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How Welspun India is emerging from a crisis that rocked its credibility

On August 19, 2016, it felt like the rug had been pulled from under the feet of Welspun India.

, ET Bureau|
Updated: Jun 09, 2019, 01.24 PM IST
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“My biggest learning was if you are a leader in the space, you must also lead the change and show the path ahead for the industry” Dipali Goenka Global CEO, Welspun India.
Welspun India global CEO Dipali Goenka remembers August 19, 2016, vividly. That was the day that felt like the rug had been pulled from under the feet of her company. She had arrived in Mumbai a day earlier, after a round of client meetings in New York. While she was in the air, unbeknownst to her, US big box retailer Target had announced it was snapping all ties with Welspun India Limited (WIL) because they found the company was supplying substandard material in the guise of premium Egyptian cotton towels and bed linen. Target accounted for about 10% of WIL’s nearly billion dollar textiles revenues at the time.

Goenka boarded a flight right back to New York that day, and went on a whirlwind tour of the company’s customers such as JC Penny, Costco and Walmart in the US and Tesco and Sainsbury in Europe, promising recalls, refunds and indemnities to protect against legal action by end-customers.

In a week, by 26 August, the WIL scrip was down 50%, at Rs 49. WIL owned up on its errors, that it could not prove the provenance or origin of all its material, instead of falling back on the justification that theirs was standard industry-wide practice. The company was buying material at three stages — cotton, yarn and fabric — and this allowed discrepancies to set in. It moved away from the practice for single-origin cotton products (Egyptian and Turkish).

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WIL now buys its Egyptian cotton from a single vendor in that country, moving rest of the processes of producing yarn and fabric fully in-house, ending outsourcing. Over the next year or so, WIL also rolled out a patented system for tracking its cotton textiles products to their origins, involving multiple audits by consultants. It also tied up with Oritain, a company that specialises in tracing cotton back to the tract of land on which it is grown.

The hurricane that swept WIL off its feet in 2016 has yet not completely blown over, but it is beginning to find its feet. The company lost around 9% of its gross sales in 2017-18 over 2016-17 and also lost its growth momentum. It had provisioned Rs 500 crore for recalls and refunds back in 2016-17. While it recovered the lost ground on revenue front in 2018-19 with a robust 8% growth in sales, in the last quarter ( January-March 2019), sales growth slowed down to a mere 3% (y-o-y), with growth in profits before depreciation, interest and tax margin at a wafer-thin 1.8%. In this quarter, WIL decided to settle class-action lawsuits in the US filed on behalf of end consumers who had bought its products, resulting in a net loss.

The settlement is expected to cost another Rs 224 crore. The visible stability in its textiles export business, however, seems to be not enough to enthuse the markets. The scrip price still hovers around Rs 55. WIL might now need a new success story to break out. After WIL’s January-March 2019 quarter results were announced, Edelweiss Securities, which has a buy recommendation on the stock, revised down its target price from Rs 77 at the end of 2019-20, to Rs 72 in September 2020.

In Search of New Stories
Dipali Goenka, at 49, is no stranger to long journeys and fresh beginnings. Her decision to join her husband Balkrishan Goenka’s business back in 2002 was itself the beginning of a new journey. In an interview to ET Magazine, she spoke about how she decided to switch from being a homemaker to an executive once her elder daughter Radhika had turned 10 (the younger daughter was seven at the time). The Welspun Group ($2.2 billion in revenues) promoted by her husband and his cousin Rajesh Mandawewala spanned textile exports, steel pipes and infrastructure.

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Dipali decided to start a new business line, exploring the domestic textiles market. “It was an entrepreneurial journey. We did not have space at the Welspun offices, so I was given an old building in Andheri. I would drop my girls at the carpool for their school, JB Petit, at 7 in the morning, and then go to work, returning by 5 pm to help them with homework,” Dipali recalls. She would usually be the first one to reach office. In 2003, she launched Spaces, a branded towels and bed sheets brand with a premium positioning.

The Spaces business touched Rs 200 crore in 2017-18 and new mass market textiles products were launched for the local market under the Welspun brand. The domestic market contributed around 9% of WIL’s sales in 2018-19. Her success with Spaces earned her a promotion as CEO of Welspun India’s global textiles manufacturing business in 2011, and later as joint managing director in 2013. The domestic textiles retail business, now headed by Manjari Upadhye, who was brought in from chocolate maker Mondelez, is targeting sales of Rs 1,000 crore by 2022.

WIL has placed two other strong bets. Advanced textiles is one of them. It is making disposable towels and wet wipes out of non-woven textiles, and had launched a range at the Ardh Kumbh Mela in Allahabad earlier this year. There are other applications of non-woven textiles that WIL wants to address in automobiles and aviation industry as well. The business is up and running and has hit Rs 200 crore in revenues already. WIL’s second big bet, possibly bigger than advanced textiles, is on flooring material.

