Equirus - Welspun India - Initiation

Home Textiles Sector
Initiating Coverage
January 6, 2019 Vikas Jain (vikas.jain@equirus.com, 7574885492), Maulik Patel (maulik@equirus.com)

Home Textiles Sector
Promising Textures
© 2018 Equirus All rights reserved
Initiation note
Significant labor cost advantages over other countries, Rising consumer preference for the online platform prodded actions and changes to business model. With a set vision of
leadership positions in key markets and favorable government many retailers to make significant changes in their business Welspun 2.0 & nearing-end of the capex cycle leading to
policies give Indian manufacturers a strong edge in the global models — ranging from becoming more aggressive on their strong cashflow generation, we expect growth to return with
home textiles space which is growing at 8% CAGR and is online channels and trimming down non-profitable stores to 12%/22% revenue/PAT CAGR and a ~360/380bps expansion
expected to reach $67bn in 2020. The fundamental strength shifting entirely to e-commerce sales and shutting down all in ROE/core ROIC over FY18-FY21E. We initiate coverage on
of India’s textile industry is its strong production base of a retail operations. the stock with LONG and a Mar’20 TP of Rs 77.
wide range of fiber/yarns from natural fibers (cotton, jute, Efforts pay off — US sales recover in late 2018 Himatsingka Seide — Initiate with LONG; Mar’20 TP Rs 282
silk) and wool-to-synthetic/man-made fibers (polyester, viscose,
While the dip in the exports to US was seen across Indian HSS is a vertically integrated player with a global footprint,
nylon, acrylic), and ready cotton availability.
players, aligning their business models led to a recovery in and focuses on manufacturing, retailing and distribution of
US — India’s key export market sales to the US from latter half of 2018. With the impact of home textiles. With recent expansion of sheeting capacity,
India’s major export market is the US (homogenous destocking subsuming and restocking happening, the new brand acquisitions and new terry plant commencing
consumption market, attractive to target) — one of the demand for home textile products started increasing, with a operations from H2FY20, it should deliver a 12% revenue CAGR
largest home textile markets in the world. While India does positive uptick and yoy improvement in sales at both country over FY18-FY21. Rising utilization of new spinning plant and
export to the EU too, the market’s heterogeneous nature and company levels. operating synergies will drive 285/100bps expansion in
and preferential tariffs to competing nations like Pakistan, Additional tailwinds offer growth visibility EBITDA/PAT margins over FY18-21E.
and Bangladesh make it difficult to target. According to the Cotton prices have declined to Rs 122/kg in Nov’18 from the
Recommendation snapshot
Office of Textiles and Apparels (OTEXA) US, India supplied peak levels of Rs 130/kg; also, INR depreciation stood at
Himatsingka
~39% of cotton towel imports into the US in CY17, up from ~10% in CY18, which should aid Indian exporters. Particulars Welspun India
Seide
30% in CY09. Even in cotton sheets, India supplied ~50% of Furthermore, the increase in duty drawback rates of up to
Revenue CAGR (FY18-21E) 12% 12%
total imports to the US in CY17, nearly doubling from 27% in 0.6% across major home textile products and extension of
CY09. This was driven by market share gains from China EBITDA CAGR (FY18-21E) 13% 17%
MEIS at 4% beyond Jun’18 for an indefinite period will boost
(down 8-9% in cotton sheets & 2-3% in terry products) & the growth in home textile exports. With demand returning EPS CAGR (FY18-21E) 22x 16%
Pakistan (down 8-9% in cotton sheets & ~2% in terry to normalcy and favorable tailwinds kicking in, we expect P/E (FY20E) 11x 8.5x
products) over 2009-17 & rising manufacturing costs in strong revenue growth for integrated and specialized home P/B (FY20E) 1.8x 1.3x
competing countries. textile exports of India, with players such as Welspun and
EV/EBITDA (FY20E) 6.5x 7x
Higher online purchases disrupt US exports, force Himatsingka Seide at the forefront.
