Welspun India - most vertically integrated textile co

Established in 1985, Welspun India today, it is one of the top three home textile manufacturers globally and the largest home textile company in Asia. It has modern manufacturing facilities at Anjar and Vapi in Gujarat where it produces an entire range of home textiles for bed & bath category. The company has state‐of‐the‐art completely vertically integrated plants, right from spinning to confectioning.

Welspun has been ranked No.1 among home textile suppliers in the US (Source: Home Textile Today). It has a distribution network in over 32 countries including US, UK, Europe, Canada and Australia.

In addition to manufacturing facilities, which predominantly supply to private labels, the company also maintains its own brands Christy, Hygrocotton, Welhome and Spaces ‐ Home and Beyond; it also has a tie up with Nautica for North American markets

Story in charts:

As we can see from the above charts - the financials have showed steady upward trend in last 3-4 years. Most striking feature has been the margins - now clocking upwards of 25%. Management have in conference calls and TV interviews have rigorously mentioned that they will surely maintain atleast 22% margins. I have had few rounds of Q&A with the investor relations team - they have mentioned that 22% is bare minimum which they will achieve in coming years. This 22% is after considering that govt. takes back some of TUF incentives (textile co’s get loans at reduced rates and company thinks that these and other similar incentives might be taken back in few years). If one goes through company presentation - there they mention share of branded (high margin category) is at 11% and growing rapidly (40% CAGR over 2 years). Innovative products accounts for 31% of revenue.

They are also backward integrated to a large extent (75%) and will be spending total of c2300 cr for modernization/capacity expansion/backward integration. Of this 2300 cr., 50% is already spent and other 50% will be spent in coming 1-2 years. After my interaction with company - I really dont feel that margins would fall below 22% in next 2-3 years atleast.

Sales - Company have guided for ~15% growth in sales for foreseeable future. (next 2-3 years atleast) One can get a fair bit of idea about growth looking at their capacity/utilization and future capacity expansion plans.

Here also, management has suggested that for current year 80-90% of sales is pre booked. We can see that both towels and sheets are operating at full capacity - in rugs and carpets they are slowly increasing capacity,this is new product segment launched last year - the IR team mentioned that they see high growth in it and expect the utilisation to increase in coming quarters. For Towels and sheets - they have visibility for 2-3 years and expect the increased capacity will be fully utilized as well.

Hedging - as 95%+ revenue is from exports, the company have a policy of hedging 60% of its next 12 months revenues. As per IR the hedged rate currently for next 12 months is at 64+

If one looks at income statement - the power fuel and water charges has remained almost at same levels in FY 15 vs FY 14, even after 20%+ jump in revenues. Figures for last 3 years - FY 13 figure was 263 cr, FY 14 at 117 cr and FY 15 stood at 119 cr. This is because the company have own captive power plant of 80MW which is providing electricity to all manufacturing units in Gujarat. This power plant is jointly owned by other Welspun group company. Welspun India owns 68% in it (the figure can be cross checked from AR, dont remember the exact %). Thus, this captive power plant would further help to control costs.

Also, its interesting to note that capacity would be increased without increase in headcount. Hence, saving in manpower cost.

Pricing with customers - The Company has a price variance Index with clients which includes Cotton, Currency, Dyes and Chemicals etc. The threshold level of increase and decrease is +/- 5% on overall basis which decide the price cut or price appreciation with the clients once in 6 months. Thus, if the price of cotton rises or falls - the same would be passed on to the clients.

Now comes the only negative point which I can sense (would be happy if others can point out any other negatives) - Debt - Current net debt stands at 2600 cr and management have suggested they wont let it increase further from 3100-3200 levels at time. Interesting part about the debt is that ~60% of this debt is low cost (TUF and Gujarat benefit). Current blended cost of long term loans is 7% and after Gujarat govt benefits it can come down to 3% levels. If debt is available at 3% and company can manage even 10-15% ROE - I believe its rational to have debt. However, in this case company is earning much higher ROEs. The IR team suggested that they don’t plan to pre pay low cost debt (which makes complete sense) - however, after 2 years when the capex is done with - debt levels should come down significantly.

Dividend policy - the company recently announced dividend policy of 25% of PAT - this I believe is a great positive - even after having debt (though low cost) and planned capex, having stated dividend policy shows confidence in sustainability of profits/margins/cash flows.

Valuations - the stock trades at relatively lower levels compared to peer such as Indo Count. The only major point of difference between both being debt. In terms of margin profile/backward integration/scale - Welspun India fares much better than Indo Count.

Views are invited. Its safe to assume Welspun India forms part of my portfolio. The charts are taken from company presentation here and here (which I believe is self explanatory in terms of Industry tailwinds and financials, etc) and 1 from edelweiss report. Introductory paras taken from edelweiss report.
This link is also good to know more about the company and future plans.

