Home Textiles Sector - Welspun India · 2020. 7. 24. · home textiles space which is growing at 8%...

Home Textiles Sector

Initiating Coverage

January 6, 2019 Vikas Jain ([email protected], 7574885492), Maulik Patel ([email protected])

January 6, 2019 Analysts: Vikas Jain ([email protected], 7574885492), Maulik Patel ([email protected]) Page 1 of 10Before reading this report, you must refer to the disclaimer on the last page.

© 2018 Equirus All rights reserved

Home Textiles Sector

Promising Textures

Initiation note

Significant labor cost advantages over other countries,

leadership positions in key markets and favorable government

policies give Indian manufacturers a strong edge in the global

home textiles space which is growing at 8% CAGR and is

expected to reach $67bn in 2020. The fundamental strength

of India’s textile industry is its strong production base of a

wide range of fiber/yarns from natural fibers (cotton, jute,

silk) and wool-to-synthetic/man-made fibers (polyester, viscose,

nylon, acrylic), and ready cotton availability.

US — India’s key export market

India’s major export market is the US (homogenous

consumption market, attractive to target) — one of the

largest home textile markets in the world. While India does

export to the EU too, the market’s heterogeneous nature

and preferential tariffs to competing nations like Pakistan,

and Bangladesh make it difficult to target. According to the

Office of Textiles and Apparels (OTEXA) US, India supplied

~39% of cotton towel imports into the US in CY17, up from

30% in CY09. Even in cotton sheets, India supplied ~50% of

total imports to the US in CY17, nearly doubling from 27% in

CY09. This was driven by market share gains from China

(down 8-9% in cotton sheets & 2-3% in terry products) &

Pakistan (down 8-9% in cotton sheets & ~2% in terry

products) over 2009-17 & rising manufacturing costs in

competing countries.

Higher online purchases disrupt US exports, force

business model transformations

The US home textiles market has been under pressure over

last two years led by sluggish demand conditions and

customer purchases shifting to the online channel, forcing

some retailers to make major changes in their business

models, including cutting down order sizes and destocking

existing inventory so as to prevent any inventory losses.

Rising consumer preference for the online platform prodded

many retailers to make significant changes in their business

models — ranging from becoming more aggressive on their

online channels and trimming down non-profitable stores to

shifting entirely to e-commerce sales and shutting down all

retail operations.

Efforts pay off — US sales recover in late 2018

While the dip in the exports to US was seen across Indian

players, aligning their business models led to a recovery in

sales to the US from latter half of 2018. With the impact of

destocking subsuming and restocking happening, the

demand for home textile products started increasing, with a

positive uptick and yoy improvement in sales at both country

and company levels.

Additional tailwinds offer growth visibility

Cotton prices have declined to Rs 122/kg in Nov’18 from the

peak levels of Rs 130/kg; also, INR depreciation stood at

~10% in CY18, which should aid Indian exporters.

Furthermore, the increase in duty drawback rates of up to

0.6% across major home textile products and extension of

MEIS at 4% beyond Jun’18 for an indefinite period will boost

the growth in home textile exports. With demand returning

to normalcy and favorable tailwinds kicking in, we expect

strong revenue growth for integrated and specialized home

textile exports of India, with players such as Welspun and

Himatsingka Seide at the forefront.

Welspun India — Initiate with LONG; Mar’20 TP Rs 77

Increasing penetration in the US market through a wide

range of quality products has made Welspun (WLSI) one of

the preferred suppliers to global retailers. Post the revenue

decline caused by traceability issues & changing buying

patterns, WLSI has emerged strong with several corrective

actions and changes to business model. With a set vision of

Welspun 2.0 & nearing-end of the capex cycle leading to

strong cashflow generation, we expect growth to return with

12%/22% revenue/PAT CAGR and a ~360/380bps expansion

in ROE/core ROIC over FY18-FY21E. We initiate coverage on

the stock with LONG and a Mar’20 TP of Rs 77.

Himatsingka Seide — Initiate with LONG; Mar’20 TP Rs 282

HSS is a vertically integrated player with a global footprint,

and focuses on manufacturing, retailing and distribution of

home textiles. With recent expansion of sheeting capacity,

new brand acquisitions and new terry plant commencing

operations from H2FY20, it should deliver a 12% revenue CAGR

over FY18-FY21. Rising utilization of new spinning plant and

operating synergies will drive 285/100bps expansion in

EBITDA/PAT margins over FY18-21E.

Recommendation snapshot

Particulars Welspun India Himatsingka

Seide

Revenue CAGR (FY18-21E) 12% 12%

EBITDA CAGR (FY18-21E) 13% 17%

EPS CAGR (FY18-21E) 22x 16%

P/E (FY20E) 11x 8.5x

P/B (FY20E) 1.8x 1.3x

EV/EBITDA (FY20E) 6.5x 7x

ROE (FY20E) 18% 17%

Rating LONG LONG

Target EV/EBITDA multiple 7.5x 8x

Target Price (Rs) 77 282

Upside 27% 31%

Home Textiles Sector OVERWEIGHT

January 6, 2019 Analysts: Vikas Jain ([email protected], 7574885492), Maulik Patel ([email protected]) Page 2 of 10

Global textile & apparel market — Key dynamics

Exports dominated by developing nations

According to WTO data, global textile trade touched US$ 748bn in 2017, of which clothing

and apparels trade stood at US$ 456bn (~61%) and textiles trade at US$ 292bn (~39%). China

and developing countries like India, Vietnam and Bangladesh lead textile and apparel

exports globally, with major manufacturing activities concentr0ated in these regions.

Exhibit 1: China dominated most of the exports from developing nations

Source: WTO.org, Equirus Securities

The global home textile market is currently valued at ~US$ 50bn at the wholesale level,

largely dominated by Asian players with India and China having a market share of 11% and

35% respectively. With strong improvement in overall macro indicators, the global home

textile market is expected to reach US$ 67bn in 2020, at an 8.3% CAGR over 2015-2020.

Key consumption markets of home textile products

US and Europe are the major end markets, comprising a third each of the home textile

market. US, being a homogenous market, is very attractive to target and explains the high

concentration of Indian players there. While Europe is also an equally big market,

heterogeneity in consumption due to sharp differences in buying habits make it a difficult

market to cater to. Additionally, preferential tariffs given to competing countries like

Pakistan and Bangladesh by Europe put Indian players at a disadvantage.

Exhibit 2: US & Europe — Major end markets comprising one-third share each

Source: Welspun Investor Presentation, Equirus Securities

US market — Multiple growth levers driving overall consumption

The US home textile market is valued at ~US$ 17bn with cotton home textile products

accounting for more than 2/3rd of the market. Home textile imports of the US constitute

~24% of global home textile imports, making it the most important markets for home textile

manufacturers in the world.

US markets displayed considerable strength in 2017 with improving economic indicators like

consumer confidence, employment statistics and personal consumption. This led to a ~3.5%

increase in overall retail sales from US$ 4.82tn in 2016 to US$ 4.99tn in 2017, with further

growth of >3% over the next three years (Exhibit 03). Favourable macro conditions and rising

personal consumption will maintain dominance of the US market in global textile trade.

China, 35%

EU-28, 24%

India, 5%

Vietnam, 4%

Bangladesh, 4%

Turkey, 3%

US, 2%

Pakistan, 2%

RoW, 20%

US34%

Europe33%

RoW33%

Global Home Textile Market Composition



Exhibit 3: Rising confidence of US consumers signals expectations of a pickup in economy

Source: Consumer Confidence Index (CCI) OECD 2018

Exhibit 4: Increasing employment in US population is leading to…

Source: US Bureau of labour statistics

Exhibit 5: ... strong growth in disposable income which in turn will boost consumption

Source: Bureau of Economic Analysis

Exhibit 6: Rising employment, disposable income has led to a pick-up in US home sales

Source: US Consensus Bureau

94

95

96

97

98

99

100

101

102

May-0

8

Oct-

08

Mar-

09

Aug-0

9

Jan-1

0

Jun-1

0

Nov-1

0

Apr-

11

Sep-1

1

Feb-1

2

Jul-

12

Dec-1

2

May-1

3

Oct-

13

Mar-

14

Aug-1

4

Jan-1

5

Jun-1

5

Nov-1

5

Apr-

16

Sep-1

6

Feb-1

7

Jul-

17

Dec-1

7

May-1

8

Oct-

18

US Consumers' Confidence Index (%)

58.5%58.3% 58.4%

58.6%58.8%

59.3%

59.7%59.9%

60.1%

60.6%

57%

58%

58%

59%

59%

60%

60%

61%

61%

Jan'10 Jan'11 Jan'12 Jan'13 Jan'14 Jan'15 Jan'16 Jan'17 Jan'18 Nov'18

US Population Employment Ratio (%)

10,000

10,500

11,000

11,500

12,000

12,500

13,000

13,500

14,000

14,500

15,000

Aug-0

9

Dec-0

9

Apr-

10

Aug-1

0

Dec-1

0

Apr-

11

Aug-1

1

Dec-1

1

Apr-

12

Aug-1

2

Dec-1

2

Apr-

13

Aug-1

3

Dec-1

3

Apr-

14

Aug-1

4

Dec-1

4

Apr-

15

Aug-1

5

Dec-1

5

Apr-

16

Aug-1

6

Dec-1

6

Apr-

17

Aug-1

7

Dec-1

7

Apr-

18

Aug-1

8

Real Personal Disposable Income (In Bn USD)

485

375

323 306

368

429 437

501

561

613 620

0

100

200

300

400

500

600

700

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 10M18

US House Sales (In 000 units)



Exhibit 7: Consistent growth in US retail sales for last 8 years


Europe — Preferential duty access restricts exporters to target aggressively

Europe’s home textile market is heterogeneous in nature with different cultures leading to

wide range of preferences for home textile products. This makes EU a difficult market to

serve. Additionally, there is preferential access given to some countries like Pakistan and

Bangladesh, which makes imports from these countries duty-free. Heterogeneity and

preferential duty access have marred Indian and Chinese exporters from aggressively

pursuing the European market for gaining market share.

Exhibit 8: Pakistan & Turkey command a major part of Europe’s home textile imports


Exhibit 9: EU’s preferential duty structure benefits select countries

Countries Import Duty Structure

India 6-9%

Pakistan Duty Free

Bangladesh Duty Free

Turkey Duty Free

Source: Equirus Securities

Preferential duty access has enabled Pakistan to consistently gain market share in Europe’s

overall imports. With market share increasing from 26% in CY09 to 38% in CY17, Pakistan is

the largest home textile exporter to EU. EU and Turkey are linked by a Customs Union

Agreement which makes imports and exports from Turkey to Europe exempt from import

duties.

India’s share in EU’s home textile imports have remained largely constant at 12-13%, mainly

due to higher landing costs of Indian goods to the European market. This has resulted in

Indian manufacturers competing only in premium categories. While India is in discussion

with the EU for an FTA which would reduce these duties significantly, the timeline for

conclusion of the agreement remains uncertain.

4.354.53

4.63 4.74.82

4.995.16

5.325.48

3.0

3.5

4.0

4.5

5.0

5.5

6.0

2012 2013 2014 2015 2016 2017 2018E 2019E 2020E

US Retail Sales (In tn $)

Pakistan38%

Turkey19%

China18%

India12%

Bangladesh6%

RoW7%

EU's Home Textile Market Composition



India — A big player in global home textiles market

Unmatched advantage in cotton home textiles

India commands a significant position (11% market share) in the global home textile

industry, particularly in cotton-based home textile products. This is largely due to a myriad

of competitive advantages that India has over its competitors, which put it in a unique spot

over other competing nations like Pakistan, Bangladesh and Vietnam.

Exhibit 10: Key factors that give competitive edge to India over others


Cotton availability

India is one of the largest producers of cotton in the world as well as a net exporter of

cotton and cotton yarn. It has the distinction of having the world’s largest area under cotton

cultivation. India’s closest competitor in terms of production is China, which is a net

importer of cotton (Exhibit xx). Ready availability of cotton gives domestic home textiles

players an edge in form of quick raw material supply and lower cotton prices.

India’s advantage of being the largest producer of cotton is expected to continue as the

country’s India’s cotton yield at present is 504 KG/HA, much lower that overall global

average of 596 KG/HA. This indicates a huge growth potential in terms of cotton yield and

production. FY18 saw a higher-than-expected rise in cotton acreage at 19% and a

consequent 11% increase in crop production; however, due to the pink bollworm attack in

some parts of the country, stock available for sale in the market was lower. The year started

with high cotton prices of Rs 43,000-44,000 per candy, which corrected to

Rs 38,000-39,000 per candy with the start of the cotton season; nevertheless, it again shot

up to Rs 40,000-41,000 per candy in Dec’17 and Jan’18 as the crop loss due to pink bollworm

became evident.

Exhibit 11: FY18 Cotton Balance Sheet (In mn meters)

Country Opening

Stock Output Import Consumption Exports

Ending Stock

World 18.9 26.7 NA 26.3 NA 19.2

US 0.6 4.6 - 0.7 3.4 1

India 2.4 6.2 0.4 5.3 1 2.7

China 10.5 6 1.1 8.7 - 8.9

Pakistan 0.5 1.8 0.6 2.3 - 0.6

Competitive cost

India provides a cost-effective model of manufacturing for textile players. As compared to

key competing countries, India has one of the lowest labor costs at US$ 160-180/month,

power cost of US$ 0.10-0.12/KWH and water cost at US cents 16-20/m3. Higher finance

costs vis-à-vis competing countries is partly mitigated through various government policies.