ROE (FY20E) 18% 17%
business model transformations
Welspun India — Initiate with LONG; Mar’20 TP Rs 77 Rating LONG LONG
The US home textiles market has been under pressure over
last two years led by sluggish demand conditions and Increasing penetration in the US market through a wide Target EV/EBITDA multiple 7.5x 8x
customer purchases shifting to the online channel, forcing range of quality products has made Welspun (WLSI) one of Target Price (Rs) 77 282
some retailers to make major changes in their business the preferred suppliers to global retailers. Post the revenue
Upside 27% 31%
models, including cutting down order sizes and destocking decline caused by traceability issues & changing buying
existing inventory so as to prevent any inventory losses. patterns, WLSI has emerged strong with several corrective
January 6, 2019 Analysts: Vikas Jain (vikas.jain@equirus.com, 7574885492), Maulik Patel (maulik@equirus.com) Page 1 of 10
Before reading this report, you must refer to the disclaimer on the last page.
Home Textiles Sector OVERWEIGHT
Global textile & apparel market — Key dynamics Exhibit 2: US & Europe — Major end markets comprising one-third share each
Exports dominated by developing nations Global Home Textile Market Composition
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. US Europe
34% 33%
Exhibit 1: China dominated most of the exports from developing nations
China, 35%
EU-28, 24%
RoW
India, 5% 33%
Vietnam, 4%
Source: Welspun Investor Presentation, Equirus Securities
Bangladesh, 4%
Turkey, 3%
US market — Multiple growth levers driving overall consumption
US, 2%
The US home textile market is valued at ~US$ 17bn with cotton home textile products
Pakistan, 2% accounting for more than 2/3rd of the market. Home textile imports of the US constitute
RoW, 20% ~24% of global home textile imports, making it the most important markets for home textile
manufacturers in the world.
Source: WTO.org, Equirus Securities
US markets displayed considerable strength in 2017 with improving economic indicators like
The global home textile market is currently valued at ~US$ 50bn at the wholesale level, consumer confidence, employment statistics and personal consumption. This led to a ~3.5%
largely dominated by Asian players with India and China having a market share of 11% and increase in overall retail sales from US$ 4.82tn in 2016 to US$ 4.99tn in 2017, with further
35% respectively. With strong improvement in overall macro indicators, the global home growth of >3% over the next three years (Exhibit 03). Favourable macro conditions and rising
textile market is expected to reach US$ 67bn in 2020, at an 8.3% CAGR over 2015-2020. personal consumption will maintain dominance of the US market in global textile trade.
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 3: Rising confidence of US consumers signals expectations of a pickup in economy Exhibit 5: ... strong growth in disposable income which in turn will boost consumption
US Consumers' Confidence Index (%) Real Personal Disposable Income (In Bn USD)
102
15,000
101 14,500
100 14,000
13,500
99
13,000
98 12,500
97 12,000
96 11,500
11,000
95
10,500
94 10,000
May-08
Oct-08
Mar-09
Aug-09
Jan-10
Apr-11
Dec-12
May-13
Oct-13
Mar-14
Aug-14
Jan-15
Apr-16
Dec-17
May-18
Oct-18
Nov-15
Nov-10
Sep-11
Feb-12
Sep-16
Feb-17
Jun-10
Jun-15
Jul-12
Jul-17
Aug-09
Dec-09
Aug-10
Dec-10
Aug-11
Dec-11
Aug-12
Dec-12
Apr-13
Aug-13
Dec-13
Aug-14
Dec-14
Aug-15
Dec-15
Aug-16
Dec-16
Aug-17
Dec-17
Aug-18
Apr-10
Apr-11
Apr-12
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
Source: Consumer Confidence Index (CCI) OECD 2018 Source: Bureau of Economic Analysis
Exhibit 4: Increasing employment in US population is leading to… Exhibit 6: Rising employment, disposable income has led to a pick-up in US home sales
US Population Employment Ratio (%) US House Sales (In 000 units)

61% 60.6% 700
613 620
61% 60.1% 600 561
59.9% 501
60% 59.7% 485
500 437
59.3% 429
60% 375 368
400
58.8% 323 306
59% 58.6%
58.5% 58.4%
58.3% 300
59%
200
58%
58% 100
57% 0
Jan'10 Jan'11 Jan'12 Jan'13 Jan'14 Jan'15 Jan'16 Jan'17 Jan'18 Nov'18 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 10M18
Source: US Consensus Bureau

Source: US Bureau of labour statistics
Exhibit 7: Consistent growth in US retail sales for last 8 years Exhibit 8: Pakistan & Turkey command a major part of Europe’s home textile imports
US Retail Sales (In tn $) EU's Home Textile Market Composition

6.0
5.48 China
5.5 5.32
5.16 18%
4.99
4.82 Turkey India
5.0
4.63 4.7 19% 12%
4.53
4.5 4.35 Bangladesh
6%
RoW
4.0 7%
Pakistan
3.5 38%
3.0
2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
Exhibit 9: EU’s preferential duty structure benefits select countries
Europe — Preferential duty access restricts exporters to target aggressively Countries Import Duty Structure
Europe’s home textile market is heterogeneous in nature with different cultures leading to India 6-9%
wide range of preferences for home textile products. This makes EU a difficult market to Pakistan Duty Free
serve. Additionally, there is preferential access given to some countries like Pakistan and
Bangladesh Duty Free
Bangladesh, which makes imports from these countries duty-free. Heterogeneity and
preferential duty access have marred Indian and Chinese exporters from aggressively Turkey Duty Free
pursuing the European market for gaining market share. 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.
