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Welspun India: Lots to look forward to - Views on News from Equitymaster
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Welspun India: Lots to look forward to
Jul 31, 2007

Performance summary
  • Topline increases by 33% YoY, on the back of 31% YoY growth in towel and 36% YoY growth in sheeting sales.

  • EBIDTA and net profit margins fall from 20.8% and 3.8% in 1QFY07 to 13.8% and 3.5% respectively in 1QFY08, largely due to the higher interest and depreciation costs on account of the company’s expansion phase.

  • Other income boosted by mark to market forex gains.

  • Higher volume, lower DEPB rates and benefits from Christy yet to filter in.

Standalone financials…
(Rs m) 1QFY07 1QFY08 Change
Net sales 1,987 2,647 33.2%
Expenditure 1,573 2,281 45.0%
Operating profit (EBIDTA) 414 366 -11.6%
EBDITA margin (%) 20.8% 13.8%  
Other income (43) 124  
Interest 108 155 43.5%
Depreciation 144 195 35.4%
Profit before tax 119 140 17.5%
Tax 44 48 10.0%
Effective tax rate (%) 37% 35%  
Profit after tax/(loss) 75 92 22.0%
Net profit margin (%) 3.8% 3.5%  
No. of shares (m) 73.1 73.1  
Diluted earnings per share (Rs)*   5.0  
Price to earnings ratio (x)   12.4  
*(on a trailing 12-month basis)

What is the company’s business?
Welspun India is Asia's largest and world’s fourth largest manufacturer of terry towels (accounted for 79% of FY06 revenues). A wide product range, fully integrated capacities and the ability to offer value added products make the company a preferred supplier to major retailers in the EU and the US. Welspun also has marketing licences for the 'Nautica' and 'Tommy Hilfiger' brands and owns the 'Spaces' brand in India. The company's foray into bed linen is a step towards positioning itself as a single-point vendor in home textiles. It is a flagship company of the Welspun Group, with promoters holding a 34% stake. In 1QFY07, Welspun India bought 85% stake in CHT Holdings Limited, the holding company of UK's leading towel brand Christy**.

** Founded in 1851, Christy is the world's oldest towel manufacturer and is the UK's leading towel brand with an annual turnover of £ 35 m (Rs 3 bn). It is UK’s leading producer of branded terry towels and bed linen products. The company supplies to a wide range of retailers in the UK and overseas and is the sole supplier to Wimbledon Tennis Championships. The company employs 464 people.

What has influenced performance in 1QFY08?
Segmental performance
1QFY08 Capacity utilisation Sales growth (YoY) EBIDTA margin
Towel 90% 31% 22%
Sheets 60% 36% 12% - 13%
Towels – Organic and inorganic growth: The stabilisation of Phase-I of the greenfield capacity at Anjar and a higher capacity utilisation in the towel segment (90% in 1QFY08), has led to Welspun capitalise on higher volumes despite the pressure on realisations. For the towel division, the company has been consuming 75% of its in-house yarn supplies, which it believes, in conjunction with the strong order book position, will enable sustained sales growth going forward. The completion of the phase II of its expansion phase will offer strong volumes to the towel division thus making up for the realisation concerns. The toweling division sustained EBIDTA margin of 22% during 1QFY08 (as in the case of 1QFY07). The same is expected to enhance going forward as the benefit of ‘Christy’ acquisition (including the shift of the latter’s manufacturing capacity to Anjar, Gujarat) starts filtering in. Some of these will include access to a premium brand and incorporation of product development skills besides access to the leading retail stores in the UK and European markets. This will be coupled with the opportunity to rationalize Christy’s sourcing requirements and extend the brand to the domestic customers through Welspun’s retail stores. In 4QFY07, Welspun’s and Christy’s distribution operations have got integrated. In FY07, Christy’s EBIDTA was ₤ 35 m while the same in 1QFY08 was ₤ 44 m.

Bed linen – Value driver: The bed linen segment, which accounted for approximately 12% of turnover in FY07, grew by 36% YoY in 1QFY08 and has caught up with the towel segment. The realisations in this segment improved by 10% YoY due to the high value business acquired from clients. The commissioning of Phase–II of the Anjar capacity will also add to the bed linen capacity of the company, nearly doubling it to 45 MMPA (m metres per annum). The decorative bedding segment is also expected to be revenue accretive, as this will fetch the company realisations that will be much higher than that in the bed linen segment currently. The EBIDTA margin in the sheeting segment is, however, low at 13% currently as the division is yet to achieve optimum utilisation levels. This has pressurised the overall operating margin of the company.

Additionally, in order to avail North American Free Trade Agreement (NAFTA) benefits and to save on freight costs, Welspun has decided to put up a decorative bedding facility in Mexico to produce 1.04 m bed-sets per annum, which is likely to be commissioned by 3QFY08.

The total cost of Phase II expansion (including the Mexico project) has been revised from Rs. 6.5 bn to Rs. 9.1 bn. These projects will be fully funded and do not entail any fresh equity raising or debt financing:

  • Equity already raised from promoters and Temasek – Rs. 1.2 bn

  • Term debt (under Technology Upgradation Fund – Rs 6.2 bn at 5% rate)

  • Internal accruals for the balance amount of Rs 1.7 bn.

Phase II expansion
Segment Capacity Likely completion Total capacity
Towels 16,500 tons 2QFY08 41,000 tons
Bed linen 10 m metres 4QFY08 45 m metres
Decorative bedding 0.72 m sets 2QFY08 0.72 m sets
Spinning 46,800 spindles 2QFY08 1,04,296 spindles

Other income - Forex benefit: Welspun is affected by cross currency fluctuations, as nearly 92% of the company's production is exported. It also does not have any natural hedge, as the company has no import liabilities. The company has now reduced its forward cover to quarterly duration (3 month’s sales) and has booked mark to market forex profits in 1QFY08 to the tune of Rs 100 m that has been included under other income. Going forward, we envisage the fluctuations in currency rates to impact the company’s other income.

Rationalising costs: Welspun India currently generates power in its captive power plant with the help of furnace oil, the price of which is directly linked to that of crude oil. Thus, to rationalise its power costs, Welspun India has set up a gas-based power plant in Vapi (catering to 40% of its power requirement), for which, it has entered into a gas supply agreement with Gujarat Gas. The delay in the gas supply that was expected to come from 4QFY07 has not helped the company’s power cost, especially with the rise in crude prices. The gas-based power plant will reduce the power cost to 2.5 to Rs 3 per unit, against Rs 4.5 per unit currently. For the remaining 60% power requirement, all the companies of Welspun Group will form an SPV, which will promote a lignite based power plant in Anjar.

What to expect?
At the current price of Rs 62, the stock is trading at a multiple of 12.4 times its trailing 12-month earnings. The company has hived off its retail business (through Spaces and Home Mart outlets), through which it is targeting a turnover of Rs 400 m (over 70,000 sq feet retail space in 80 stores by FY08). Also, 35% of its business is expected to be sourced though the branded home textile segment. Keeping in mind the company's strong presence in the home textile industry, global markets and capacities (through Christy) and future growth prospects, Welspun remains our preferred play amongst the mid-tier textile companies. We shall soon revisit our target price for the stock.

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