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The Rise and Fall of a Ten-Bagger: Welspun India

Aug 26, 2016

In this issue:
» Should one borrow for IPO listing gains?
» Loss making PSUs sucking tax payer money
» Heads was Skill and Tails was Bad luck
» ....and more!
00:00
Tanushree Banerjee, Co-Head of Research

If you look at its stock price even two years back, it looks like a penny stock. But Welspun India was not a penny stock. And hopefully will not become one even if the crash in recent sessions continues.

The stock price of Welspun India until February 2014 appears to be less than rupees ten. But that is the adjusted price post stock split. The last time we closed our recommendation on the stock was back in November 2007 - when it was trading at Rs 79.

Welspun India was one of the first to enter a very lucrative segment of India's textile export business. Indian home textile exporters do not face as much competition as their apparel manufacturing counterparts. Particularly because cheaper suppliers in countries like Vietnam, Pakistan, and Bangladesh do not match up in quality. So exporting premium towels and bed linen has been one of the most profitable segments of textile business. Welspun also had the distinction of being the exclusive supplier of towels for the Wimbledon tournaments, with its 85% stake in UK-based Christy's.

The stock performed above expectations when we recommended it thrice between 2006 and 2007. But soon we had more than one reason to get cautious. The management of Welspun for one, had one and only one target - growth. Every management meeting convinced us that the strategies were designed to grow at any cost. It seemed like a management that's so obsessed with getting the numbers that it will at some point be tempted to make up the numbers. The growth potential for the sector was evident. But the means the company was pursing seemed unsustainable and potentially dangerous. The debt-to-equity stayed close to 2x. The management tried its hands at everything from exclusive retail stores in India to global tie-ups.

The growth and the stock price of Welspun really took off post 2014. Incidentally, this was when the fortunes turned for the entire textile sector. Most companies rode the tailwinds of cheap cotton prices, favourable exchange rates, and good export demand. Market leaders like Welspun had the edge over others. The stock price of Welspun India multiplied ten times between June 2014 and June 2016!

But eventually, Welspun's 'target' (pun intended) came back to haunt it.

One of its biggest customers, Target, just severed ties with Welspun. This was after extensive investigations confirmed that Welspun substituted Egyptian cottons with cheaper inputs to make sheets and pillowcases. Plus, the products were falsely labelled.

Other big retailers like Bed Bath and Beyond and Walmart are also expected to pull the plug, unless investigations prove otherwise. Target accounted for 10% of the company's total business in FY16. But apart from the loss of revenue, the damage to reputation is going to cost Welspun heavily for years to come. The rumour is that a whistleblower spurred Target's investigation into the cotton quality. Will more skeletons be tumbling out?

The stock has lost Rs 48 billion of shareholder wealth within a week and has fallen 47% in six sessions. The ten-bagger is already half way down from June 2016 peak. Investors who had bought the stock at the start of the 2014 bull run still have some safety. But those who bought it near the peak have literally lost their shirts.

We never recommended Welspun India after 2007. It may seem premature to have turned cautious on a high-growth stock. But we cannot time businesses disasters and stock crashes. So we would rather err on the side of caution.

Don't get us wrong. We love growth stocks. But only the ones that are managed with some degree of responsibility towards customers and shareholders. Only the ones that can sustain growth while offering healthy returns to shareholders.

Precisely why we recommend a differentiated approach to buying the best growth stocks. In case you want proof of that...click here for the details.

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------------------------------

02:30 Chart of the day

Do you borrow money to invest in the stocks, that too for listing gains?

This is something HNIs or High net worth individuals are doing. An article on Business Standard, offers an interesting finding. Since the beginning of the year 2016, many wealthy individuals are borrowing money from the Non-banking financial companies or NBFCs to invest in IPOs. As a result, the NBFC arms of brokers such as Edelweiss, IIFL, JM Financial, Reliance Securities, Kotak Securities are making money by financing them for the IPOs.

With the increasing appetite, the interest rate charged for the loans has come down too. Thus encouraging more individuals to borrow and invest. All this has led to sharp surge in the HNI activity in some of the recent IPOs.

