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Welspun India: New products spur volumes
Feb 8, 2010

Performance summary
  • Topline grows by 34% YoY during 9mFY10, up 38% YoY in 3QFY10.
  • Improved volumes in exiting products and new product lines help EBIDTA margins grow by 2% in 9mFY10 over that in 9mFY09.
  • Lower interest costs in 3QFY10 due to the repayment of long term debt to the tune of Rs 399 m.
  • Bottomline growth aided by higher operating margins and lower interest costs.
  • Total planned capex of Rs 3.6 bn to be completed by FY11.


Standalone financial performance
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 3,589 4,948 37.9% 10,217 13,657 33.7%
Expenditure 3,032 4,312 42.2% 8,556 11,147 30.3%
Operating profit (EBDITA) 557 636 14.2% 1,661 2,510 51.1%
EBDITA margin (%) 15.5% 12.9%   16.3% 18.4%  
Other income 14 114 714.3% 52 350 573.1%
Depreciation 243 265 9.1% 714 778 9.0%
Interest 234 200 -14.5% 631 666 5.5%
Profit before tax 94 285 203.2% 368 1,416 284.8%
Forex (gain) / loss 85 (29)   282 (34)  
Tax 6 109 1716.7% 29 493 1600.0%
Effective tax rate 6% 38%   8% 35%  
Profit after tax/(loss) 3 205 6733.3% 57 957 1578.9%
Extraordinary items (33) -   7 -  
Net profit 36 205 469.4% 50 957 1814.0%
Net profit margin (%) 0.1% 4.1%   0.6% 7.0%  
No. of shares (m)         73.0  
Diluted earnings per share (Rs)*         16.6  
Price to earnings ratio (x)         4.5  
(*On a trailing 12-month basis)

What has driven performance in 9mFY10?
  • Backed by the economic recovery in the US and Europe, higher export demand from the global retailers of home textiles helped Welspun India derive the benefits of consolidation in the industry. After a few quarters of sluggish textile exports, Welspun has been able to profitably capture the incremental growth in volumes during 9mFY10. While the growth in the company’s towel business has been relatively slower, the sheeting business continues to remain unaffected. The latter infact has managed to reap better realizations from its marquee clients in global retailing. The volume growth was contributed by Welspun’s new innovative product lines including the bath rug business. Higher capacity utilization also ensured that the expanded capacities get optimally utilized.

    Growth across segments
    Rs m 9mFY09 9mFY10 Change
    Production      
    Towel (MT) 24,593 27,410 11.5%
    Bed sheet ('000 m) 21,937 29,912 36.4%
    Rugs (MT) - 1,849  
    Sales      
    Towel (MT) 24,274 27,344 12.6%
    % of production 98.7% 99.8%  
    Bed sheet ('000 m) 21,826 29,468 35.0%
    % of production 99.5% 98.5%  
    Rugs (MT) - 4,252  
    % of production   230.0%  

  • As per the management, the higher input costs of cotton and yarn may play spoilsport when it comes to retention of operating margins. However, it believes that improved product mix backed by product innovation will help it derive higher realisations. Thus the new product lines are expected to play an important role in sustenance of the company's operating margins and improvement in net margins.

  • Although the TUF debt has kept the company's funding costs relatively moderate and most of the capacities have already been commissioned, extended period of lower capacity utilisation may force the company to bear interest costs longer than expected without deriving the benefit of growth in volumes and margins. Having said that, timely debt repayment will help the company lower its debt to equity ratio.

What to expect?
At the current price of Rs 74, the stock is trading at 4.5 times its trailing 12-month earnings. While we are certainly enthused by the company’s ability to attract higher volumes through product innovation, the high leverage may restrain its ability to plough back the profits. Having said that, armed with sizeable capacity and strengthened overseas presence, the company is set to reap the benefits of higher sales and better realizations over the next 4-5 years. Despite the better prospects of Welspun’s textile business on the completion of its capex drive in FY11, the shareholder returns may continue to remain abysmal. However, considering that the company failed to display the intended performance over our investment horizon of 2-3 years we discontinue our coverage on the stock.

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