Thus, Indian manufacturers get a competitive edge in terms of cost over other countries

manufacturing home textiles.

Exhibit 12: India’s cost advantage over other cotton-producing countries

Cost Element Unit India Bangladesh China Vietnam

Labour Cost US $/ month 160-180 100-110 550-600 170-190

Power Cost US$/kwh 0.10-0.12 0.09-0.12 0.15-0.16 0.08-0.10

Lending Rate % 11-12% 12-14% 5-6% 6-7%

Water Cost US Cents/m3 16-20 20-22 55-60 50-80

Socio-economic contribution

The textile industry is an integral part of India’s development because of its role in earning

foreign exchange and generating employment. It works on the fundamental strength of a

strong production base of a wide range of fiber/yarns from natural fibers like cotton, jute,

silk and wool to synthetic/man-made fibers like polyester, viscose, nylon and acrylic. The

Cotton Availability

Competitive Costs

Socio-Economic Factors

Supportive Govt. Policies



industry is also labor-intensive and one of the largest employers (~40mn workers directly,

60mn workers indirectly). It contributes 14% to the country’s manufacturing, 4% to the GDP

and 13% to the country’s export earnings. With significant employment generation and

contribution to exports earnings, the textile industry occupies an important space in

framing the economic and policy decisions of the country.

Supportive Government policies

India’s textile industry, being an integral part of the country’s development, foreign

exchange earnings and employment generation, benefits from central and state

government policies which are conducive for industry growth. Various policies devised by

Indian government to boost the growth of India’s textile sector are as follows:

• Amended Technology Upgradation Fund Scheme (ATUFS): Under this scheme,

government provides credit linked capital investment subsidy with an objective of

augmenting investment, productivity and employment in textile sector. The

percentage of subsidy depends upon the type of machinery purchased.

• Merchandise export scheme (MEIS): This scheme was started to offset the

infrastructural inefficiencies & associated cost of exporting products produced in India

which can generate employment and enhance India’s competitiveness in the world

market. In this, 2% of FOB value of exports is paid to the manufacturer on quarterly

basis. This rate has been doubled to 4% to increase India’s competitiveness as compared

to other nations.

• Duty Drawback: This involves refund of duties paid to government like excise duty and

others. Before GST, this was at ~7-8% which has been reduced to 2% post GST. But due

to falling textile exports across categories, this has recently been increased by upto

0.6% across categories.

• Rebate on State Levies (ROSL): In the ROSL scheme, the Central Govt. provides rebate

of State levies comprising of State VAT/CST on inputs including packaging, fuel, duty

on electricity generation and duties and charges on purchase of grid power as

accumulated through the stages of production from yarn to finished made-ups. ROSL is

currently provided at ranging from 1.5-2.2% for textile products.

India — Second largest home textile exporter after China

The world’s top-10 importing nations contribute to around 80% of the home textiles market

with EU-28 comprising 36% of overall imports and US ~24%. To these importing nations,

China is the largest supplier with a market share of 35% followed by India with exports close

to US $5bn and a market share of 11% (2017).

EU-28, being a difficult market to serve, is less preferred by India’s home textile exporters

while US being a homogenous and easy-to-serve market is most preferred. Main products

which are currently supplied to US markets include cotton sheets, cotton towels,

bedspreads and cotton pillow cases.

Rising dominance of Indian goods in US bed sheet and towel market

According to the Office of Textiles and Apparels (OTEXA) US, India supplied about 39% of

cotton towel imports into the US in CY17, up significantly from the levels of 30% in CY09.

Even in the cotton sheets segment, India supplied about 50% of total imports to the US in

CY17, nearly doubling from 27% in CY19.

Exhibit 13: India has a dominant position in US towel market


30%

36%38% 39%

23%26% 25% 24%

22% 22% 22% 21%

25%

16% 15% 16%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

CY2009 CY2012 CY2015 CY2017

India China Pakistan ROW



Exhibit 14: One out of every two sheets imported by US is manufactured in India


India Home Textile Industry — A big market in itself

The Indian textile industry has a noteworthy presence in both the Indian economy and in

the international textile economy. The fundamental strength of India’s textile industry is

its strong production base of wide range of fiber/yarns from natural fibers like cotton, jute,

silk and wool-to-synthetic/man-made fibers like polyester, viscose, nylon and acrylic. The

country’s domestic and apparel Industry has grown at a 10% CAGR over 2009-17 and stood

at US$ 150bn in 2017. It is further expected to reach US $200bn by 2019.

Exhibit 15: Indian Textile industry has grown at 10% CAGR over last 8 years

Source: Wazir Analysis, Equirus Securities

Home textile includes products such as bedsheets, pillow cases, blankets, terry towels,

upholstery, table clothes, carpets and rugs. Because of superior product quality, Indian

home textile manufacturers have gained sizeable market share in global home textile

market over the last few years. However, India still accounts for only 7% of the global home

textile trade, leaving significant headroom for growth, which would be driven by market

share gains. Growth in domestic home textiles would be supported by favourable

demographics, increasing household income, rising population and growth in end-use

sectors like housing, hospitality and healthcare.

India’s home textile industry stood at US$ 4.7bn in 2014 and is expected to grow at 8.3%

CAGR during 2014-21 to reach US$ 8.2bn in 2021. India is the third largest home textile

market in the Asia-Pacific region. Around 70% of the domestic home textile market is

unorganized in nature which offers a great opportunity for big and organized players to

capture some market share. Bed linen is the largest product category constituting almost

half of India’s home textile market, followed by bath linen and other products like flooring,

and upholstery.

Exhibit 16: Indian Home textile industry to grow at 8.3% CAGR over CY14-21E

Source: IBEF, Equirus Securities

27%

45%48% 50%

29%

22% 23%20%

26%

18% 16% 15%18%

15% 13% 15%

0%

10%

20%

30%

40%

50%

60%

CY2009 CY2012 CY2015 CY2017

India China Pakistan ROW

70 78 89 92 96 99 108 137 150 2000

50

100

150

200

250

2009 2010 2011 2012 2013 2014 2015 2016 2017 2020E

Indian Textile Industry (In Bn USD)

4.70 5.50 8.200.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

2014 2016P 2021E

Indian Home textile Industry (US $ Bn)



Exhibit 17: Bed linen products are almost half of Indian home textile industry

Source: IBEF, Equirus Securities

Growth drivers of Indian Home Textile Industry

• Rising supply, but overall pie also increasing

Despite a demand pickup in both domestic and global markets, there is still a vacuum to

supply more goods as most home textile units are not operating at their full capacities.

Further, investment in newer technologies and processes, and benchmarking these with

global units will help Indian home textile manufacturers to gain market share in both

domestic and global markets.

• Premiumization, branding to boost demand growth

The preference for branded and premium products has increased over the years. This has

led to home textile companies going aggressive in branding their products, resulting in

improved sales for branded home textile products. There is a supply glut in the lower-end

of the pyramid with a high supply of basic goods. Players able to differentiate their products

are able to gain the market share.

• Constant innovation, R&D to lead to high demand

In similar lines to the clothing and apparel industry, the home textile market faces a

continuous change in designs and fashions. Companies that are able to cater to the rapidly

changing needs typically dominate the market.

• Changing retail trends

The rapidly expanding Indian e-commerce industry is expected to surpass the US to become

the second-largest e-commerce market in the world by 2034. Rising internet penetration is

expected to lead growth in e-commerce and this sales channel is likely to be a major growth

driver of the industry.

US Home Textile Market: Disruption & recovery

The US home textiles market has been under pressure from 2017-beginning led by sluggish

demand conditions and customer purchases shifting to the online channel, forcing some

retailers to make major changes in their business models (some who did not change had to

close down).

Higher online buying forces industry players to transform business models

The advent of aggressive marketing & promotions by giant online players along with the

convenience of getting the product delivered to the doorstep has led to a major shift in

buying patterns of buyers across the globe. This trend gathered momentum with an influx

of online startups coming up with offerings in segments like electronics, kids wear, toys,

and menswear.

Preference for online shopping due to its ease and convenience was further boosted by a

series of discounts and offers conducted by online retailers like Amazon and others,

attracting many customers to purchase goods online.

While a significant shift was seen in some industries like electronics, books and apparels,

(some saw ~70% of sales moving online), the home textile industry was not impacted to a

great extent given the element of touch & feel present for making purchase decisions.

According to industry estimates, 10-15% of home-textile sales have shifted to the online

platform. This was partly contributed by new online startups offering attractive discounts

and also due to lower footfalls in stores of big retailers as most other products were

purchased online.

Rising consumer preference for the online platform prodded many retailers to make

significant changes in their business models — ranging from becoming more aggressive on

their online channels and trimming down their non-profitable stores to shifting entirely to

e-commerce sales and shutting down all retail operations. Exhibit 17 shows many of the

retail stores chains downsizing operations because of lower footfalls in their stores.

Bed Linen49%

Bath Linen18%

Others (Floor, Upholstery, etc)

33%

Product Mix of Indian Home textile Industry



Exhibit: 18: List of some prominent retailers downsizing with online channels eating away

sales and reducing footfalls

• J.C. Penney: The department store chain closed 138 stores last year while restructuring its

business to meet shifting consumer tastes.

• Michael Kors: With same-store sales plunging, the upscale fashion retailer said it would close

as many as 125 stores to adapt to a difficult, promotional sales environment.

• Sears/Kmart: Sears Holdings is one of the most prominent traditional retailers to suffer in a

tough sales environment. The brand shuttered 35 Kmart locations and 8 Sears stores last July

and has closed more than 300 locations last year amid pressure from ecommerce outlets.

• Abercrombie & Fitch: Facing declining sales, the once-prominent fashion brand announced

last March that it would close 60 of its U.S. stores with expiring leases during its 2017 fiscal

year. The chain has closed hundreds of store locations over the last few years while placing

an increased emphasis on online sales.

• The Limited: After a brutal holiday season in 2016, the clothing chain closed all 250 of its

physical stores last January as part of a bid to focus on ecommerce. The closures reportedly

resulted in the loss of about 4,000 jobs.

• Aerosoles: The New Jersey-based women’s footwear company filed for bankruptcy last year

and announced plans to move forward with a “significant reduction” in its retail locations.

• Bebe: The women’s apparel chain closed all of its remaining 168 stores by last May, days

after it said it was exploring “strategic alternatives for the company” amid plunging sales.

• Bon-Ton Stores Inc.: The struggling department store filed for Chapter 11 bankruptcy,

according to court papers filed in February. The chain, which operates 256 stores in 23 states,

also announced it plans to close 42 stores in 2018 as part of a restructuring plan.

• The Children’s Place: A fixture at shopping malls, the children’s clothing retail said it will

close hundreds of store locations by 2020 as part of a shift toward digital commerce.

• Gymboree: The kids clothing retailer confirmed last July that it would close 350 of its more

than 1,200 store locations to streamline its business and achieve “greater financial

flexibility,” according to CEO Daniel Griesemer.

Source: FoxBusiness

There were a series of actions taken by retailers to deal with the changing trends. Some

players who found difficult to adjust with the changing buying patterns had to forcefully

close down stores and move to the online channel only, while some became more aggressive

with their online presence while continuing with their retail operations. The first action

taken by most retailers to deal with this uncertainty was to cut down order sizes and destock

the existing inventory so as to prevent any inventory losses. This led to a sharp dip in sales

of most home textile exporters. Exhibit 18 shows the dip in sales of leading home textile

companies of India due to the destocking exercise of retailers.

Exhibit 19: Most peers saw their revenues affected due to a shift in buying patterns in

FY18

YoY Revenues (Growth/Decline) % 1QFY18 2QFY18 3QFY18 4QFY18

Welspun -3.3% -10.2% -6.9% -14.3%

Trident 1.2% -2.3% -0.1% -7.5%

Indocount -16.2% -18.1% -8.4% -13.2%

Himatsingka Seide 6.5% 10.0% 8.8% -3.6%


Efforts pay off with recovery seen across product categories

The impact of destocking was largely seen from 2018-beginning on all major exporting

countries to US like India, China and Pakistan. For the first six months of 2018, cotton sheets

saw a 3% decline in volumes and 7% decline in value while terry towels saw an 18% decline

in volume and 17% decline in value. Pillow cases too saw a decline of 7% in volumes and 14%

in value for the same period. The market share fall was also observed in some categories

with low unit costs as importing from nearby countries saved on logistics costs. Other

exporting countries like China and Pakistan too saw a decline in their exports to the US.

While the dip in the exports to US was seen across Indian players, aligning their business

models that suited the changing needs of US customers led to a recovery in sales to the US

from latter half of 2018. With the impact of destocking subsuming and restocking

happening, the demand for the home textile products started increasing at a gradual rate

and is expected to restore to normal levels. This was visible in the export numbers which

saw a positive uptick and year-on-year improvement in sales at both country and company

levels (Exhibit 19). The decline in volumes in the first-half is expected to be be made up in

the second half, resulting in either flat or some market share gains for India.



