2014.
Any long term investor needs to understand if the margins are sustainable at this levels or they may revert back to earlier trend.
Any drop in margins in the normal course of the business coupled with lost credibility with customers may prove to be dampener to the stock price.
In such a situation even the current depressed price may turn out to be high.
Yes you absolutely right Adavait itās
magement s responsibility to interact properly if the said cotton is not in supply.USDA-FAS estimated cotton hectare fallen from 500000 to 100000 last year(80s to 2014)and 50ā000 only current year.So, material is scarce ,better talk to client n solve the problem.Looks like they solved it internally n hoped to get away showing certified documentsā¦
First of all the disclosure that I am not invested in the stock. This is a purely numbers based analysis of the risk reward ratios the stock has to offer at this price range.
Case 1: You are about to make a new investment in the stock.
The risk to reward is 100% price apprectiation assuming the stock will bounce back to 100 range. This might happen over 2-3 quarters as investors gain the confidence over the capacity of the company to handle the situation without affect on its revenues.
However we need to consider that this is not the opportunity to play the fat pitch i.e betting 10% of your portfolio on the stock. so at the very least u can play say 2% of your portfolio. Hence return will be 2% in 2-3 months time with considerable risk and heart ache. You can find better stocks which you can dedicate your time and efforts for a fat pitch.
In my opinion not worth taking a chance at this price Rs 46/- .
If the risk return was say 500% price appreciation ( price falls to rs 20 . Even the 2% investment would have given 10% return to the portfolio. at this stage it may have been worth the risk and heart ache )
Case 2: You are already invested in the stock.
So your stock is down by 50%. From where I can see this in 1-2 years time this issue will blow over. Company will find some new client who doesnt care if the cotton strands are from egypt as long as it feels like egyptian cotton and then buisness will be as usual ( if at all at a bit less OPM ) ( I myself have a shirt which has a tag of superfine giza cotton and the finish is super smooth. I dont care if the strands were from egypt or not as long the end product is a quality product ) . So the long term story of the stock is intact. So it would be wise to hold the stock for the long term if your conviction is still intact.
No.7 & 8 point is of most importance at present situation.How management deals with it and be able to repair the damaged reputation is to be seen.How their clients react to their action taken to solve the problem is important.They have high volume production capacity but need to sell in high vol.also to keep sustainable.So,next 4-6 weeks and audit outcome,management action thereafter is important.Lets seeā¦(not invested).
I heard people saying - Iāll only consider buying the stock if it touched 20.
But its doesnāt look like it is going to touch such a low level. Thatās only possible if the other companies like Walmart, JC Penney etc crease their orders too which is practically not possible.
Because if they do, How will they manage to substitute the alternate product immediately? Just after Target creases the order, they started finding alternative company. Very low chances that other company will also follow the same footprint of Target.
But still, the point of worry is the high amount of debt in books which will affect profit margins due to decline in sales (at least, minimum of 10% from Target).
Today, there was block deal on Welspun and only buyers on the stock:
Wal-Mart Stores Inc. will stop selling Welspun India Ltd.ās Egyptian-cotton sheets over concerns about the productsā provenance, dealing a fresh blow to a supplier embroiled in controversy.
I think Wal-martās request is reasonable, if Welspun is labeling 100% Egyptian cotton, they want the supplier to guarantee that. I canāt understand Welspunās argument, either you label n guarantee 100% Egyptian Cotton or you donāt lable it. In contrast to Targetās decision, Walmart didnāt severe their total relationship, which is a blessing for Welspun at this momentā¦
Bad news (which, already may have been priced in) with a silver lining. Walmart did not go Taget-style-full-crazy and did what was logical. Others are now much more likely to follow Walmartās lead rather than Targetās. It is also likely that, Walmart, which also agrees that the sheets are of excellent quality may reorder the same sheets but under a different label (Not Egyptian Cotton). So, maybe, in the medium term, after relabelling, there may not even be a serious loss of revenue from this episode as the volume of sheets wonāt suffer much, just the price.
IMHO, in hindsight, 3-5 years down the road, this episode would look more like a blip, which strengthened Welspunās Operations.
YAY for more unwarranted LCs and more buying opportunities.
DISC: Invested after the so-called fiasco. Looking to add on every opportunity.
The margins on Egyptian cotton (much higher price bcz of Egyptian label, but low cost) would be much higher than other cotton sheets. So, loss of Egyptian cotton business should be a big hit to bottomline. All the high margin business gone to dogs. What is left is pig business! Low ROE, high debt, high fixed cost business. The ROE will drop due to loss of high margin business in coming quarters and will stay there. How much impact will happen needs to be seen. Plus there is loss of complete target business.
Companies like Walmart has massive supply chain resources and they bring huge buying power on the table. But when such issue happens, they also need to time to react to outsource the supplies to another supplier. My guess is the current announcement is phase 1 of pull out. This gives them time to adjust their supplier capacities (which are optimized for most of the time).
Having worked in US company in supply chain function, I can tell you that credibility is a one way street. Once lost, it can not be regained. Walmart must have reviewed their supplier capacities and decided they can not afford complete pull out right now. So they would have started working with their other suppliers to ramp up capacities while buying time with current supplier. I have seen this movie too many times