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Why is ROCE so low at 7.7% and as such isnt it a value trap? having said this Indias ecosystem is v positive due to
1)India being the only country to invest in spinning in last10-12 years thanks to TUFS & has become spinning capital of world?
2)Due to BT cotton success abundant availability of RM.
3) China losing its edge due to higher labour n Yuan costs and pollution issues?
4) Bangladesh doesnt have the ecosystem like India n is mainly a converor.
5) Increasing exports n specially of value added items like Welspun n Indo count

How does players like Nitin Spinners stand out?

How is the promoter quality,integrity,execution and attitude towards minority shareholders?.

Vivek - how do you calculate this ROCE figure of 7.7%, can you share your calculation? As per my calculation and co’s presentation - ROCE for FY 15 comes to ~25%, we have to adjust numbers a bit for FY 14 as there was large depreciation expense. Detailed numbers are provided in the 1st presentation link I shared above (see slides 32 to 34)

Also, don’t think its a value trap by any means. The company has income generating assets (and not some assets in balance sheet in terms of shares, etc) and we are not looking for any statistical bargains wherein we hope for valuations to catch up to levels as represented by share holdings in BS.

Promoter integrity - while past seems bit clouded - some ban by SEBI (now stands withdrawn) and some big M&A’s done in past which were not fruitful. However, recent actions like stated dividend policy and clear articulation of plans, actions in conf calls - implies there might be some change. Whenever I see co’s performance improve - I like to give management the benefit of doubt even if the past was stained/clouded. Another example can be Aurobindo Pharma.

Nitin spinner - dont track it so cant comment. But Welspun India and Nitin are not comparable given my limited knowledge of Nitin.

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ROCE figure was as per Screener.This 25% fig was after tax or before tax? I think in india entire eco system will benefit so Nitin too may benefit.

ROCE is pre tax - would suggest you to go through the presentation once, its clearly mentioned over there as well.

http://economictimes.indiatimes.com/et-now/experts/indian-economy-will-continue-to-grow-valuequest-invest/videoshow/47731091.cms

Ravi Dharmashi of valuequest also positive on the sector.welspun fits the bill

Latest announcement on BSE by company suggests CARE has revised upwards long and short term loan ratings.

Reinstills the faith that though debt in absolute terms is high, but very much manageable - given visibility of revenues and stable margins.

Stock still provides a dividend yield of 2%+ (assuming company will pay minimum of Rs 15 as dividend next year- this is highly likely).

Welspun India covered in latest issue of The Economist link here

Expecting strong results on the back of record sales of Towels at Wimbledon by Welspun this year.

Dipali Goenka, ED, Welspun India shares Wimbledon Towels Story

Q1 results are out - it is on expected lines - full year EPS expected to be in range of 60-65
Interest expense have reduced - due to availing of Gujarat textile policy benefits - this is again as per expected lines and is a positive.

Q1 Presentation can be see here

Positives from presentation:

  1. Major breakthrough in hospitality segment
  2. Overall Revenue Growth of 17.9% & Domestic Revenue Growth of 35.6% YoY
  3. EBITDA margin for Q1 at 27.9% (vs 25.9% in Q1 14)
  4. Long Term CreditRating upgraded to AA- from A+ by CARE
  5. Net Debt to Equity at 1.6x
  6. Positive free cash flows after meeting capex requirements
  7. ROE at 43.4%, Pre-Tax ROCE at 25.8%

For a company growing at the rate of 20% and trading at a LTM PE multiple of 13-14x the stock looks quite attractive (despite the recent run up) with the potential to reach triple digit figure by the end of the year. Only negative is the debt level.

The company hosted a call to addressed concern regarding CNY depreciation to Indian Home Textile Industry and Welspun India.

Cost wise Indian textile industry is like 7-10% more competitive than China and some players can have even more cost advantage. Management suggested that they don’t compete on price alone and Welspun provide much more value added stuff/product design/Welspun not into commodity business/have stickiness with foreign retailers as the prog run for 2-3 years.

While procuring goods foreign vendors strictly look at working conditions/labour/environment/CSR/sustainability and Welspun takes all these things very seriously (similar to what Kitex does). In fact management said that Welspun sits on board of sustainability council for one of its retailers - which goes to show their strength in terms of sustainability/CSR.

As per management - they have not competed with any Chinese company in last 2-3 years as Welspun cater to different class of customers and act as strategic vendor.

Also, what matters more is the relative movement of CNY-INR, after the CNY devaluation announcement, INR has also depreciated by approx 1-2% in last 2-3 days. Management said that till 10% relative change in currency (implying INR appreciating 10% against CNY) there wont be any impact in global market share for India & Welspun - in case there is more than 10% change (which I believe is unlikely in next 2-3 years in normal course), management said after such change the Chinese players will earn the right to come on table to compete. Even after such development Welspun as a company will not allow Chinese co’s to enter their turf.