Exhibit 20: Sales pick-up in latter half made up for sharp decline in first half; 2018 to

end with either marginal decline or flat sales

Value Growth – YoY Jan-Jun'18 Jul-Oct'18 10M2018

Cotton Sheets

World -5% 4% -3%

India -7% 7% -1%

Terry Towels

World -8% 9% -3%

India -17% 19% -5%

Pillowcases

World -7% 3% -3%

India -14% 6% -6%

Bedspreads

World 8% 14% 11%

India 17% 2% 10%

Source: Otexa, Equirus Securities

Exhibit 21: India’s cotton sheets exports to US picked up in H2 resulting in some

market share gains


Exhibit 22: India’s terry towel exports to US recovered in H2, leading to flat market share


As seen in the exports data and also mentioned by managements of India’s top exporting

companies, the impact of destocking is coming to an end with retailers restocking to normal

levels and demand picking up gradually. This is further supported by a decline in cotton

prices which stood at Rs 122/kg in Nov’18 from the peak levels of Rs 130/kg, and INR

depreciation at ~10.5% YTD-CY18. Furthermore, the increase in duty drawback rates of up

to 0.6% across major home textile products and extension of MEIS at 4% beyond Jun’30 for

an indefinite period will further boost the recovery in the exports of home textile products.

With demand returning to normalcy and favourable tailwinds kicking in, we expect strong

revenue growth for integrated and specialized home textile exports of India.

37.8%44.9% 45.9% 46.6% 47.8% 48.7% 49.7% 49.8%

23.4%21.7% 23.7% 23.3% 23.0% 21.6% 20.3% 20.8%

22.7%18.5% 17.7% 16.9% 16.8% 15.9% 15.8% 17.1%

16.0% 14.9% 12.7% 13.2% 12.5% 13.9% 14.1% 12.3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016 2017 10M2018

Market share of countries in US's cotton sheets market

India China Pakistan Rest of World

34.6% 36.4% 35.6% 36.5% 38.3% 39.9% 38.8% 38.7%

24.8% 26.2% 25.7% 25.8% 24.7% 23.1% 24.0% 24.8%

24.4% 22.4% 23.2% 22.7% 22.0% 22.0% 21.5% 20.1%

16.2% 15.1% 15.6% 14.9% 15.1% 15.0% 15.7% 16.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013 2014 2015 2016 2017 10M2018

Market Share of countries in US's terry towels market

India China Pakistan Rest of World

January 6, 2019 Analysts: Vikas Jain [email protected] (+91-7574885492)/ Maulik Patel [email protected](+91-8128694110) Page 1 of 25

Before reading this report, you must refer to the disclaimer on the last page.

Welspun India Ltd. Absolute : LONG

Relative : Overweight

Initiating Note Regular Coverage 23% ATR in 15 Months

Continued resilience in US market – Initiate with LONG Textiles

© 2018 Equirus All rights reserved

Rating Information

Price (Rs) 61

Target Price (Rs) 77

Target Date 31st Mar' 2020

Target Set On 6th Jan'2019

Implied yrs of growth (DCF) 15

Fair Value (DCF) 83

Fair Value (DDM) 27

Ind Benchmark SPBSMIP

Model Portfolio Position NA

Stock Information

Market Cap (Rs Mn) 61,138

Free Float (%) 31.52 %

52 Wk H/L (Rs) 82.5/48.8

Avg Daily Volume (1yr) 25,45,278

Avg Daily Value (Rs Mn) 156

Equity Cap (Rs Mn) 1,005

Face Value (Rs) 1

Bloomberg Code WLSI IN

Ownership Recent 3M 12M

Promoters 68.5 % 0.0 % -5.0 %

DII 10.1 % 2.4 % 8.6 %

FII 7.3 % -0.1 % -4.4 %

Public 14.1 % -2.3 % 0.8 %

Price % 1M 3M 12M

Absolute 1.0 % 9.5 % -14.5 %

Vs Industry -1.9 % 1.4 % 1.7 %

Trident 0.2 % 18.4 % -26.0 %

Indocount -6.2 % -6.7 % -53.2 %

Consolidated Quarterly EPS forecast

Rs/Share 1Q 2Q 3Q 4Q

EPS (18A) 1.3 1.0 0.8 0.9

EPS (19E) 1.3 1.2 0.9 0.9

Increasing penetration in the US market through a wide range of quality products has

made Welspun (WLSI) one of the most preferred suppliers to global retailers. Post the

revenue decline caused by traceability issues & changing buying patterns, WLSI has

emerged strong with several corrective actions and changes to business model. With

a set vision of Welspun 2.0 & nearing-end of the capex cycle leading to strong cashflow

generation, we expect growth to return with 12%/22% revenue/PAT CAGR and a

~380/385bps expansion in ROE/core ROIC over FY18-FY21E. We initiate coverage on

the stock with LONG and a Mar’20 TP of Rs 77.

Leading home textile player, well-poised to benefit from changing industry

dynamics: WLSI is India’s leading home textile exporter to the US to the extent that

every 5th towel and every 10th sheet sold in the US is made by Welspun. WLSI has been

proactive in adjusting its business model to cotton traceability issues and changing

customer buying patterns. With a series of steps taken to respond to changing industry

dynamics, enhanced focus on increasing revenue share from underpenetrated markets

and innovative product rollouts, we expect the company to post a 12% revenue CAGR

over FY18-FY21E.

Three pillars to next phase of growth: WLSI has carved out its vision Welspun 2.0 which

articulates strategies for achieving growth. Apart from increasing its market share in the

US, the company will look at driving revenues by (a) launching new products/channels

(tile carpets, fashion & utility bedding, hospitality & healthcare), (b) entering new

markets and scaling up existing markets (Europe & India) and (c) improving the share of

innovative & branded products (from 37% in FY18 to a target of more than 50% by 2022).

Cashflows generated from FY20 to reduce debt levels, boost margins: By installing

the flooring plant by FY20, WLSI is expected to end its multi-year capex cycle. Post

this, cashflows generated from the business will be utilized for debt repayment, which

in turn would boost margins. While EBITDA margins are expected to remain flattish on

a gradual pickup in flooring operations, debt repayment and lower depreciation should

aid PAT margins. We have built in an 50bps/185bps expansion in EBITDA/PAT over

FY18-FY21E with a ~380bps /385bps expansion in RoE/RoCE.

Initiate with LONG, Mar’20 TP Rs 77: WLSI currently trades at 6.5x FY20 EV/EBITDA

and a P/E of 11x FY20E EPS. With uncertainties settling down, volumes picking up and

debt levels reducing, we expect a strong bounce-back in the stock. Initiate coverage

with LONG and a PT of Rs 77 set at 7.5x Mar’20 EV/EBITDA.

Consolidated Financials

Rs. Mn YE Mar FY18A FY19E FY20E FY21E

Sales 60,506 65,649 74,183 85,310

EBITDA 11,234 11,177 14,021 16,294

Depreciation 5,042 4,472 5,365 5,870

Interest Expense 1,408 1,438 1,588 1,355

Other Income 812 796 891 941

Reported PAT 3,850 4,359 5,570 7,007

Recurring PAT 3,850 4,359 5,570 7,007

Total Equity 26,057 29,102 33,584 39,140

Gross Debt 32,807 34,607 30,807 25,307

Cash 2,661 2,771 3,292 5,033

Rs. Mn YE Mar FY18A FY19E FY20E FY21E

Earnings 3.8 4.3 5.5 7.0

Book Value 26 29 33 39

Dividends 0.7 0.7 0.9 1.2

FCFF 3.2 0.8 6.6 10.1

P/E (x) 15.9 14.0 11.0 8.7

P/B (x) 2.3 2.1 1.8 1.6

EV/EBITDA (x) 8.5 8.7 6.6 5.2

ROE (%) 15 % 16 % 18 % 19 %

Core ROIC (%) 7 % 7 % 9 % 11 %

EBITDA Margin (%) 19 % 17 % 19 % 19 %

Net Margin (%) 6 % 7 % 8 % 8 %

Welspun India Ltd. Absolute – LONG Relative – Overweight 23% ATR in 15 Months


Company Snapshot

How we differ from Consensus - Equirus Consensus % Diff Comment

EPS FY19E 4.3 4.5 -3 % Debt reduction in FY20 and a pick-up in

efficiencies of recently-expanded

capacities to boost earnings growth FY20E 5.5 5.8 -4 %

Sales FY19E 65,649 66,560 -1 %

FY20E 74,183 74,935 -1 %

PAT FY19E 4,359 4,496 -3 %

FY20E 5,570 5,782 -4 %

Our Key Investment arguments:

• Leading home textile exporter to benefit the most from changing industry dynamics.

• The vision of Welspun 2.0 will enable the company to strategize its energies towards

attaining the next phase of growth.

• Capex cycle would end by FY20E, and cash flows generated thereafter would

significantly bring down debt levels.

• Expect RoE/RoIC to expand ~380/ 385bps over FY18-FY21E.

• At 6.5x EV/EBITDA and 11x P/E for FY20 EPS, valuations are attractive for a market leader.

Key Assumptions:

Particulars FY18 FY19 FY20 FY21

Capacity Utilization

Towels 80% 87% 93% 88%

Cotton Sheets 80% 85% 90% 88%

Rugs & Carpets 65% 70% 80% 85%

Flooring - - 10% 30%

Gross Margin (%) 50% 49% 50% 50%

Capex (In Rs Mn) 2,873 9,000 5,000 2,000

Risk to Our View: Extended uncertainty related to customer shift towards the online

platform, low acceptance of flooring products, sluggish cashflow generation & subsequent

delay in debt reduction, INR appreciation & rise in cotton prices.

Key Triggers

• Quick settlement of uncertainties, strong acceptance of flooring products, rise in

penetration in Indian & European markets.

Sensitivity to Key Variables % Change % Impact on EPS

Revenue 1 % 2 %

EBITDAM 1 % 8 %

- - -

DCF Valuations & Assumptions

Rf Beta Ke Term. Growth Debt/IC in Term. Yr

7.4 % 1.3 11.8 % 4.0 % 31.1 %

- FY19E FY20E FY21-23E FY24-28E FY29-33E

Sales Growth 9 % 13 % 9 % 8 % 8 %

NOPAT Margin 7 % 8 % 9 % 9 % 9 %

IC Turnover 0.98 1.11 1.45 1.44 1.30

RoIC 7.5 % 9.1 % 13.7 % 14.4 % 12.6 %

Years of strong growth 1 2 5 10 15

Valuation as on date (Rs) 32 40 67 71 72

Valuation as of Mar'20 37 46 76 81 83

Based on DCF, assuming 15 years of 8% CAGR growth and 13% average ROIC, we derive our

current fair value of Rs 72 and our 31 Mar’20 fair value of Rs 83.

Company Description:

Welspun is India’s largest home textile company with a presence in cotton bedsheets,

towels and rugs & carpets. It is Asia's largest and the world’s 2nd largest terry towel

producer. It exports more than 94% of its home textile products to >50 countries, with >68%

of production to the US, 23% to Europe and the balance to Middle East, Australia & Japan.

It supplies to 17 of the top-30 retail chains in the world.

Comparable valuation Mkt Cap

Rs. Mn.

Price

Target Target Date

EPS P/E BPS P/B RoE Div Yield

Company Reco. CMP FY18A FY19E FY20E FY18A FY19E FY20E FY18A FY19E FY18A FY19E FY20E FY18A FY19E

Welspun India LONG 61 61,138 77 31st Mar' 2020 3.8 4.3 5.5 15.9 14.0 11.0 25.9 2.1 15 % 16 % 18 % 1.1 % 1.2 %

Trident NA 67 34,016 NA NA 5.3 7.3 8.4 12.6 9.2 7.9 57.7 1.1 9 % 12 % 12 % 0.9 % 1.9 %

Indocount NA 57 11,183 NA NA 6.4 6.0 7.1 8.9 9.5 7.9 48.4 1.1 14 % 11 % 12 % 1.4 % 1.3 %



Initiate with LONG

One of Asia’s largest home textile players

WLSI is Asia’s largest home textile company with a presence in cotton bedsheets, towels

and rugs & carpets. The company has a towel manufacturing capacity of 80,000 MTPA, the

second highest after Trident India which has an installed capacity of 90,000MTPA but at a

lower utilization rate (45% in FY18 vs. 80% for WLSI). In bedsheets, WLSI’s installed capacity

stands at 90mn meters similar to Indo Count (90mn meters).

WLSI operates two state-of-the-art manufacturing facilities in Gujarat (Anjar and Vapi)

with ~70% integration of its yarn and fabric requirements. It also has a 80MW captive power

plant at Anjar which meets its power requirements. Apart from India, WLSI has warehouses

in the US, the UK and Germany, which ensure quick delivery to retailers.

Almost 85-87% of WLSI’s revenues come from B2B channels with supplies to large retailers

in the US, the UK, Europe and others. The remaining 13-15% of revenues come from B2C

sales under the brands Spaces (domestic market) and Christy (largely UK market).

Lion’s share in world’s largest home textile market

India is the largest home textile player in the US market with a ~38% market share in US

towel market (up from 30% in 2009) and a ~50% market share in the US sheets market (up

from 27% in 2009). Of the current market share of India in the US market, WLSI commands

a dominant position with the company contributing ~50%/~21% of India’s towel/bedsheet

exports to the US.

