Mumbai: Welspun India Ltd, which saw clients such as Target Corp. cut ties with the company for inaccurate labelling of its bedsheets, said on Tuesday that the issue was not about quality but traceability of the cotton it sourced because of the complex nature of the supply chain.

“The textile industry has become very fragmented. This resulted in the need to source from various suppliers. As a result, our supply chain had become complex and this provided a challenge for tracking and traceability," B.K. Goenka, chairman of Welspun Group, told reporters in Mumbai.

US retailer Target Corp. snapped ties with Welspun, alleging that the Indian textile manufacturer had passed off inexpensive sheets as made of premium Egyptian cotton for two years.

Welspun is moving towards making all its Egyptian cotton products in-house, Goenka said.

The company has taken a one-time charge of Rs501 crore in the fiscal second quarter to provide for all the likely costs. These costs do not account for liabilities that may arise because of the three suits filed against the company in the US, said Goenka.

Speaking about clients terminating contracts, Goenka said that the company continues to work with all its top clients, except for Target.

Its other clients such as Wal-Mart Stores Inc. and Bed Bath & Beyond Inc. have only terminated its Egyptian cotton contracts and continue to work with the firm. Egyptian cotton accounted for 6% of its overall revenue and is now at 3-5% of its overall revenue, said Rajesh Mandawewala, managing director of Welspun Group.

Earlier, a “significantly large" part of its Egyptian cotton manufacturing was outsourced from close to 30 different vendors, Mandawewala said, explaining that the inputs now will have third-party assurances such as Gold Seal from Cotton Egypt Association, vendor audits and DNA tests.

The company is also putting in place systems like radio frequency identification to be able to trace back all its products from cotton to finished products, said Mandawewala, explaining that the one-time charge will include these expenses.

The company also plans to spend Rs600 crore over 18 months spread over financial year 2018 and 2019 to make carpets and rugs.

These initiatives will help it meet is 2020 objective of being a $2 billion textiles business with zero net debt. However in the interim the company will have a muted growth in fiscal 2018 as against the initial guidance, said Goenka.

As of September quarter, the company’s debt stood at Rs2,500 crore.

In the September quarter, Welspun reported a loss of Rs147.52 compared to a net profit of Rs179.37 crore a year-ago. However sales continue to grow. Net sales grew 19% to Rs1,575.71 crore in September quarter from Rs1,327.76 in the year-ago quarter.

To be sure, the stock has already regained most of its lost market capitalization.

Since 22 August when the news first emerged of Target terminating its business relationship with it the stock lost 43% to Rs46.75 up to 30 August. From 30 August to till date, the stock gained 33% to Rs62.

The company’s credit ratings have also been reaffirmed. On 2 November, India Ratings and Research, a Fitch Group Company reaffirmed Welspun India’s credit rating of “IND AA-/Stable", the company said in a statement to BSE.