India — A big player in global home textiles market 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
Unmatched advantage in cotton home textiles
some parts of the country, stock available for sale in the market was lower. The year started
India commands a significant position (11% market share) in the global home textile with high cotton prices of Rs 43,000-44,000 per candy, which corrected to
industry, particularly in cotton-based home textile products. This is largely due to a myriad Rs 38,000-39,000 per candy with the start of the cotton season; nevertheless, it again shot
of competitive advantages that India has over its competitors, which put it in a unique spot up to Rs 40,000-41,000 per candy in Dec’17 and Jan’18 as the crop loss due to pink bollworm
over other competing nations like Pakistan, Bangladesh and Vietnam. became evident.
Exhibit 10: Key factors that give competitive edge to India over others Exhibit 11: FY18 Cotton Balance Sheet (In mn meters)
Opening Ending
Country Output Import Consumption Exports
Stock Stock
World 18.9 26.7 NA 26.3 NA 19.2
Cotton Availability 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 Costs
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,
Socio-Economic Factors
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
Supportive Govt. Policies manufacturing home textiles.
Exhibit 12: India’s cost advantage over other cotton-producing countries

Cost Element Unit India Bangladesh China Vietnam
Source: Equirus Securities
Labour Cost US $/ month 160-180 100-110 550-600 170-190
Cotton availability Power Cost US$/kwh 0.10-0.12 0.09-0.12 0.15-0.16 0.08-0.10

India is one of the largest producers of cotton in the world as well as a net exporter of Lending Rate % 11-12% 12-14% 5-6% 6-7%
cotton and cotton yarn. It has the distinction of having the world’s largest area under cotton
Water Cost US Cents/m3 16-20 20-22 55-60 50-80
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
Socio-economic contribution
players an edge in form of quick raw material supply and lower cotton prices.
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
India’s advantage of being the largest producer of cotton is expected to continue as the
strong production base of a wide range of fiber/yarns from natural fibers like cotton, jute,
country’s India’s cotton yield at present is 504 KG/HA, much lower that overall global
silk and wool to synthetic/man-made fibers like polyester, viscose, nylon and acrylic. The
average of 596 KG/HA. This indicates a huge growth potential in terms of cotton yield and
industry is also labor-intensive and one of the largest employers (~40mn workers directly, India — Second largest home textile exporter after China
60mn workers indirectly). It contributes 14% to the country’s manufacturing, 4% to the GDP
The world’s top-10 importing nations contribute to around 80% of the home textiles market
and 13% to the country’s export earnings. With significant employment generation and
with EU-28 comprising 36% of overall imports and US ~24%. To these importing nations,
contribution to exports earnings, the textile industry occupies an important space in
China is the largest supplier with a market share of 35% followed by India with exports close
framing the economic and policy decisions of the country.
to US $5bn and a market share of 11% (2017).