Exhibit 1: Every 5th towel sold in the US made by WLSI


Exhibit 2: WLSI contributes ~50% of India’s total towel exports to the US


Exhibit 3: Every 10th sheet sold in the US is made by WLSI


Exhibit 4: WLSI contributes ~21% of India’s total sheet exports to the US


15%

19%

10%

12%

14%

16%

18%

20%

CY13 CY17

41%

50%

30%

35%

40%

45%

50%

55%

CY13 CY17

7%

10%

0%

2%

4%

6%

8%

10%

12%

CY13 CY17

16%

21%

0%

5%

10%

15%

20%

25%

CY13 CY17



Exhibit 5: Industry home textile players — A snapshot

Companies Home textile segment & capacity Backward Integration

level

Total Revenues

(FY18, In Rs Bn)

Home textile Revenues

(FY18, In Rs Bn)

EBTIDA Margins

(FY18)

Welspun India Bath linen (Towels - 80,000 MT, Bed linen (Sheets - 90mn metres)

& Rugs - 10mn sq. metres Largely Integrated 60.5 60.5 (100%) 18-19%

Trident Bath linen (Towels – 90,000 MT) and Bed linen (Sheets - 43.2mn metres) Largely Integrated 46.7 22.4 (48%) 19-20%

Himatsingka Seide Bed linen (Sheets - 46mn metres), Drapery & Upholstery - 2mn metres Largely Integrated 22.5 22.5 (100%) 17-18%

Indo Count Bed Linen (Sheets - 90 mn meters) Outsourced 19.6 19.6 (100%) 14-15%

Source: Company, Equirus Securities

Over the years, WLSI has increased its market share in the US led by superior products with

supplies to almost all big retailers which account for majority of home textile sales in the

US. These market share gains were achieved despite high competition from Chinese players

in the US and from a number of home textile players in India as well. This was achieved

due to the following:

Factors driving WLSI’s market share gains in the US

• Wide range of products offered in the home textile segment — bath linen (towels, bath robe),

bed linen (sheets, basic and fashion bedding) and flooring solutions (carpets & rugs).

• World class manufacturing facilities capable of serving bigger orders in terms of order sizes

and SKUs at competitive prices.

• High customer satisfaction leading to repeat business from retailers; 80% of WLSI’s orders are

replenishment orders.

These qualities make WLSI a preferred supplier of home textile products among most of its

customers, thus leading to a higher wallet share.

Egyptian cotton issue a thing of the past, but lessons well learnt

Egyptian cotton is considered to be the best type of cotton in the world because of its long

fiber that makes it softer and stronger. Lack of Egyptian government’s intervention on

regulation of cotton and rapidly declining supplies of authentic long-staple quality Egyptian

cotton (1.4mn bales in 2004-05 vs. only 0.18mn bales in 2016-17) has led to its scarcity.

Apart from Egypt, there are many countries (including India, US, Peru, Israel and China)

who on the basis of technological advancements, are able to produce long-staple cotton

on similar lines as Egyptian cotton with similar quality and strength. Multiple procurement

sources and large number of suppliers have led to fraudulent varieties making their way

into world markets.

In Aug’16, Target, one of WLSI’s major customers discontinued its entire business with the

company, alleging that WLSI used fake Egyptian cotton in bedsheets and pillowcases which

were labelled to be made of ‘100% genuine Egyptian cotton’. The claim was made based

on an audit conducted by Target which could not determine the traceability of cotton used

in these products.

The Indian textile industry is highly fragmented with several unorganized suppliers

dominating the space. Big companies like WLSI, who have to depend on them for their yarn

requirements, find it difficult to keep a tab on such a large number of unorganized

suppliers. This along with shortage of genuine Egyptian cotton may have led to this issue.



Series of steps taken to integrate processes post the Egyptian cotton issue

WLSI took a number of structural, technological, procedural and people steps based on the

recommendations of E&Y — appointed as an individual consultant to improve WLSI’s production and

procurement processes.

• Structural steps: Improvement in the procurement process through vertical integration of

manufacturing units (including ancillary units) along with procuring cotton from certified

sources to ensure that only genuine cotton enters into the system via better tracking — right

from procurement to the finished stage. WLSI also deployed personnel at Egypt to oversee

buying activities.

• Technological steps: Using SAP-based of material and usage of RFID to track cotton through

the entire manufacturing process.

• Procedural steps: Separating planning & verification of Egyptian cotton, keeping buffer

stock to manage rush orders, obtaining Gold seal certification from Cotton Egypt Association

(CEA), increasing audits and surprise visits to vendor facilities along with 3rd party DNA

testing.

• People steps: Segregating the duties of personnel to avoid any procedural lapse.

Exhibit 6: WEL-TRACKTM: A traceability solution process supplemented by OritainTM is

the most comprehensive end-to-end fiber tracking process


To deal with the traceability issue of cotton, WLSI developed a complete end-to-end fiber

tracking process that verified fibers from the origin and at every stage of production,

ensuring rigorous process control of the fiber’s physical parameters. Additionally, WLSI has

also tied up with Oritain Global, a world leader in the use of scientific traceability. This

partnership provides independent validation of WLSI’s supply chain by using a method of

chemical fingerprinting to identify the origin of cotton fiber used for its home textile

products. This exclusive tie-up with Oritain’s traceability technology supplements Wel-

Trak, and demonstrates WLSI’s commitment to full transparency and traceability of its

home textile products throughout the supply chain.

Apart from these production process-related changes, WLSI also carried out a number of

steps to reach out to its retailers and address their concerns — ranging from product recalls,

product replacements, product reviews and product relabeling.

Right measures pay off — All customers barring Target retained

With unfolding of the Egyptian cotton issue, along with Target (which contributed ~10% of

revenues), business from other customers was also impacted to the extent of product

supplies which were claimed to be fake; this led to an overall impact of ~13% on revenues.

Barring Target, business from other customers was restored to earlier levels by adopting a

series of corrective steps and addressing their concerns.

Well-poised to leverage on changing business dynamics

Change in buying patterns impacts overall demand

Aggressive marketing & promotions by giant online players along with convenience of

getting the product delivered to the doorstep has led to a major shift in buying patterns of

buyers. This along with an influx of online startups coming up with offerings in segments

like electronics, kids wear, toys, and menswear has totally changed the buying patterns of

customers in various segments. Additionally, series of discounts and offers conducted by

online retailers like Amazon and others has attracted masses to buy goods online.

The home textiles segment, unlike other industries like electronics, books and apparels

(which saw ~70% of sales moving online) saw relatively lower volumes moving online.

According to industry estimates, 10-15% of home-textile sales have shifted to the online

platform. This was partly contributed by new online startups offering attractive discounts

and also due to lower footfalls in stores of big retailers as most other products were

purchased online.



Just like any trend picks up pace in initial stages and gradually wanes with time, we expect

this trend of online buying picking up from current 10-15% levels to 20-25%, and then

stabilizing at those levels. European markets, which are comparatively more mature than

the US, had experienced similar changes and settled at these levels. Additionally, home

textile products warrant the element of touch & feel and are totally different from

electronics like mobile phones wherein 70-80% of sales can move online.

Welspun makes amends, effectively takes on the ecommerce challenge!

WLSI, being the largest exporter of home textile products to the US, was also impacted by

this shift and the subsequent destocking by almost all retailers. In accordance with

retailers, manufacturers like WLSI had to make significant changes in their business models.

Steps taken by WLSI to tap the ecommerce opportunity

• Key ecommerce platforms

Key e-commerce platforms have increased the share of private labels to capture more value,

cater to increased volumes and have a better control over products. WLSI is increasing its

focus on being a preferred sourcing partner for private labels of such ecommerce platforms.

• Big-Box retailers’ website

WLSI has been a preferred supplier to almost all giant retail chains and shared strong

relationships will them for last many years. With buyers moving online for purchases, these

retailers have turned aggressive in online sales. WLSI as adopted to sell its products with a

presence on websites of these retailers. It also includes providing omni-channel support to

retailers on product development, warehousing, pick & pack, drop-ship and analytics.

Welspun has also signed a deal with Amazon to supply its products under Amazon’s private

label, Amazon Basics, with shipping to happen in the next 1-2 quarters.

• WLSI’s own website, Shopwelspun.com

WLSI has become aggressive on its own website to sell branded products. It also tried to

increase its brand presence through its website across key markets.

• Exclusive online D2C players

With online trend picking up, there was an influx of startups coming up in the home textile

market as well as those working on direct-to-customer sales. WLSI has acquired a minority

stake (for US$ 4mn) in two start-up firms to understand their functioning, strategy and

financials. Learnings gathered will be helpful at the time of launching new brands or a new

online channel.

WLSI also adjusted its retail model in commensuration with big retailers. For instance,

some retailers trimmed on inventory levels and pushed manufacturers to carry inventory

on their behalf. Another change included retailers asking manufacturers to ship goods

directly to customers. WLSI, being a large-scale manufacturer, was able to adopt to such

changes as it owns three warehouses in the UK, the US and Germany where it could store

finished goods on behalf of retailers (at an extra carrying cost) while having tie-ups with

logistics chains that can deliver goods directly to customers (at an added cost to retailers).

Small and unorganized players from India as well as other countries finding it difficult to

operate with such changing needs will have to curtail business from these retailers, leading

to incremental orders to players like WLSI who would gain market share.

Three pillars for next phase of growth

WLSI has a strong growth track record stemming from organic expansion with increasing

penetration in the US market through its wide range of quality products. Over time, WLSI

has changed its offerings as per customer needs, thus remaining a preferred supplier to

most of the global retailers for the last three decades. The company’s revenues have grown

at an impressive 21% CAGR over FY11-FY17 (even as FY18 revenues slid due to retailer-

level destocking) with EBITDA margins expanding from ~11% in FY11 to reach a peak of 27%

in FY16; margin expansion was the result of a number of steps taken by the company

towards backward integration and enhancing the efficiency of operations.

As a preferred supplier to many retailers with a strong track record, WLSI has gained market

share in the US (~19% in towels, ~10% in sheets) over the years. While there is further scope

for WLSI to grow its revenues by gaining market share in towels, sheets and rugs, this may

not be sufficient to achieve the next phase of growth in the coming years. In FY16, WLSI

worked out its vision for Welspun 2.0 with a financial target to achieve revenue of US$ 2bn

by 2020, which was later revised to 2022 due to many one-off events (duty drawbacks,

dealer de-stocking) in FY18.

As a part of the vision ‘Welspun 2.0’, WLSI has identified the following three broad areas

which would drive the next leg of growth:

a) New products/categories along with new channels

b) New markets/scaling up existing markets

c) Improving share of innovative & branded products



a) Pillar 1: New products/categories along with new channels

• Increasing share of flooring products with ongoing capacity expansion

WLSI entered into the carpet category in FY14 with an initial capacity of 6mn sq. meters

with product offerings in decorative carpets and area rugs. Initially, it invested in

building rugs capacity as many customers preferred buying rugs of similar patterns and

colors as towels, and accordingly retailers also sold towels and rugs in combos. Later, as

a category extension, WLSI started manufacturing carpets for living areas and under-the-

table carpets. With good customer response, it increased capacity to 10mn sq. meters

in FY18. The entire flooring segment (carpets & rugs) contributes ~10% of total revenues.

As a part of its vision, WLSI has identified the flooring business as an important driver

for revenue growth. Apart from the existing offerings, the company is venturing into

tile carpets. The domestic market size for tile carpets is estimated to be ~US$ 100mn

with a potential to grow to US$ 500mn. Target customers for its flooring products

would be both institutional and residential.

WLSI ventures into tile carpets — the story so far

• Despite a growing market for tile carpets, there are no big domestic players in this segment

in India; most home textile players are evolving with a major focus on using existing

capacities for bedsheets and towels to serve the global market.

• WLSI, being one of the most evolved players, has identified this space and planned a capex

of ~Rs 11bn to set up a carpet manufacturing plant of 27mn sq. meters in Telangana, AP;

this was against a ~Rs 6bn capex planned for a 7mn sq. meters capacity at Anjar, Gujarat

earlier, with the shift in plant location stemming from attractive terms offered by the

Telangana government. Construction work for this facility has already started and should be

completed by mid-FY20; a major part of the capex would be incurred in FY19. Revenue

contribution from this plant should start flowing in from 3QFY20.

• The new facility will cater to wall-to-wall and tile carpets. In contrast to traditional floor

carpets, tile carpets come in small pieces which offer the convenience to wash only a small

part of the carpet (with stains for instance) vis-à-vis the entire carpet earlier, saving customers

significant time and energy on this tedious job.

• In India, a large proportion of tile carpets are imported, which attract 25-30% import duty.

WLSI, being one of the first players to have such a carpet manufacturing facility, would see

a significant boost to its revenues and margins.

• Untapped opportunities in bedding category

Though a large portion of WLSI’s revenues comes from sheets, it does have some

presence in basic and fashion bedding business. As per management, there is a large

untapped opportunity in categories like basic bedding, comforters and quilts.

