As Welspun awaits Wal-Mart review, investors brace for worst4 min read . Updated: 25 Aug 2016, 08:25 AM IST
Welspun incident comes at an inopportune time for PM Narendra Modi who hopes to create 10 million jobs and boost exports by $30 billion in the next three years
Mumbai: Welspun Group chairman Balkrishan Goenka earlier this month celebrated his 50th birthday in grand style, with a bash at the five-star St. Regis Hotel in Mumbai. Party-goers hit the dance floor to the pulse of classic Bollywood tunes and feasted on Indian and Western cuisine as well as a massive cake in the industrialist’s honour.
This week has been far less festive for Goenka and Welspun India Ltd, the textiles unit of his conglomerate that’s run by his wife, Dipali. The maker of bedding, towels, rugs and carpets is now caught up in a spin-cycle of negative publicity. On 19 August, Target Corp. said that Welspun had mislabelled 750,000 sheets and pillow cases sold under the Fieldcrest label as premium Egyptian cotton products.
Target took dramatic action, terminating all business ties to Welspun and offering customers refunds.
This week, Wal-Mart Stores Inc. and J.C. Penney Co. have announced reviews of the company’s products and cotton certification records, while Bed Bath & Beyond Inc. said it appointed an independent third party to audit its supply chain. The mishap comes at an inopportune time for Prime Minister Narendra Modi, who in June unveiled a nearly $1 billion package for textile and garment makers to drive jobs growth under his “Make in India" campaign.
“The Welspun issues show the whole industry in a very bad light," said Sanjiv Bhasin, executive vice president for markets at India Infoline Ltd., a Mumbai brokerage. “The overseas retailer will now be very discerning."
Welspun India’s stock tumbled more than 40% over three days after Target said it had pulled the supplier’s products off shelves. In all, $650 million in market value has been vaporized along the way. Welspun Corp., an affiliate that manufactures pipes, has lost about 7%.
“There has been a failure on our part, without an ambiguity," Welspun managing director Rajesh Mandawewala told analysts during a conference call on Monday. “The error is on our side so we have to take responsibility for it."
Welspun has launched an internal audit into its manufacturing process and sourcing. Analysts pressed Mandawewala about why Target was severing its entire business relationship with Welspun—worth $90 million a year—over a dispute about a premium sheet product that only made up 10 percent of the goods it sources from the Indian manufacturer. “It’s very difficult for me to react to this," said Mandawewala.
Welspun is a big player in Indian textiles, and says it produces one in five towels sold in the US. It supplies the biggest retailers there, including Bed Bath & Beyond and Macy’s Inc. It’s part of the Welspun Group, a $3 billion conglomerate headed by Goenka with interests spanning textiles, steel, pipes, energy and infrastructure. About 95% of the unit’s sales last fiscal year came from overseas exports, with the US a key market, it said.
Modi’s stimulus package for textile and garment makers includes subsidies for hiring, tax refunds and relaxation of overtime rules. He hopes to create 10 million jobs and boost exports by $30 billion in the next three years.
At the moment, India is locked in a pitched market share battle with its Asian neighbours in the global textiles market. India’s overseas textile shipments reached about $36 billion in 2014, compared with $27 billion for Bangladesh, $25 billion for Vietnam and China’s dominant $298 billion, according to the latest World Trade Organization data.
Meanwhile, manufacturers face rising prices as the global cotton supply tightens. While futures in New York have retreated from a two-year high reached on 5 August, prices are still heading for a second annual advance. Cotton futures closed in New York at 68.44 cents a pound on Tuesday, up 8.2% for the year.
Goenka skipped college, according to a CNBC-TV18 report, and launched Welspun in 1985 with a textile manufacturing plant in Palghar near Mumbai. By 2000, the company had a production facility in the US and a joint venture with Vincenzo Zucchi SpA in Italy. Six years later, Welspun diversified into oil and natural gas exploration through a tie-up with the Adani Group.
These days, Goenka is something of a business luminary. At the 12 August birthday party, pictures of the industrialist over the years were put up on a life-size board and the two-tier cake was topped by a vintage automobile, according to an Economic Times account of the celebration.
Target didn’t mince words in its 19 August statement in which it ended its business ties to Welspun, nor did it reveal how it uncovered the problem. “This was a clear violation of both Target’s Code of Conduct and our Standards of Vendor Engagement, and was contrary to the high ethical standards to which we hold ourselves, and our vendors," the statement said.
On Monday, Welspun’s Mandawewala said the company is rigorously reviewing what went wrong. “We are taking this issue very, very seriously," he said. “We want to make sure that our supply system and processes are extremely robust going forward." Bloomberg