Select 2016 IPOs with High HNI Participation


Given such a large number of HNI applications in the IPOs, their allotments are also bound to be higher. So the price at which the stock will start trading at will be much higher than its issue price. The oversubscription numbers, may lure the small investors too, to invest.

However, in the event the stock lists with negative gains, these individuals not only incur losses but also bear the interest cost of the borrowed funds. Over and above, one may have to further borrow funds to repay loans invested in IPOs.

When the markets are bullish, these investors may continue to invest in IPOs as a bet on the market sentiment.

But this is something we at Equitymaster are sternly opposed to. When it comes to IPOs, we have not just been value investors but also outright contrarians. We always recommend that one should not get driven by the noises of stocks getting oversubscribed. The key lies in answering only two questions when it comes to IPOs

That's it. Everything else can be ignored.

03:30

The actual losses of loss making public sector units in India are often a subject of debate. As per an article in Business Standard, the government is seeking cabinet's nod to shut down seven loss making public sector units (PSUs), after availing approval from respective line ministries. These PSUs are part of the larger list of 74-loss making state-owned units.

Now it's a known fact, that the government of India has pumped a lot of money into these companies over the years to keep them going. That too from the hard earned money of the taxpayers. Thus, the plans to shut down such bleeding businesses is a positive news indeed.

Speaking about loss making PSUs, here is something that Vivek Kaul has written in his Diary...

  • The fact that the government has been ready to bailout the loss making public sector enterprises and the best people don't work for it anymore, has led to a situation where the losses have just kept piling up.

    In sectors where the private sector has been allowed entry it has flourished and the government companies have had to take a backseat.

Further he adds...

  • Despite, the public sector enterprises being a small insignificant part of many sectors and with many of these companies making losses, the government continues to operate them and take on their losses. A major reason remains the fear of taking on the trade unions.

The shutdown of PSUs will surely attract agitation from the employee unions. However, India is at a stage wherein it cannot afford the unproductivity at public sector enterprises being subsidized by the government. Further, every rupee that goes towards sustaining these loss making PSUs is at the cost of taking away from something else.

To know exactly how the PSU losses could impact each and every individual taxpayer like you...read more.

04:10

Humans have a fragile sense of self-esteem and a key mechanism to protect our self-image is self-attribution bias. We have a tendency to attribute good outcomes to skill and bad outcomes to luck. This is how human psychology works. The problem is it prevents us from recognising mistakes as mistakes, which prevents us from learning from our mistakes.

Living with this bias can be detrimental to your trading. If you want to know more about this bias and see how you can combat it, then click here and read the full article by Apurva Sheth from Daily Profit Hunter.

04:45

In the meanwhile, after opening the day on a positive note, the Indian indices have slipped into red and trading below the red dotted line. Sectoral indices are trading on a mixed note with stocks from the consumer durables, oil & gas sectors trading in green while capital goods & IT stocks are bearing the maximum brunt. At the time of writing, the BSE Sensex is trading lower by 80 points (down 0.3%) while the NSE Nifty is trading lower by 17 points (down 0.2%). The BSE Mid Cap index and BSE Small Cap index both are trading flat.

04:50 Investing mantra

"There's no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating." - Peter Lynch

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Bhavita Nagrani (Research Analyst).

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Equitymaster requests your view! Post a comment on "The Rise and Fall of a Ten-Bagger: Welspun India". Click here!

3 Responses to "The Rise and Fall of a Ten-Bagger: Welspun India"

Agnelo Pereira

Aug 27, 2016

Indian managed companies have always brought bad reputation by acts such as done by Welspun India.
There is a danger of MAKE IN INDIA brand gaining bad reputation abroad. Also importance of good continuous research of companies and their management is affirmed.

Like (1)

KUMAR

Aug 26, 2016

you are going to lose your customers if you keep harping this viveks songs every day...

It is such a boring song, he want to some how become famous by predicting dooms day

Like (2)

mahesh ch kabi

Aug 26, 2016

What is the future of Well spun ind.What is the target in 01 months.Can we buy or sale at current level.

Like (4)
  
Equitymaster requests your view! Post a comment on "The Rise and Fall of a Ten-Bagger: Welspun India". Click here!
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