Currently, China dominates this market but with an increase in China’s cost of

production and rising preference for quality, India is gradually making inroads into this

segment. WLSI, being the largest player, is expected to benefit from this shift. Bedding

contributed ~3% of sales (~Rs 1.8bn) in FY18.

• Technical/advanced textiles: Another big opportunity

In the past, there has been strong demand growth for technical/advanced textiles with

specialized applications such as healthcare, fire departments, aerospace, defense,

automobile, railways and others. These products are made with specialized features

such as being fire retardants, stain resistant, anti-bacterial, PET resistant and soil

resistant.

WLSI is gradually expanding its product portfolio in technical/advanced textiles with

products such as Welicate baby care wipes, personal care wipes, household wipes and

medical wipes. Recently, the company’s products were approved by a major

automobile company, and its fabric by an airline industry in US and Europe. WLSI also

won a contract to supply pillow covers and napkins to Rajdhani trains in India. The

company currently derives ~2% or Rs 1.2bn revenues from this segment, which we

believe can surely scale up owing to its R&D and product development capabilities.

• New channels: Entering healthcare and hospitality sectors

Though WLSI has a large customer base operating on a global scale, it has continued to

focus on increasing its market by adding new channels. Apart from traditional channels

for selling products to retailers under private labels, the company has identified

hospitality and healthcare as new channels to drive revenues.

The US hospitality market is estimated to be ~US$ 1.5bn in size (for towels and sheets)

and is fast expanding with improving standards of living and disposable incomes. WLSI

currently earns ~US$ 50mn from this category, indicating huge growth potential. It has

tie-ups with hotel chains like Starwood, Hilton and the Taj, and is further looking to

tie up with the Intercontinental Hotel Group (IHG), Accor Group and Marriott

International.



Till now, these retail chains were served by traders who bought in small quantities

from various places. WLSI wants to replace these traders by dealing directly with

hotels and suppling to their branches globally. This will benefit (a) hotels, by

maintaining consistency in products (sheets & towels) as well as (b) WLSI, by creating

a new sales channel. Ingredient brands like Hygrocotton bring some differentiation to

products and thus are preferable to be used by high-end hotels.

Apart from these, WLSI has tied up with Staywell, a startup that ties up with hotels by

a taking few hotel rooms from them and converting them into Staywell rooms. Staywell

infuses wellness into hotel rooms with features and programs to maximize the guest

experience and minimize the impact that travel has on the human body. Typically, these

are premium rooms (10-20% pricier than normal rooms) with facilities like air purifier,

Hygrocotton sheets, suitable lights, aroma therapy and yoga sessions (by Deepak

Chopra). This arrangement is a win-win deal for both parties as hotels receive their share

from Staywell and manufacturers like WLSI get dedicated orders.

On the healthcare side, WLSI is in the process of developing products that suit the

needs of hospitals. As per current demand, WLSI is developing disposable sheets sturdy

enough to lift the patient, but are cheap so can be disposed easily. Through a mix of

cotton, synthetic and viscose, it will develop sheets that meet these requirements.

On the e-commerce front, WLSI plans to sell products on its own website

(shopwelspun.com & shopwelspun.in), on retailer websites (e.g. Walmart.com), and

that of e-commerce players (like amazon.com).

b) Pillar 2: New markets/scaling up existing markets

WLSI has a formidable presence in the US market (for sheets & rugs) which has been

achieved over three decades, with most of the growth coming in the last decade. While

there is scope for WLSI to further grow and increase its market share in the US, we

believe incremental double-digit revenue growth that will fulfill its vision of attaining

US$ 2bn of revenues by 2022 will come from penetration in non-US markets (Europe,

Japan, Middle East countries, Russia, South Africa and India).

Europe

After the US, which contributed 66-68% of WLSI’s revenues in FY18, Europe/India are

the next major countries with a revenue share of 17-18%/6-7%. Despite the FTA

agreement of Europe with countries like Pakistan, Bangladesh, Turkey and Egypt which

gave a duty-free access to the European market, WLSI’s revenue share from Europe

has increased from 13-14% in FY14 to 17-18% in FY18 led by the sale of innovative

products. The company believes this strategy of selling innovative and premium

products wherein price sensitivity is lower will increase its sales from Europe.

India

India is the next major market for WLSI after Europe. The Indian urban home textile

market, which stood at ~Rs 257bn in 2016, is expected to grow at an 8.3% CAGR over

2014-21 (to US$ 8.2bn in 2021 from US$ 4.7bn in 2014) mainly due to (a) the

government’s policy on ‘Housing for All by 2022’ to boost domestic consumption, (b) GST

implementation resulting in demand shift to the organized sector, (c) rising household

income and (d) growth of end use for sectors like housing, hospitality and healthcare.

Considering WLSI’s growth potential and renewed focus on this market, India is expected

to contribute significantly to the company’s growth in the coming years.



Exhibit 7: India’s home textile industry is expected to grow at a CAGR of 8.3%

Source: IBEF, Technopak, Equirus Securities

India’s home textile market is largely dominated by unorganized players with a share

of >85%. There are no major players with credible brands in India. Very few names like

Bombay Dyeing, D’Décor, and Portico are top-of-the-mind brands that are recalled at

the time of buying.

Exhibit 8: Welspun is present in India with its brand, SPACES


WLSI serves the Indian market with its brand SPACES under which it sells bed, bath

and rugs & carpets currently. Its strategy to make SPACES a well-known brand in the

home textile market includes use of a 360-degree marketing approach by increasing

customer touch points (social media, POS, in-store, PR news, TV, outdoor, radio and

customer services). SPACES has a presence in more than 200+ shop-in-shops, including

major players like shopper’s stop, lifestyle, Home Town and @home. It has also

obtained a license to sell its products with brands of Wimbledon, Minions, Disney,

Royal Ascot, Manchester City, FCB & FIFA World Cup – Russia 2018.

Exhibit 9: Presence in leading LFS stores with license to sell products of top brands


The company derives ~6% of its revenues from the domestic market (estimated to be

~US$ 3.6bn in size). To reach a sizable number in the Indian market, WLSI plans to

launch an affordable brand that will cater to the mass market. Increase in acceptance

of the SPACES brand along with a new flooring capacity should help WLSI achieve its

target of ~20% revenue share from the domestic market by 2022.

4.70 5.50 8.200

1

2

3

4

5

6

7

8

9

2014 2016P 2021E

Indian Home textile Industry (US $ Bn)



c) Pillar 3: Improving share of innovative & branded products

WLSI’s innovative product basket includes ingredient innovations like Hygrocotton,

Nanocore, Wel-Track products and innovative products like SpinTales.

• Hygrocotton contributes more than 20% of overall sales

As most products sold in the US markets are through private labels, the only way to

premiumize the product is to create ingredient brands like Hygrocotton & Nanocare.

Hygrocotton is WLSI’s proprietary spinning technology which traps air in its core and

thus naturally maintains an even temperature, soaks up moisture, facilitates airflow,

and is softer. Products based on this technology have witnessed strong traction among

retailers and created a pull factor for WLSI’s products. Sales of Hygrocotton products

have crossed more than US$ 175mn annually for WLSI, forming more than 20% of its

overall sales.

Exhibit 10: Hygrocotton products have various ingredient qualities


Nanocore is another ingredient brand from WLSI’s innovative product portfolio which

prevents dust mites and other allergens from entering the product. After stringent

testing, Nanocare has received asthma and allergy-free certification for bedding

products in the US.

• Moisture sensor sheets: WLSI is developing moisture sensor sheets in which a

conductor wire is stitched along with the yarn so that if it gets wet, the moisture will

increase, which will set off an alarm. This type of arrangement is very useful in places

like old age homes or in US homes where kids (who generally sleep in separate rooms)

wet their beds and require immediate parent attention.

Besides these, WLSI has also developed disruptive innovations like SpinTales which

incorporate artificial reality into bedsheets. It requires an application to be run through a

smart device in which characters from the sheets pop out in the app and the entire story

plays out like a fairy tale. It is more like a game/story book and is targeted towards kids.

Rising demand for innovative products due to high acceptance has led to their share rising

from ~25% in FY14 to ~37% in FY18.

Exhibit 11: Increasing share of innovative products in overall revenues


• Launching Christy brand in other parts of the world

Apart from innovative products, WLSI expects to increase the share of branded sales in its

overall revenue mix. Its branded product portfolio includes Christy and Spaces; while

Christy will be launched in other countries such as the US, China and Middle East, the

company intends to keep Spaces for the domestic market only.

In Jul’06, WLSI had acquired Christy, a dominant brand in the UK with a small presence in

the US and Ireland markets. While it continues to be a major brand in the UK (~22% share

of branded market), it has also seen some early success in the US market. Of late, WLSI

has been revamping the Christy brand to entice a younger customer base; its marketing

campaign includes running new advertising campaigns, opening new stores in the US,

China, Middle East, getting aggressive on online channels and increasing brand awareness

through associations like Wimbledon, Disney and FIFA World Cup. As on Jun’18, Christy had

25%

30%

34%36% 37%

0%

5%

10%

15%

20%

25%

30%

35%

40%

FY14 FY15 FY16 FY17 FY18

Revenue share of Innovative Products (%)



36 stores in China and 18 stores in the Middle East. In the US, where Christy is at a nascent

stage, opening new stores and going aggressive on the e-commerce channel will help push

sales.

All these initiatives seem to be playing out as Christy saw double-digit volume growth over

the last few quarters, mainly driven by aggressive store expansion and a pick-up in its e-

commerce sales (~10% of UK sales; maximum revenue contributor for Christy).

Exhibit 12: Strong growth in Christy revenues over last few quarters

3QFY17 4QFY17 1QFY18 2QFY18 4QFY18

Christy Sales Growth YoY (%) 35% 12% 24% 15% 18%

Apart from SPACES under which products like rugs, sheets and towels are sold in the

domestic market, WLSI plans to launch carpets and other flooring products under the

Welspun brand itself, which is quite well known and would be easier for customers to

recognize and associate with.

Exhibit 13: Increasing share of innovative products in overall revenues


Led by strong growth in Christy and SPACES brands, the contribution of branded products

in overall sales has increased from ~9.5% in FY13 to 17% in FY18. The innovative and

branded product portfolio are not mutually exclusive, and in totality, contributed ~45% of

the company’s FY18 revenues.

Financial profile

Revenues to grow at ~12% CAGR over FY18-FY21E

WLSI has a strong revenue growth track record with an 18% revenue CAGR over 10 years

ending FY17, with FY18 impacted by several one-offs. This growth was driven by timely

expansion of capacities, entry into new product manufacturing, expanding business with

retailers around the world, serving new business segments through new channels,

acquisition of the Christy brand and subsequent expansion to other geographies.

FY18 revenues declined 9% yoy largely due to the traceability issue coming up followed by

destocking by key US customers, pressure from online retailers and a reduction in duty

drawback rates. However, there are signs of recovery seen from 4QFY18 onwards, with

restocking at the retailer level, rising e-commerce sales driven by several initiatives taken

by the company, and a pick-up in domestic sales of SPACES. Exhibit 14 shows quarterly

recovery details shared by management over the conference call.

Exhibit: 14: Key excerpts from last few quarters’ concall signal demand recovery

4QFY18:

• Strong domestic business growth (SPACES).

• Impact of destocking almost ending and restocking taking place.

• E-commerce business now at 10% of Christy sales in the UK.

1QFY19:

• Volume growth for the quarter stood at 8% on restocking by retailers.

• Adjusting for high ROSL and duty drawback rate in 1Q18, revenue growth stood at 8%.

• Domestic business (SPACES) grew 18% yoy

• An 18% growth in sales of Christy Wimbledon towels.

• E-commerce revenues of Christy grew by more than 2x yoy.

2QFY19:

• Double digit revenue growth yoy.

• SPACES revenues grew 20% yoy.

• Balance between Ecommerce & Brick & mortar sales achieved.

10%10%

11%

13%

16%17%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

FY13 FY14 FY15 FY16 FY17 FY18

Revenue share of Branded Products (%)



While WLSI is witnessing a volume growth recovery, FY19 revenue growth would be modest

at 8.5% due to adjustments related to changes in duty drawback and import incentives,

hedging losses arising from volatile exchange rate, and proper retailer-level restocking.

However, with hedges turning favourable, completion of entire restocking exercise, and

flooring revenues kicking in, we expect double-digit revenue growth from FY20 onwards.

We have built in a 12% revenue CAGR over FY18-FY21E driven by:

• Strong growth in non-US markets like Europe and India. Penetration in European

markets would be through increased sales of innovative products where competing

countries like Pakistan, Bangladesh and others do not have a strong hold. Revenue

growth from the Indian market will come from aggressive marketing strategies adopted

to make SPACES a top-of-the-mind brand. This will be further helped by rising sales of

SPACES products through online channels.

• Increase in sales of branded products, with successful acceptance of Christy in the

non-UK market (helped by strong online sales) boosting sales.

• Success in catering to segments like hospitality and healthcare can be an additional

contributor to revenue growth.

• Flooring, the next focus area for WLSI, will be another product to be served in the

domestic market. New plant (set to commence operations by 3QFY20) is likely to boost

revenue growth from FY21 onwards.

• Increase in effective utilization of the newly-enhanced rugs & carpets capacity (from

8mn sq. meters to 10mn sq. meters in FY18).