Supportive Government policies
EU-28, being a difficult market to serve, is less preferred by India’s home textile exporters
India’s textile industry, being an integral part of the country’s development, foreign while US being a homogenous and easy-to-serve market is most preferred. Main products
exchange earnings and employment generation, benefits from central and state which are currently supplied to US markets include cotton sheets, cotton towels,
government policies which are conducive for industry growth. Various policies devised by bedspreads and cotton pillow cases.
Indian government to boost the growth of India’s textile sector are as follows:
Rising dominance of Indian goods in US bed sheet and towel market
• Amended Technology Upgradation Fund Scheme (ATUFS): Under this scheme,
According to the Office of Textiles and Apparels (OTEXA) US, India supplied about 39% of
government provides credit linked capital investment subsidy with an objective of
cotton towel imports into the US in CY17, up significantly from the levels of 30% in CY09.
augmenting investment, productivity and employment in textile sector. The
Even in the cotton sheets segment, India supplied about 50% of total imports to the US in
percentage of subsidy depends upon the type of machinery purchased.
CY17, nearly doubling from 27% in CY19.
• Merchandise export scheme (MEIS): This scheme was started to offset the
infrastructural inefficiencies & associated cost of exporting products produced in India
Exhibit 13: India has a dominant position in US towel market
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 India China Pakistan ROW
basis. This rate has been doubled to 4% to increase India’s competitiveness as compared 45%
to other nations. 38% 39%
40% 36%
35%
• Duty Drawback: This involves refund of duties paid to government like excise duty and 30%
30% 26%
others. Before GST, this was at ~7-8% which has been reduced to 2% post GST. But due 25% 25% 24%
25% 23% 22% 22% 22%
to falling textile exports across categories, this has recently been increased by upto 21%
0.6% across categories. 20% 16% 16%
15%
15%
• Rebate on State Levies (ROSL): In the ROSL scheme, the Central Govt. provides rebate 10%
of State levies comprising of State VAT/CST on inputs including packaging, fuel, duty 5%
on electricity generation and duties and charges on purchase of grid power as
0%
accumulated through the stages of production from yarn to finished made-ups. ROSL is CY2009 CY2012 CY2015 CY2017
currently provided at ranging from 1.5-2.2% for textile products.
Exhibit 14: One out of every two sheets imported by US is manufactured in India Home textile includes products such as bedsheets, pillow cases, blankets, terry towels,
upholstery, table clothes, carpets and rugs. Because of superior product quality, Indian
India China Pakistan ROW
home textile manufacturers have gained sizeable market share in global home textile
60%
50% market over the last few years. However, India still accounts for only 7% of the global home
48%
50% 45% textile trade, leaving significant headroom for growth, which would be driven by market
40% share gains. Growth in domestic home textiles would be supported by favourable
27% 29% 26% demographics, increasing household income, rising population and growth in end-use
30% 23%
22% 20% sectors like housing, hospitality and healthcare.
18% 18% 16%
20% 15% 13% 15% 15%
India’s home textile industry stood at US$ 4.7bn in 2014 and is expected to grow at 8.3%
10%
CAGR during 2014-21 to reach US$ 8.2bn in 2021. India is the third largest home textile
0% market in the Asia-Pacific region. Around 70% of the domestic home textile market is
CY2009 CY2012 CY2015 CY2017
unorganized in nature which offers a great opportunity for big and organized players to
Source: Welspun Investor Presentation, Equirus Securities 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,
India Home Textile Industry — A big market in itself and upholstery.
The Indian textile industry has a noteworthy presence in both the Indian economy and in
Exhibit 16: Indian Home textile industry to grow at 8.3% CAGR over CY14-21E
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, Indian Home textile Industry (US $ Bn)
silk and wool-to-synthetic/man-made fibers like polyester, viscose, nylon and acrylic. The 9.0
country’s domestic and apparel Industry has grown at a 10% CAGR over 2009-17 and stood 8.0
at US$ 150bn in 2017. It is further expected to reach US $200bn by 2019.
7.0
Exhibit 15: Indian Textile industry has grown at 10% CAGR over last 8 years 6.0
5.0
Indian Textile Industry (In Bn USD)
250 4.0
3.0
200 2.0
1.0
150 4.70 5.50 8.20
0.0
2014 2016P 2021E
100
Source: IBEF, Equirus Securities
50
70 78 89 92 96 99 108 137 150 200
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2020E
Source: Wazir Analysis, Equirus Securities
Exhibit 17: Bed linen products are almost half of Indian home textile industry • Changing retail trends
Product Mix of Indian Home textile Industry 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
Bath Linen
driver of the industry.