Believe Welspun is best placed in Indian home textile industry given their scale, offerings and competitiveness. As and when debt comes to more comfortable levels I believe the market perception of company being less risky/leveraged will disappear and valuations might come at par with some of other industry players.

Disclosure: Welspun is one of my top positions and views will be biased.

@anil,

Is it worth looking now - after 10x run up. Re-rating is over. Now, why there is a turn around in the profitability and returns ratio in last few yrs - bcos of some favourable scene has come - IS IT SUSTAINABLE beyond 3 yrs as mkt is already factoring 2 yrs earnings upside in the current price ??

Hi,

If you frankly ask me - re rating is yet to start for Welspun India.

Current EV of Welspun stands at 10,500 cr, what is FY16 EV/EBITDA? FY17 EV/EBITDA? and lets compare with likes of Indo count/Trident or even Kitex to get some idea where Kitex trades even after 25% fall in price. Also please do take into consideration that Welspun provide ~2% dividend yield at CMP of 820 on current year expected dividends. (hint: take 23% EBITDA margin and 15% growth in sales - that’s the absolute base case as per management and I feel the same)

PE wont be a suitable measure as company has fair amount of debt.

I feel market is not pricing even this years earnings potential and the sustainability of the same.

Note: Not at all trying to compare Kitex with Welspun - but just put in perspective where the current valuations stand and what is priced in actually. Invested in both Kitex, Welspun.

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For all the concerns on Yuan devaluation and their impact on the export sales, the Rupee Yuan equation hasn’t changed much and is only better.

The last 14 days currency values…

Mon 24/08/15 24th August 2015 1 CNY = 10.4216 INR
Sun 23/08/15 23rd August 2015 1 CNY = 10.3563 INR
Sat 22/08/15 22nd August 2015 1 CNY = 10.3387 INR
Fri 21/08/15 21st August 2015 1 CNY = 10.3218 INR
Thu 20/08/15 20th August 2015 1 CNY = 10.2419 INR
Wed 19/08/15 19th August 2015 1 CNY = 10.1933 INR
Tue 18/08/15 18th August 2015 1 CNY = 10.2321 INR
Mon 17/08/15 17th August 2015 1 CNY = 10.2222 INR
Sun 16/08/15 16th August 2015 1 CNY = 10.1844 INR
Sat 15/08/15 15th August 2015 1 CNY = 10.1885 INR
Fri 14/08/15 14th August 2015 1 CNY = 10.1865 INR
Thu 13/08/15 13th August 2015 1 CNY = 10.1692 INR
Wed 12/08/15 12th August 2015 1 CNY = 10.1424 INR
Tue 11/08/15 11th August 2015 1 CNY = 10.1517 INR

Disc: Invested

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New Spaces collection ad looks impressive. It was out in big 2 page color splash in print ads today. Find the designer in u, tag line is befitting

@ Anil
Isn’t too much dependence on exports around 95% can hurt company in coming years due to global slowdown in world economy ??

Can u provide some of ur visibility about future which made u so committed about this stock ?

Deepak,

If you go through co’s conference call and presentations - they mention that 80-85% of the business is from replenishment - implying recurring nature (the frequency may not be yearly though)

Also, the products - towels, sheets - think for yourself what would be the life of such products? naturally after every 1-2-3 years we would require such products again. Also, around 60-65% of business is from US - which is in great shape atleast in terms data coming out for home sales, etc. Welspun is increasing geographic reach by expanding in Japan/Middle East. They are also expanding their product base and now catering to hotels, etc wherein the frequency of requirement would be much higher. Hence, I believe management guidance of mid teens growth in revenue for next 3-4 years is very much possible and realistic I believe.

See these charts below to get a macro view on whats happening in US regarding home sales - which in turn would automatically translate into demand for Welspun’s products in addition to many many other home building/related products (think of Pokarna and its products, can be another good medium term bet)

In fact being export oriented is a major plus, I find export oriented co’s better relatively.

Disc: My largest holding and views will be biased.

Whats happening with Welspun, such a steep downtrend in past few days is unwarranted without any news. Or is it because of the recent AGM where they approved to raise additional 500 Cr debt? But cant be.

In my view, high debt is not bad. In fact it would only enhance Equity returns to the shareholders as long the model is sustainable which it is I believe. Welspun is on a high growth aggressive trajectory and hopefully would multiply further if added at right levels.

Discl: 5% of my portfolio, buying on dips

Welspun eyes 150% jump in textiles sales at $2.5 bn by 2020

Direct online presence in a developed market like US would definitely boost the margins further.

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