• Technical and advanced textile products finding higher demand in specialty sectors.

• New channels like e-commerce where WLSI is not only present with the online channel

of existing retailers, but also with giant online retailers and own websites.

Exhibit 15: Revenues to grow at 12% CAGR over FY18-FY21E


EBITDA to grow at 13% CAGR over FY18-FY21

Cotton is a key raw material for WLSI and volatility in cotton prices has a significant impact

on EBTIDA margins. In case of rupee depreciation, the domestic cotton-prices get aligned

with global cotton prices, which in turn adjust with INR, thus mitigating the overall impact

to the margins. But, rise in cotton prices without rupee depreciation has a direct impact

on the margins for the company. WLSI has adopted the policy of procuring its cotton

requirements for the full year in the cotton season i.e. from Oct-March.

WLSI’s gross margins have expanded from 50-51% in FY12-FY13 to 54-55% in FY16-FY17

driven by favorable currency and lower cotton prices. However, with traceability issue

coming up and a subsequent pressure from other retailers along with changing buying

patterns of customers and a sharp uptick in cotton prices has pulled down gross margins by

~500bps to 50% during FY18. We expect gross margins to remain at ~49-50% over FY19E-21E

as the benefits arising from the stabilization of cotton prices will be set off by the gradual

ramp up of the newly commissioned flooring plant.

17 19 21 32 36 45 53 59 66 61 66 74 85

3%

14%9%

52%

13%

23%18%

12% 12%

-9%

8%13% 15%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

0

20

40

60

80

100

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19EFY20EFY21E

Revenues (In Rs Bn) Growth (YoY)



Exhibit 16: Gross margins expected to remain at current levels going ahead


Employee expenses as a percentage of sales which peaked to 11% in FY18 (due to a 9% yoy

decline in sales) will normalize to ~10.5% in FY19-FY20. Post this, due to commissioning of

the flooring plant, employee expenses are again set to increase to 11% from FY21 onwards.

Other expenses as a percentage of sales will decline marginally over time with an increase

in utilization levels (of existing and new plants) and better operational efficiencies. Overall

EBITDA margins as a result, after bottoming out in FY19E at 17%, are expected to again

increase to 19% in FY21E.

Exhibit 17: Operating expenses to largely remain at current levels


Exhibit 18: EBTIDA to rise post bottoming out in FY19E


Multi-year capex cycle expected to end by FY20

WLSI has been under a capex cycle for last many years. Apart from vertically integrating

its production process across the manufacturing chain, it has carried out significant

expansion across segments over the years to meet the strong demand inflow from retailers.

Exhibit: 19: Capex cycle of Welspun over last few years

FY14-FY15: Capex of Rs 11bn

• Installing 170k spindles in Anjar, taking the total count to 300K spindles.

• Addition of 140 looms

• Install a 20 tons/day open ended yarn capacity and upgrade spinning capacity from 12

tons/day to 25 tons/day.

• De-bottlenecking & infrastructure development

FY16 Capex: Rs 11bn

• Increasing towels capacity from 50,000 MTPA to 60,000 MTPA

• Increasing bed linen capacity from 60 mn mtrs to 72mn mtrs.

• Modernization of Vapi plant.

16 19 22 28 33 36 30 32 37

52%

50%

52%

55%

54%

50%

49%50% 50%

46%

47%

48%

49%

50%

51%

52%

53%

54%

55%

56%

-

5

10

15

20

25

30

35

40

FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E

Gross Profit (In Rs Bn) Gross Margin (%)

48% 45% 46% 50% 51% 50% 50%

8% 9% 10%11% 11% 10% 11%

20% 19% 21%20% 22% 20% 20%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY15 FY16 FY17 FY18 FY19E FY20E FY21E

RM costs Employee costs Other expenses

12.7 15.9 15.8 11.2 11.2 14.0 16.3

24%

27%24%

19%

17%

19% 19%

0%

5%

10%

15%

20%

25%

30%

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0


EBITDA (In Rs Bn) EBITDA Margins



FY17 Capex: Rs 7.2bn

• Increasing towels capacity from 60,000 MTPA to 72,000 MTPA

• Increasing bed linen capacity from 72 mn. mtrs to 90mn. mtrs.

• Increasing rugs capacity from 8 mn. sq. mtrs to 10. mn sq. mtrs.

FY18 Capex: Rs 3bn

• Increasing towels capacity from 72,000 MTPA to 80,000 MTPA.

FY19E Capex: Rs 9bn.

• Largely towards construction of flooring plant in Telangana of 27 mn. sq. mtrs.

FY20E Capex: Rs 5bn

• Remainder capex for flooring plant (Rs 4bn) and maintenance capex

Exhibit 20: Barring FY18, capex intensity has been high; capex cycle to end from

FY20E with installation of flooring capacity


WLSI’s capex over the last few years has been targeted towards removing bottlenecks and

increasing capacities. Capex for vertical integration of operations has helped improve its

EBITDA margins from 16% in FY13 to 24% in FY17. As a part of its strategy, the company has

now focused on increasing its front-end processing capacities while leaving back-end

processes like spinning, weaving, and packaging to ancillarisation.

In similar lines to the automobile industry, wherein small units are set up closer to a giant

automobile manufacturer and serve only to its needs, WLSI has many new small units set

up besides its Anjar plant that exclusively manufacture yarn according to the company’s

requirements. This creates a win-win situation for both parties as small manufacturers

do not have to worry about their sales and utilization (which stand close to 95% vs. industry

utilization of 55-60%) while also saving on logistics and material handling costs. For the

company, it is beneficial as it is more like captive outsourcing of its requirements with

assured quality. It is saved from investing in low-ROCE and low value-added businesses. All

processes are controlled in terms of quality and processing checks, ruling out any quality

issues.

Exhibit 21: Regular capacity expansion has and will continue to boost revenues


WLSI will further add flooring capacity for manufacturing tiles carpets with a capacity of

27mn sq. meters at Telangana at a planned capex of Rs 11bn spread over FY19 and FY20.

The capex will be funded with debt and equity in the ratio of 72:28.

11 11 7.2 3 9 5 20

2

4

6

8

10

12

FY14-15 FY16 FY17 FY18 FY19E FY20E FY21E

Capex (In Rs Bn)

50

60

7280 80 80

88

60

72

90 90 90 90

99

8 8 8 10 10 10 10

27 27

0

20

40

60

80

100

120


Towels (In 000' MTPA) Bed Linen (In mn meters)

Rugs & Carpets (In mn sq. meters) Flooring (In mn sq. meters)



Debt reduction to drive earnings growth

Most of WLSI’s expansion activities were funded through a combination of debt and internal

accruals. This resulted in mounting net debt levels (Exhibit 21) which jumped from Rs

17.1bn in FY13 to Rs 30.1bn by FY18-end. The company has adopted a policy of calibrating

its capex to cashflows generated by the business and hence net debt levels are not

expected to increase going ahead substantially.

WLSI will incur a capex of Rs 9bn for the flooring plant in FY19 which will be funded via a

combination of low-cost debt and internal accruals (in ratio of 72:28). Additionally, cash

generated will also reduce some of the old high-cost debt; thus, overall debt levels will not

increase substantially. From FY20, the capex intensity would reduce and cashflows generated

would be used to fund the residual flooring capex (~Rs 4bn) and repay debt. As a part of its

vision, WLSI aims to be net-debt free by 2022 by using a major portion of cashflows to achieve

this target.

Exhibit 22: Total debt to increase in FY19, post which it will start reducing from FY20E


We expect net working capital to remain at the higher levels due to (a) strong growth in

revenue (b) the new flooring plant requiring high amount of inventory of raw materials &

finished goods. As against this, payables days are also set to rise but at a gradual rate

resulting in higher overall net working capital.

Exhibit 23: Net working capital to remain on higher levels


Exhibit 24: FCF generation to be healthier as capex intensity declines going ahead


26.2 31.0 30.3 30.1 31.8 27.5 20.3

2.2

1.6

1.41.3

1.2

0.9

0.6

0%

50%

100%

150%

200%

250%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0


Net Debt (Short Term & Long Term, In Rs Bn) Total D/E

17 20 24 23 24 26

5253

5660 59 58

68 70

7975 75 75

41 41 3943 44 42

0

10

20

30

40

50

60

70

80

90

0

5

10

15

20

25

30

FY16 FY17 FY18 FY19E FY20E FY21E

Net working capital (In Rs Bn) - LHS Receivable Days - RHS

Inventory Days - RHS Payable Days - RHS

9,391

13,280

8,322

5,450

8,895

10,009

11,193

5,763

4,453

3,196 3,248

758

6,621

10,141

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000


CFO (In Rs Mn) FCF (In Rs Mn)



PAT to grow at 22% CAGR over FY18-FY21E

WLSI has been following an accelerated depreciation policy wherein high depreciation is

charged in the initial years of capacity expansion. This will come down in FY19E, post which

the decline will be more than offset by additional depreciation for the flooring plant from

FY20 onwards. Along with this, reduction of high-cost debt will bring down interest

payments. Despite these tailwinds, PAT margins for FY19 are expected to be muted due to

(a) hedging losses, (b) legal fees related to the class action suit in the US, (c) provisions

for advances to IL&FS, (d) high-input costs and (e) some one-offs expenses. However, from

FY20 onwards, higher operating efficiencies, declining depreciation (w.r.t to rising

revenues) and falling interest expenses will lead to a 22% CAGR in PAT over FY18-FY21E.

The company’s return ratios jumped sharply in FY16 and FY17 on the back of multiple

tailwinds of strong demand from retailers, favorable currency, low cotton prices and good

export incentives. However, post FY17, ratios came down due to a weak demand scenario

led by traceability issues, dealer destocking and a shift in buying behavior to online

channels. We expect ROE/ROCE to pick up from FY20E onwards on external factors turning

favorable, demand picking up, reducing debt levels and improving efficiencies. We have

built in a ~380bps/385bps improvement in ROE/ROCE to 19%/12% in FY21E.

Exhibit 25: Expect 22% PAT CAGR over FY18-FY21E on strong revenue growth, flattish

depreciation & lower interest expenses


Exhibit 26: Return ratios to improve on rising profitability and debt reduction


Key assumptions

Exhibit 27: Key Assumptions

Particulars FY18 FY19 FY20 FY21


Towels 80% 87% 93% 88%

Cotton Sheets 80% 85% 90% 88%

Rugs & Carpets 65% 70% 80% 85%

Flooring - - 10% 30%

Gross Margin (%) 50% 49% 50% 50%

Capex (In Rs Mn) 2,873 9,000 5,000 2,000


5.4 7.4 8.2 3.8 4.4 5.6 7.0

10.2%

12.4% 12.4%

6.4% 6.6%

7.5% 8.2%

0%

2%

4%

6%

8%

10%

12%

14%

0

1

2

3

4

5

6

7

8

9


Recurring PAT (In Rs Bn) PAT Margin (%)

42% 43%

38%

15% 16%18%

19%

21%24%

19%

10% 10%13%

15%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%


ROE ROCE



Investment risk & concerns

• Trade wars: WLSI generates more than 90% of its revenues from foreign countries,

primarily the US. With the ongoing trade war of the US with other countries, any

imposition of tariffs or import duty on home textile products manufactured by WLSI

can hit the company’s revenues and earnings. In contrast, any materialization of the

ongoing talks between India and EU to enter an FTA can be a significant positive for

companies like WLSI.

• Customer concentration: A major part of WLSI’s revenues come from big retailers in

the US. Termination of relationship from any customers (like Target in the past) can

have a material impact on revenues and earnings of the company.

• Cotton price volatility: The contracts entered into between WLSI and its customers

are revised every six months (from the date of entry) to factor in any movements in

raw materials and pass them on to customers. WLSI buys its annual estimated cotton

requirement in the cotton season (Oct-March). Any sudden spike in cotton prices can

impact margins for 2-3 quarters, but eventually get passed on. Any inability to pass on

the same can have negative impact on overall margins.

• New markets/products: As a part of its vision, WLSI intends to derive ~20% of its

revenues from the domestic market (current market share 8-10%) by going aggressive

on its SPACES brand and launch of new tiles carpet from its upcoming flooring plant at

Telangana. Non-acceptance of WLSI’s products by customers can slow down the

company’s growth trajectory.

• Currency appreciation: Almost 90-92% of WLSI’s revenues are in foreign currencies.

Though it hedges 60% of its revenues at any point of time, but continuous appreciation

of INR against USD can have negative impact on revenues of the company.

Corporate Governance

Key highlights on corporate governance based on HSS’s recent Annual Reports:

• Company accounts were audited by S R B C & Co LLP, from FY18 prior to which Price

Waterhouse Chartered Accountants LLP were the auditors for the firm for a period of

thirteen years ending FY17. The change in auditors was as per the directions of ICI and

S R B C & Co LLP will continue to be the auditors to the firm for a period of five years.

The reports and findings of the Internal Auditor and the internal control system are

periodically reviewed.

• Welspun’s Board of Directors has an optimum combination of Executive, Non-Executive

and Independent Directors, including women directors. The Board comprises one

chairman, two executive directors, four non-executive and Independent Directors and

one non-executive and non-independent director.

• Welspun has a clear defined dividend policy according to which it pays at least 25% of

its standalone PAT (incl. dividend tax) as dividend.