18%
US Home Textile Market: Disruption & recovery

Others (Floor,
Upholstery, etc) The US home textiles market has been under pressure from 2017-beginning led by sluggish
Bed Linen 33% demand conditions and customer purchases shifting to the online channel, forcing some
49%
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
Source: IBEF, Equirus Securities 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
Growth drivers of Indian Home Textile Industry of online startups coming up with offerings in segments like electronics, kids wear, toys,
and menswear.
• Rising supply, but overall pie also increasing
Preference for online shopping due to its ease and convenience was further boosted by a
Despite a demand pickup in both domestic and global markets, there is still a vacuum to
series of discounts and offers conducted by online retailers like Amazon and others,
supply more goods as most home textile units are not operating at their full capacities.
attracting many customers to purchase goods online.
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 While a significant shift was seen in some industries like electronics, books and apparels,
domestic and global markets. (some saw ~70% of sales moving online), the home textile industry was not impacted to a
• Premiumization, branding to boost demand growth 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
The preference for branded and premium products has increased over the years. This has
platform. This was partly contributed by new online startups offering attractive discounts
led to home textile companies going aggressive in branding their products, resulting in
and also due to lower footfalls in stores of big retailers as most other products were
improved sales for branded home textile products. There is a supply glut in the lower-end
purchased online.
of the pyramid with a high supply of basic goods. Players able to differentiate their products
are able to gain the market share. Rising consumer preference for the online platform prodded many retailers to make
• Constant innovation, R&D to lead to high demand 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
In similar lines to the clothing and apparel industry, the home textile market faces a e-commerce sales and shutting down all retail operations. Exhibit 17 shows many of the
continuous change in designs and fashions. Companies that are able to cater to the rapidly retail stores chains downsizing operations because of lower footfalls in their stores.
changing needs typically dominate the market.
Exhibit: 18: List of some prominent retailers downsizing with online channels eating away There were a series of actions taken by retailers to deal with the changing trends. Some
sales and reducing footfalls 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
• J.C. Penney: The department store chain closed 138 stores last year while restructuring its
business to meet shifting consumer tastes. 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
• Michael Kors: With same-store sales plunging, the upscale fashion retailer said it would close the existing inventory so as to prevent any inventory losses. This led to a sharp dip in sales
as many as 125 stores to adapt to a difficult, promotional sales environment.
of most home textile exporters. Exhibit 18 shows the dip in sales of leading home textile
• Sears/Kmart: Sears Holdings is one of the most prominent traditional retailers to suffer in a
companies of India due to the destocking exercise of retailers.
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. Exhibit 19: Most peers saw their revenues affected due to a shift in buying patterns in
FY18
• Abercrombie & Fitch: Facing declining sales, the once-prominent fashion brand announced YoY Revenues (Growth/Decline) % 1QFY18 2QFY18 3QFY18 4QFY18
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 Welspun -3.3% -10.2% -6.9% -14.3%
an increased emphasis on online sales. Trident 1.2% -2.3% -0.1% -7.5%
• The Limited: After a brutal holiday season in 2016, the clothing chain closed all 250 of its Indocount -16.2% -18.1% -8.4% -13.2%
physical stores last January as part of a bid to focus on ecommerce. The closures reportedly Himatsingka Seide 6.5% 10.0% 8.8% -3.6%
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. Efforts pay off with recovery seen across product categories
The impact of destocking was largely seen from 2018-beginning on all major exporting
• Bebe: The women’s apparel chain closed all of its remaining 168 stores by last May, days
countries to US like India, China and Pakistan. For the first six months of 2018, cotton sheets
after it said it was exploring “strategic alternatives for the company” amid plunging sales.
saw a 3% decline in volumes and 7% decline in value while terry towels saw an 18% decline
• Bon-Ton Stores Inc.: The struggling department store filed for Chapter 11 bankruptcy, in volume and 17% decline in value. Pillow cases too saw a decline of 7% in volumes and 14%
according to court papers filed in February. The chain, which operates 256 stores in 23 states, in value for the same period. The market share fall was also observed in some categories
also announced it plans to close 42 stores in 2018 as part of a restructuring plan.