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Dipali Goenka says the product line relates to interiors and WIL is already into home décor in the domestic market. Out of the recent Rs 600 crore spent on capital expenditure, around Rs 400 crore has gone into setting up the manufacturing facility close to Hyderabad for inter-locking clay and PVC tiles that can be laid or unlaid on floor with ease. Alongside, there are plans for carpet tiles and artificial grass, too. WIL estimates say these products can bring in revenues of Rs 2,200 crore by 2022. Around Rs 1,100 crore is the total capex planned for floorings business, and the plant will be commissioned in the next quarter.

The year 2022 is when WIL hopes to hit the $2 billion mark in revenues and the plans seem to hinge on the flooring revenues as well as its ability to net Rs 1,000 crore in its domestic textiles sales. The company has grown inorganically, too. It acquired London-based Christy, known for supplying towels to the Wimbledon and as the first supplier of towels for the Buckingham Palace. It has also launched an ecommerce business for textiles focused on the United Kingdom and the West Asian market.

Building Differentiators
“It is a diversification away from a commodity business of supplying towels and bed-sheets to big retailers to a branded specialty businesses,” says Altaf Jiwani, director and chief financial officer of WIL. Jiwani points out that WIL also sells a couple of premium licensed branded products — Wimbledon and Disney — that now account for 17% of revenues. He recounts how Christy still gets public requests for supplying unwashed towels used by specific players, after the end of every Wimbledon tennis tournament.

Even in the commoditised supply of textiles to large retailers, WIL has tried to create differentiators or hybrid brands. It has created an in-house label called Hygro, which indicates the presence of WIL’s special brand of cotton that blooms after the first wash. WIL also has Wel-Trak, a patented tracking technology for pure origin cottons, and the Wel-Trak logo is now placed on products.

WIL also has a tie-up with New Zealand based company Oritain that has the technology to chemically break down cotton, and analyse its contents (for example the magnesium content in the fibre) and match it to the tract of land where it must have grown. Jiwani says WIL continues to spend around 0.5% to 0.75% of its revenues on innovation and 1%-1.5% on brand building. He says today almost 38% of its revenues come from innovative businesses (including products that use Wel-Trak).

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Jiwani has also set ambitious targets for WIL. This include double digit revenue growth and an earnings before interest, tax, depreciation and amortisations (EBITDA) margin of 19-21%. The saving grace for Welspun has been its profitability, right through the crisis. Even in the tough years of 2016-17 and 2017-18 it recorded profits after tax of Rs 368 crore and Rs 392 crore.

Edelweiss analyst Nihal Mahesh Jham in his May 24 report pointed out the key risk factors ahead for WIL. He wrote: “Cotton yarn accounts for 50% of the overall expenses and are a prime driver of profitability. Volatility in cotton prices can impact the profitability adversely.” Apart from the currency fluctuation risk that affects all exporters, he also mentions any recurring quality issue around Egyptian cotton or a similar product could also affect the company.

Founder and chairman Balkrishan Goenka told ET Magazine that in 2016, WIL had the option of walking away from the Egyptian cotton product market, but instead it decided to own up its mistakes and worked on its processes to ensure such an issue of traceability of fibre never occurs in future. And then he adds: “Egyptian long staple cotton has this association with luxury, but Indian long staple cotton sometimes turn out better.”

CEO and joint MD Dipali Goenka explains how WIL is taking the idea ahead, placing large bets on Indian cotton too, working with a large number of farmers in Wardha in Maharashtra and investing artificial intelligence technologies to determine the exact amount of pesticide needed to contain the pink ballworm menace that ruin the cotton crop. And at its cotton spinning and weaving plant in Gujarat’s Anjar, close to Bhuj, WIL is working on a hydroponics project in collaboration with MIT Media Labs, for growing cotton in its lab. The cotton plant grows in water with nutrients being supplied through pipes. The project has worked in the labs in Anjar and WIL is working on moving to a larger green-house at Anjar to grow high-staple Indian cotton under close supervision.

While the journey to New York in August 2016, facing an uncertain future, remains etched in her mind, Dipali loves to talk about her journeys to Anjar, where innovation is happening on the ground. There is another key change. The plant now also has one all-women unit, with 600 workers, led by a woman graduate engineer. “My biggest learnings are at the plant,” Dipali says. She explains that spinning and weaving has traditionally been a male-dominated industry, but the customer who makes the buying decision is usually a woman. With 22% women employees now, Anjar plant has also completed a journey of its own.
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