• Regarding the traceability issue, four putative class action suits filed in USA against

the Company and its subsidiary viz., Welspun USA Inc. by certain consumers were

consolidated in one of the courts during the quarter ended December 31, 2016 and are

proceeding as a single putative class action. The court proceedings are in a preliminary

stage and it cannot be determined at present whether the consolidated putative class

action suit will be permitted to proceed as a class action and therefore the monetary

impact, if any, of the final outcome of the law suit is currently un-ascertainable.



Competitor Analysis

Welspun India (WIL) is India’s largest home textile company with presence in cotton bed

sheets, towels and rugs & carpets. WLSI is India’s largest home textile company with a

presence in cotton bed sheets, towels and rugs & carpets. The company has a towel

manufacturing capacity of 80,000 MTPA, the second highest after Trident India which has

an installed capacity of 90,000MTPA but at a lower utilization rate (45% in FY18 vs. 80% for

WLSI). In bedsheets, WLSI’s installed capacity stands at 90mn meters, only after Alok

Industries (105mn meters) and similar to Indo Count (90mn meters).

Exhibit: 28: Installed capacity of leading home textile exporters of India.

Companies Home textile segment & capacity

Welspun India

Bath linen (Towels - 80,000 MT)

Bed linen (Sheets - 90mn metres)

Rugs & Carpets (10mn sq. metres)

Trident Bath linen (Towels – 90,000 MT)

Bed linen (Sheets - 43.2mn metres)

Himatsingka Seide Bed linen (Sheets - 46mn metres)

Drapery & Upholstery - (2mn metres)

Indo Count Bed Linen (Sheets – 90 mn meters)


Indian home textile export market is largely an oligopoly market where a majority of the

exports is supplied by four or five big players. Welspun is one of the largest market players

having higher installed capacities and utilization levels in comparison with its competitors.

Largely integrated production and high capacity utilization levels have led to higher return

ratios. Indo count have high ROCEs vs. Welspun and others as it outsources almost 75% of

its back-end activities like spinning and weaving to third parties. (Exhibit: 29). Higher

outsourcing has led to lower capital requirements resulting in higher capital employed

turns.



Exhibit 29: Peer comparisons of Welspun for various matrices

Rs Mn Welspun India Trident* Indocount Himatsingka Seide

FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18 FY16 FY17 FY18

Revenue 59,238 66,405 60,506 29,049 38,719 37,124 20,010 19,896 17,092 18,896 21,384 22,491

Growth 12% 12% -9% -23% 33% -4% 24% -1% -14% -3% 13% 5%

Installed capacity

Towels (In MTPA) 60,000 72,000 80,000 90,000 90,000 90,000 - - - - - -

Bed Linen (In mn meters) 72 90 90 5 43 43 90 90 90 23 46 46

Rugs & Carpets (In mn. Sq. meters) 8 8 10 - - - - - - - - -

Utilizations

Towels 92% 97% 80% 41% 50% 45% - - - - - -

Bed Linen 92% 86% 80% 6%# 29% 44% - - - - - -

Rugs & Carpets 76% 85% 65% - - - - - - - - -

EBITDA 15,927 15,834 11,234 6,029 7,780 6,226 4,645 4,284 2,622 2,972 3,777 4,486

EBITDAM 27% 24% 19% 21% 20% 17% 23% 22% 15% 16% 18% 20%

EBIT 12,208 10,780 6,192 3,000 4,150 2,630 4,344 3,953 2,291 2,307 3,197 3,767

Capital Employed 54,707 61,607 62,874 51,509 46,274 48,544 11,205 12,778 14,588 18,968 24,865 36,369

Capital Employed Turns 1.1 1.1 1.0 0.6 0.8 0.8 1.8 1.6 1.2 0.1 0.1 0.1

Pre taxRoCE 24% 19% 10% 7% 8% 6% 29% 33% 17% 11% 15% 12%

Source: Company filings, Equirus Securities #: Utilization was for only one quarter in the year, *: Home textile business



Valuations

WLSI, being the largest Indian exporter of home textile products to the US, is poised to

benefit from changing buying patterns and further utilization of expanded capacities and

upcoming flooring capacities. Strong revenue growth coupled with an increase in operating

efficiencies will provide a boost to earnings. Additionally, cash generated by the business

will lead to significant debt reduction from FY20 onwards. We believe that with a rise in

share of innovative & branded products, incremental revenues from non-US countries and

debt reduction will drive business growth. We have built in a 12%/13%/22% CAGR in

revenues/EBITDA/PAT over FY18-FY21E.

Key rerating triggers: Revenue growth, reduction of debt & expansion of return ratios.

At CMP, WLSI is trading at 6.5x EV/EBITDA, 11x P/E & 1.8x P/B of FY20E earnings. Initiate

coverage with LONG and a target of Rs 77/share based on 7.5x Mar’20 EV/EBITDA. At our

target price, the stock will trade at 14x P/E & 2.3x P/B.

Exhibit 30: Valuation Table

Particulars (In Rs Mn) FY18 FY19E FY20E FY21E

Target EBITDA 11,234 11,177 14,021 16,294

Target EV/EBITDA Multiple (x) 7.5 7.5 7.5 7.5

Target EV 84,254 83,829 1,05,154 1,22,207

Net Debt 30,146 31,836 27,515 20,274

Market Cap 54,107 51,993 77,639 1,01,933

Shares 1005 1005 1005 1005

Target Price 54 52 77 101

CMP 61 61 61 61

Upside -12% -15% 27% 66%

Exhibit 31:TTM P/E vs. 2 year forward EPS Growth


Exhibit 32:TTM EV/EBITDA vs. 2 year forward EBITDA Growth


Exhibit 33:TTM P/B vs. 2 year forward RoE


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Annexure 1: Company Overview

Welspun India started its operations in 1985 as a part of the US $3 bn Welspun Group, which

operates in sectors such as pipes, steel and infrastructure (through listed entities Welspun

Corp Limited and Welspun Enterprises Limited). Welspun India was founded by BK Goenka

and his cousin Rajesh Mandawewala. The company started its business as a synthetic yarn

manufacturer. In 1993, installed its first manufacturing facility at Vapi and soon started

the cotton sheets and towels exports business. The second manufacturing unit at Anjar was

set-up in 2006. It ventured into rugs in 2008. The current CEO, Dipali Goenka (wife of the

founder, BK Goenka) joined the company in early 2000 in its retail business and was

appointed as the CEO and joint MD in 2010.

Welspun aggressively expanded the business from the early 2000s to 2008. It acquired a

couple of companies over 2006-08 (Christy in UK and Sorema in Portugal), both being retail

brands with manufacturing facilities. It invested aggressively in the India retail business,

opening several retail stores under Spaces and Welhome brands. The company also did an

organizational restructuring by demerging its brands, marketing and investment unit

(Welspun Global Brands) in 2008 (post demerger, Welspun India’s products were sold to

this company, which in turn had all the customer relationships).

However, not all these initiatives panned out as planned. In 2012, Welspun India merged

the marketing/branding entity back, bringing all the textile manufacturing, marketing and

brands operations under one roof. It also closed its loss-making operations like Sorema,

Mexico, and a significant part of the Indian standalone store retail operations under the

brand Welhome. The company now uses shop-in-shop model for the Spaces brand (a luxury

brand). In FY13, the company initiated a multi-year capex program to improve its vertical

integration (from 35% to over 70%)—it increased the spinning and weaving capacity,

commissioned a thermal-based captive power plant, expanded its towel, sheeting and rugs

& carpet capacities. Lastly its will also install a flooring plant at Telangana which will

manufacture tiles carpets serving to domestic market.

These measures reflected in improved operational performance starting FY13—the EBITDA

margins have improved from 11% in FY12 to over 25% in FY16. The restructured retail

business is also performing well in India as well as globally. Innovative and branded

products now account for 37% and 17% of company’s revenue (not mutually exclusive),

respectively, and these remain key pillars of the company’s growth strategy.

Exhibit 34: Capacity expansion over years and its utilization rate

Particulars Units FY14 FY15 FY16 FY17 FY18

Towels MTPA 45,000 50,000 60,000 72,000 80,000

Bed Linen mn mtrs 55 60 72 90 90

Rugs & Carpets mn sq. mtrs 6 8 8 8 10


Towels MTPA 99% 102% 92% 97% 80%

Bed Linen mn mtrs 89% 97% 92% 86% 80%

Rugs & Carpets mn sq. mtrs 68% 58% 76% 85% 65%


Exhibit 35: Welspun’s journey over various phases

Source: RHP, Equirus Securities

1985•Began operations in the textile industry as a part of the Welspun Group

1993•Set up towels facility at Vapi, Gujarat

2005•Set up sheets facility at Anjar, Gujarat

2006•Acquired the most prestigious brand of towels in UK - Christy

2008•Entered the rugs segment

2012•Ranked No. 1 Home textile exporter to the US

2014•Started its capex cycle targetted towards vertical integration & capacity expansion

2015

•Entered online space, launched: shopwelspun.com & .in

•Launched brand SPUN globally & Hygro brand in the US

2016•Commissioned India’s largest spinning facility under one roof

2017

•Foray in flooring solutions, smart textiles

•Expanded to Middle East, Japan, Australia & EU

2018•Launched industry defining traceability solution Weltrack



Key Management profile

Board of Directors

B.K.Goenka, Chairman

• Amongst India’s most dynamic businessmen

• Ranked amongst India’s Most Powerful CEO by Economic Times

• Emerging Company of the Year Award in 2008

Arun Todarwal, Independent Director, Audit Committee Chairman

• 20+ years of experience in Finance, Audit, Taxation and Quality Management.

Member of ICAI, practicing since 1981

Anisha Motwani, Independent Director

• 28+ years of experience in advertising, auto-manufacturing, financial and health

services. Currently advisor to World Bank. Voted among ‘50 Most Powerful Women

in Indian Business’ by Business Today for 3 consecutive years.

Pradeep Poddar, Independent Director

• Technocrat & Corporate Leader with 30+ years of experience in consumer

products industry and vast experience in brand building

Arvind Singhal, Independent Director

• MBA from University of California, founded Technopak, India’s leading

management & operations consulting firm with focus on Textiles, Retail,

Healthcare etc.

Shalil Mukund Awale, Nominee Director

• Chief GM at IDBI Bank with nearly 22 years covering areas like Priority sector,

Retail Banking, Investment & Treasury, Venture Capital Finance, Audit.

Management Team

Rajesh Mandawewala, Managing Director

• In-charge of textile business; instrumental in growing reach over 50 countries

• 25+ years of experience in industries varying from Textiles to SAW pipes.

• He is a Qualified chartered accountant

Dipali Goenka, CEO & Joint Managing Director

• Driving force behind textile business, successfully led development of two

brands – SPACES and Welhome

• Graduate in Psychology & completed Management Program from Harvard

Altaf Jiwani, CFO (Welspun India)

• 25+ years’ experience in corporate finance roles across diverse industries.

• Worked with RPG Group for 19years. Last role as CFO, Phillips Carbon Black

Julie McKenzie, CEO (Welspun USA)

• 35+ years of domestic and international experience in sales, merchandising,

sourcing and licensing in the retail industry.

• Has been previously associated with Nickelodeon, Wal-Mart among others

Leigh Taylor, CEO & President (Welspun UK)

• 30+ years of international experience across consumer products industry.

