Mumbai: The $1.5 billion (around Rs7,035 crore) Welspun group, India’s largest steel pipe and home textile furnishings maker, is merging three promoter-owned investment companies that hold majority stakes in three listed units into Welspun Investments Ltd, to unlock value and help raise funds.

Eyeing new areas: Welspun group chairman and managing director B.K. Goenka says he wants Welspun to become a $1 billion retail company by 2012-13. The retail business has also been restructured. Ashesh Shah / Mint

“Our plan is to merge three of our investment companies—Welspun Trading Ltd, Welspun Finance Ltd and Krishiraj Trading Ltd—into one company," Welspun group chairman and managing director B.K. Goenka told Mint in an interview last week.

The three investment companies, fully owned by the promoters, hold 20.55% of Welspun Gujarat Stahl Rohren Ltd, which makes steel pipes to ferry oil and gas; 33.78% of Welspun Syntex Ltd, a polyester texturising unit; and 20.6% of Welspun India Ltd, which makes towels and bed sheets and owns retail stores at home and abroad.

The group will spin off Welspun Investments, which holds the investments of Welspun India and Welspun India Global Brands Ltd, from Welspun India.

“We will have two structures—one at the promoter level and (the) other at the operating level—and we can sell stakes in the holding company as the scope to dilute stake at the operating companies is low," Goenka said.

The group owns a total 36% in the flagship steel company, 37.69% in Welspun Syntex and 44.10% in Welspun India.

“We can either borrow money or sell equity of the holding company to meet future cash requirements," the chairman said, and added that this depends on funding needs in the next growth phase.

A larger shareholding will allow the promoters to boost their position in the holding company, said Anil Harish, legal counsel and managing partner at DM Harish and Co., a law firm that advises clients on corporate laws and tax. New investors will benefit from the growth of the operating company without getting any direct voting rights, he added.

Welspun’s immediate fund requirements are already in place but it needs cash to build power plants.

“We have tied up Rs7,000 crore to fund our existing expansion in steel and retail for two years," said Akhil Jindal, director at Welspun group.

“The next big business for us will be to generate power and the group is building a 660 MW thermal power plant in two phases to fire its steel plants and to sell extra power to users," Goenka said.

Welspun, which started with a small polyester texturising mill in 1985, diversified into home textiles and steel pipes in 1997. It’s the largest exporter of steel pipes and has got accreditation from Chevron Corp. and Exxon Mobil Corp. Welspun India also supplies bed linen and towels to Wal-Mart Stores Inc. and Tesco Plc.

The promoters have diluted their stake in flagship Welspun Gujarat Stahl Rohren to 36% from 44% after raising $250 million through equity sales to qualified institutional investors and foreign currency convertible bonds.

Welspun Gujarat, which has an order book of Rs7,800 crore with a delivery period of 18-24 months, will double margins to $450 a tonne once it builds 1.5 mt steel slabs, said Akhil Jindal.

The company purchased the Aditya Birla Group’s Vikram Ispat sponge iron plant for Rs1,030 crore to make steel slabs in 2009. Welspun Gujarat will also enter the water pipeline segment by building two steel pipe service centres in Bangalore and Paradip for nearly Rs100 crore. Similar centres will come up across the country, Goenka said.

The key risks to Welspun Gujarat are slowing orders due to competition, lower operating margins, price volatility of key inputs such as steel, coal and iron ore and a decline in plate prices that could reduce the company’s cost advantage, Ruchi Vora and Niraj Mansingka, analysts at Edelweiss, wrote in a report on 26 November, soon after the company raised $250 million.

Welspun Gujarat has teamed up with Gautam Adani of Adani Power Ltd to invest in the oil exploration business and plans to quadruple its investment to 00 crore from 50 crore.

“It is a risk and reward business," said Goenka, who does not want to invest too heavily in the venture. “We will restrict our shareholding at 35%."

The retail business has also been restructured. Welspun India, which owns labels such as Christy (towels and bath rugs) and Sorema (a Portuguese bath rug and shower curtains brand), has separated brands and investments into separate companies.

Welspun India will make bed linen and towels, Welspun India Global Brands will acquire or licence more labels to those it already has while Welspun Investments will be a stand-alone investment company.

The recast at Welspun India has two benefits: Welspun India Global Brands has the freedom to market and distribute licensed brands and Welspun India can focus on supplying products to global retail chains.

“In the UK, we have Christy to cater to the top end of the market, America is for big guys," Goenka said. “We are looking at Germany, France, Italy, Istanbul and Moscow," he said and added that he wanted Welspun to become a $1 billion retail company by 2012-13.

The decision to split manufacturing from distribution of retail brands is a better model to de-risk the business, said Pinakiranjan Mishra, partner and national leader at consulting firm Ernst and Young. Production has to be low cost and efficient as it gets lower margins on higher volumes and will have to supply to global retail companies, he added. The home textiles business in India is very small compared with the global market, Mishra said over the telephone on Saturday.

The share of domestic retail in the company’s business will be smaller relative to the other ventures, said Goenka, whose wife Deepali looks after that aspect of the business.

“We have scaled down our retail stores in India to 190 from 260 and 50% of the stores are franchised and the rest owned," he said. “We are not in a hurry to add to these stores."

The global retail business is now demand-led rather than supply-led, Jindal said.

Welspun India’s towel production has been sold to global retail chains for the next 12 months and bed linen for 18 months, Jindal said. The demand for the next 6 months has been much higher than it has ever been in the last two years, he said.