• Turnaround specialist with expertise in innovation & product development

Manjari Upadhye, CEO (Domestic Retail Business)

• 17+ years of experience across the consumer products industry

• Significant contribution in brand building for FMCG companies

Mukesh Savlani, CEO (Welspun Flooring)

• Home-grown CEO with 17+ years’ experience in various roles at Welspun

• Engineering graduate; Leadership Program from Harvard



Consolidated Quarterly Earnings Forecast and Key Drivers Rs in Mn 1Q18A 2Q18A 3Q18A 4Q18A 1Q19A 2Q19E 3Q19E 4Q19E 1Q20E 2Q20E 3Q20E 4Q20E FY18A FY19E FY20E FY21E

Revenue 15,394 16,070 13,980 15,062 15,492 17,799 15,900 16,457 17,563 19,817 18,647 18,156 60,506 65,649 74,183 85,310 Raw Materials Consumed 7,436 8,560 6,900 7,339 7,614 9,179 7,944 8,612 8,678 10,083 9,125 9,428 30,235 33,350 37,314 42,655

Employee Costs 1,660 1,717 1,687 1,690 1,742 1,799 1,729 1,623 1,829 1,907 1,937 2,042 6,754 6,893 7,715 9,043

Other expenses 3,056 2,960 2,869 3,398 3,171 3,927 3,570 3,562 3,725 4,147 3,815 3,447 12,283 14,229 15,133 17,318

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

- - - - - - - - - - - - - - - - - EBITDA 3,242 2,833 2,523 2,635 2,965 2,895 2,657 2,661 3,331 3,680 3,770 3,239 11,234 11,177 14,021 16,294 Depreciation 1,183 1,287 1,272 1,301 1,059 1,083 1,140 1,190 1,315 1,315 1,368 1,368 5,042 4,472 5,365 5,870 EBIT 2,059 1,547 1,252 1,335 1,906 1,812 1,516 1,471 2,017 2,366 2,402 1,871 6,192 6,705 8,655 10,424 Interest 356 325 345 381 342 369 374 353 413 405 397 373 1,408 1,438 1,588 1,355 Other Income 132 230 164 287 286 179 165 165 223 223 223 223 812 796 891 941 PBT 1,835 1,452 1,070 1,241 1,850 1,621 1,308 1,284 1,826 2,183 2,227 1,720 5,597 6,062 7,957 10,010 Tax 550 449 275 342 522 404 392 385 548 655 668 516 1,615 1,703 2,387 3,003 PAT bef. MI & Assoc. 1,286 1,003 795 899 1,328 1,217 915 899 1,278 1,528 1,559 1,204 3,982 4,359 5,570 7,007 Minority Interest 0 0 0 0 0 0 0 0 0 0 0 0 132 0 0 0 Profit from Assoc. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Recurring PAT 1,286 1,003 795 899 1,328 1,217 915 899 1,278 1,528 1,559 1,204 3,850 4,359 5,570 7,007 Extraordinaries 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Reported PAT 1,286 1,003 795 899 1,328 1,217 915 899 1,278 1,528 1,559 1,204 3,850 4,359 5,570 7,007

EPS (Rs) 1.28 1.00 0.79 0.89 1.32 1.21 0.91 0.89 1.27 1.52 1.55 1.20 3.83 4.34 5.54 6.97

Key Drivers

Sheets capacity utilization - - - - - - - - - - - - 80 % 85 % 90 % 88 % Terry capacity utilization - - - - - - - - - - - - 80 % 87% 93 % 88 % Rugs capacity utilization - - - - - - - - - - - - 65 % 70 % 80 % 85 % Flooring capacity utilization - - - - - - - - - - - - - - 10% 30% - - - - - - - - - - - - - - - - -

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

Sequential Growth (%)

Revenue -12 % 4 % -13 % 8 % 3 % 15 % -11 % 4 % 7 % 13 % -6 % -3 % - - - - Raw Materials Consumed -14 % 15 % -19 % 6 % 4 % 21 % -13 % 8 % 1 % 16 % -9 % 3 % - - - - EBITDA -15 % -13 % -11 % 4 % 12 % -2 % -8 % 0 % 25 % 10 % 2 % -14 % - - - - EBIT -16 % -25 % -19 % 7 % 43 % -5 % -16 % -3 % 37 % 17 % 2 % -22 % - - - - Recurring PAT -7 % -22 % -21 % 13 % 48 % -8 % -25 % -2 % 42 % 20 % 2 % -23 % - - - -

EPS -16 % -22 % -21 % 13 % 48 % -8 % -25 % -2 % 42 % 20 % 2 % -23 % - - - -

Yearly Growth (%)

Revenue -3 % -10 % -7 % -14 % 1 % 11 % 14 % 9 % 13 % 11 % 17 % 10 % -9 % 9 % 13 % 15 % EBITDA -23 % -34 % -27 % -31 % -9 % 2 % 5 % 1 % 12 % 27 % 42 % 22 % -29 % -1 % 25 % 16 % EBIT -34 % -49 % -42 % -46 % -7 % 17 % 21 % 10 % 6 % 31 % 58 % 27 % -43 % 8 % 29 % 20 % Recurring PAT -32 % -68 % -25 % -35 % 3 % 21 % 15 % 0 % -4 % 26 % 70 % 34 % -48 % 13 % 28 % 26 %

EPS -38 % -70 % -37 % -42 % 3 % 21 % 15 % 0 % -4 % 26 % 70 % 34 % -53 % 13 % 28 % 26 %

Margin (%)

EBITDA 21 % 18 % 18 % 17 % 19 % 16 % 17 % 16 % 19 % 19 % 20 % 18 % 19 % 17 % 19 % 19 % EBIT 13 % 10 % 9 % 9 % 12 % 10 % 10 % 9 % 11 % 12 % 13 % 10 % 10 % 10 % 12 % 12 % PBT 12 % 9 % 8 % 8 % 12 % 9 % 8 % 8 % 10 % 11 % 12 % 9 % 9 % 9 % 11 % 12 %

PAT 8 % 6 % 6 % 6 % 9 % 7 % 6 % 5 % 7 % 8 % 8 % 7 % 6 % 7 % 8 % 8 %



Consolidated Financials P&L (Rs Mn) FY18A FY19E FY20E FY21E Balance Sheet (Rs Mn) FY18A FY19E FY20E FY21E Cash Flow (Rs Mn) FY18A FY19E FY20E FY21E

Revenue 60,506 65,649 74,183 85,310 Equity Capital 1,005 1,005 1,005 1,005 PBT 5,597 6,062 7,957 10,010

Op. Expenditure 49,272 54,471 60,162 69,016 Reserve 25,052 28,098 32,580 38,135 Depreciation 5,042 4,472 5,365 5,870

EBITDA 11,234 11,177 14,021 16,294 Networth 26,057 29,102 33,584 39,140 Others 617 0 0 0

Depreciation 5,042 4,472 5,365 5,870 Total Debt 32,807 34,607 30,807 25,307 Taxes Paid 1,343 1,703 2,387 3,003

EBIT 6,192 6,705 8,655 10,424 Def Tax Liability 4,010 3,910 3,810 3,310 Change in WC -4,463 63 -927 -1,684

Interest Expense 1,408 1,438 1,588 1,355 Minority Interest 467 467 467 467 Operating C/F 5,450 8,895 10,009 11,193

Other Income 812 796 891 941 Account Payables 6,447 7,734 8,943 9,817 Capex -3,203 -9,171 -4,500 -2,000

PBT 5,597 6,062 7,957 10,010 Other Curr Liabi 2,461 2,854 3,372 4,266 Change in Invest -64 0 0 0

Tax 1,615 1,703 2,387 3,003 Total Liabilities & Equity 72,249 78,675 80,983 82,307 Others 252 0 0 0

PAT bef. MI &

Assoc. 3,982 4,359 5,570 7,007 Net Fixed Assets 34,599 39,126 38,761 34,891 Investing C/F -3,015 -9,171 -4,500 -2,000

Minority Interest 132 0 0 0 Capital WIP 829 1,000 500 500 Change in Debt -303 1,800 -3,800 -5,500

Profit from Assoc. 0 0 0 0 Others 1,713 1,713 1,713 1,713 Change in Equity 0 -467 0 0

Recurring PAT 3,850 4,359 5,570 7,007 Inventory 13,054 13,489 15,243 17,530 Others -2,197 -947 -1,188 -1,951

Extraordinaires 0 0 0 0 Account Receivables 9,310 10,792 11,991 13,556 Financing C/F -2,500 386 -4,988 -7,451

Reported PAT 3,850 4,359 5,570 7,007 Other Current Assets 10,083 9,783 9,483 9,083 Net change in cash -64 110 520 1,742

FDEPS (Rs) 3.8 4.3 5.5 7.0 Cash 2,661 2,771 3,292 5,033 RoE (%) 15 % 16 % 18 % 19 %

DPS (Rs) 0.7 0.7 0.9 1.2 Total Assets 72,249 78,675 80,983 82,307 RoIC (%) 8 % 8 % 10 % 12 %

CEPS (Rs) 8.8 8.8 10.9 12.8 Non-cash Working Capital 23,539 23,476 24,403 26,087 Core RoIC (%) 7 % 7 % 9 % 11 %

FCFPS (Rs) 3.2 0.8 6.6 10.1 Cash Conv Cycle 142.0 130.5 120.1 111.6 Div Payout (%) 20 % 19 % 20 % 21 %

BVPS (Rs) 25.9 29.0 33.4 39.0 WC Turnover 2.6 2.8 3.0 3.3 P/E 15.9 14.0 11.0 8.7

EBITDAM (%) 19 % 17 % 19 % 19 % FA Turnover 1.7 1.6 1.9 2.4 P/B 2.3 2.1 1.8 1.6

PATM (%) 6 % 7 % 8 % 8 % Net D/E 1.2 1.1 0.8 0.5 P/FCFF 18.8 80.7 9.2 6.0

Tax Rate (%) 29 % 28 % 30 % 30 % Revenue/Capital

Employed 1.0 1.0 1.1 1.2 EV/EBITDA 8.5 8.7 6.6 5.2

Sales Growth (%) -9 % 9 % 13 % 15 % Capital Employed/Equity 2.7 2.5 2.4 2.2 EV/Sales 1.6 1.5 1.2 1.0

FDEPS Growth (%) -53 % 13 % 28 % 26 % Dividend Yield (%) 1.1 % 1.2 % 1.5 % 2.0 %

TTM P/E vs. 2 yr forward EPS growth

TTM EV/EBITDA vs. 2 yr forward EBITDA growth

TTM P/B vs. 2 yr forward RoE

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Historical Consolidated Financials

P&L (Rs Mn) FY15A FY16A FY17A FY18A Balance Sheet (Rs Mn) FY15A FY16A FY17A FY18A Cash Flow (Rs Mn) FY15A FY16A FY17A FY18A

Revenue 53,025 59,238 66,405 60,506 Equity Capital 1,005 1,005 1,005 1,005 PBT 7,533 10,745 5,355 5,597

Op. Expenditure 40,283 43,312 50,571 49,272 Reserve 13,314 18,696 22,967 25,052 Depreciation 3,329 3,718 5,054 5,042

EBITDA 12,742 15,927 15,834 11,234 Networth 14,318 19,700 23,971 26,057 Others 2,548 1,740 501 617

Depreciation 3,329 3,718 5,054 5,042 Long Term Debt 30,821 32,478 33,114 32,807 Taxes Paid 1,767 2,393 1,067 1,343

EBIT 9,412 12,208 10,780 6,192 Def Tax Liability 1,661 2,529 4,521 4,010 Change in WC -2,252 -530 -1,522 -4,463

Interest Expense 2,829 2,368 1,583 1,408 Minority Interest 378 412 355 467 Operating C/F 9,391 13,280 8,322 5,450

Other Income 949 904 806 812 Account Payables 6,910 6,652 7,517 6,447 Capex -5,672 -10,478 -6,435 -3,203

PBT 7,533 10,745 10,003 5,597 Other Curr Liabi 2,865 2,989 3,804 2,461 Change in Invest -619 925 -984 -64

Tax 2,090 3,253 1,731 1,615 Total Liabilities & Equity 56,953 64,761 73,283 72,249 Others 220 430 294 252

PAT bef. MI & Assoc. 5,443 7,491 8,271 3,982 Net Fixed Assets 26,270 33,484 36,890 34,599 Investing C/F -6,071 -9,123 -7,124 -3,015

Minority Interest 45 126 48 132 Capital WIP 1,564 1,832 564 829 Change in Debt 568 -2,294 455 -303

Profit from Assoc. 0 0 0 0 Others 1,562 1,469 1,537 1,713 Change in Equity 4 0 0 0

Recurring PAT 5,398 7,365 8,223 3,850 Inventory 11,006 11,046 12,810 13,054 Others -3,820 -5,017 -1,445 -2,197

Extraordinaires 0 0 4,648 0 Account Receivables 4,467 8,499 9,601 9,310 Financing C/F -3,249 -7,310 -990 -2,500

Reported PAT 5,398 7,365 3,576 3,850 Other Current Assets 7,427 6,941 9,025 10,083 Net change in cash 71 -3,153 208 -64

EPS (Rs) 5.4 7.3 8.2 3.8 Cash 4,657 1,490 2,857 2,661 RoE (%) 42 % 43 % 38 % 15 %

DPS (Rs) 1.1 1.3 0.7 0.7 Total Assets 56,953 64,761 73,283 72,249 RoIC (%) 17 % 18 % 16 % 8 %

CEPS (Rs) 86.9 11.0 13.2 8.8 Non-cash Working Capital 13,125 16,845 20,114 23,539 Core RoIC (%) 16 % 17 % 15 % 7 %

FCFPS (Rs) 57.4 4.4 3.2 3.2 Cash Conv Cycle 90.3 103.8 110.6 142.0 Div Payout (%) 23 % 21 % 22 % 20 %

BVPS (Rs) 14.3 19.6 23.9 25.9 WC Turnover 4.0 3.5 3.3 2.6 P/E 11.3 8.3 7.4 0.0

EBITDAM (%) 24 % 27 % 24 % 19 % FA Turnover 1.9 1.7 1.8 1.7 P/B 4.3 3.1 2.6 0.0

PATM (%) 10 % 12 % 12 % 6 % Net D/E 1.8 1.6 1.3 1.2 P/FCFF 1.1 13.7 19.1 18.8

Tax Rate (%) 28 % 30 % 17 % 29 % Revenue/Capital

Employed 1.5 1.3 1.3 1.0 EV/EBITDA 7.1 6.1 6.3 0.0

Sales growth (%) 18 % 12 % 12 % -9 % Capital Employed/Equity 3.5 3.5 3.0 2.7 EV/Sales 1.7 1.6 1.5 0.0

FDEPS growth (%) 486 % 36 % 12 % -53 % Dividend Yield (%) 1.7 % 2.1 % 1.1 % 1.1 %

Home Textiles Sector - Welspun India · 2020. 7. 24. · home textiles space which is growing at 8%...

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Transcript of Home Textiles Sector - Welspun India · 2020. 7. 24. · home textiles space which is growing at 8%...