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.
• 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.
While the dip in the exports to US was seen across Indian players, aligning their business
• Gymboree: The kids clothing retailer confirmed last July that it would close 350 of its more models that suited the changing needs of US customers led to a recovery in sales to the US
than 1,200 store locations to streamline its business and achieve “greater financial from latter half of 2018. With the impact of destocking subsuming and restocking
flexibility,” according to CEO Daniel Griesemer.
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
Source: FoxBusiness
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 Exhibit 22: India’s terry towel exports to US recovered in H2, leading to flat market share
end with either marginal decline or flat sales
India China Pakistan Rest of World
Value Growth – YoY Jan-Jun'18 Jul-Oct'18 10M2018
100%
Cotton Sheets 16.2% 15.1% 15.6% 14.9% 15.1% 15.0% 15.7% 16.4%
90%
World -5% 4% -3% 80%
24.4% 22.4% 23.2% 22.7% 22.0% 22.0% 21.5% 20.1%
India -7% 7% -1% 70%
Terry Towels 60%
50% 26.2% 25.7% 25.8% 24.7% 23.1% 24.0% 24.8%
World -8% 9% -3% 24.8%
40%
India -17% 19% -5%
30%
Pillowcases 20% 38.3% 39.9% 38.8% 38.7%
34.6% 36.4% 35.6% 36.5%
World -7% 3% -3% 10%
India -14% 6% -6% 0%
2011 2012 2013 2014 2015 2016 2017 10M2018
Bedspreads
Market Share of countries in US's terry towels market
World 8% 14% 11%
Source: Otexa, Equirus Securities
India 17% 2% 10%
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
Exhibit 21: India’s cotton sheets exports to US picked up in H2 resulting in some levels and demand picking up gradually. This is further supported by a decline in cotton
market share gains prices which stood at Rs 122/kg in Nov’18 from the peak levels of Rs 130/kg, and INR
India China Pakistan Rest of World depreciation at ~10.5% YTD-CY18. Furthermore, the increase in duty drawback rates of up
100% to 0.6% across major home textile products and extension of MEIS at 4% beyond Jun’30 for
16.0% 14.9% 12.7% 13.2% 12.5% 13.9% 14.1% 12.3% an indefinite period will further boost the recovery in the exports of home textile products.
90%
80% 16.8% 17.1% With demand returning to normalcy and favourable tailwinds kicking in, we expect strong
18.5% 17.7% 16.9% 15.9% 15.8%
70% 22.7% revenue growth for integrated and specialized home textile exports of India.
60% 23.7% 23.3% 23.0% 21.6% 20.3% 20.8%
21.7%
50% 23.4%
40%
30%
44.9% 45.9% 46.6% 47.8% 48.7% 49.7% 49.8%
20% 37.8%
10%
0%
2011 2012 2013 2014 2015 2016 2017 10M2018
Market share of countries in US's cotton sheets market
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 Increasing penetration in the US market through a wide range of quality products has Consolidated Financials
Rating Information made Welspun (WLSI) one of the most preferred suppliers to global retailers. Post the Rs. Mn YE Mar FY18A FY19E FY20E FY21E
Price (Rs) 61 revenue decline caused by traceability issues & changing buying patterns, WLSI has Sales 60,506 65,649 74,183 85,310
Target Price (Rs) 77 emerged strong with several corrective actions and changes to business model. With EBITDA 11,234 11,177 14,021 16,294
Target Date 31st Mar' 2020 a set vision of Welspun 2.0 & nearing-end of the capex cycle leading to strong cashflow Depreciation 5,042 4,472 5,365 5,870
Target Set On 6th Jan'2019 generation, we expect growth to return with 12%/22% revenue/PAT CAGR and a Interest Expense 1,408 1,438 1,588 1,355
Implied yrs of growth (DCF) 15 ~380/385bps expansion in ROE/core ROIC over FY18-FY21E. We initiate coverage on
Other Income 812 796 891 941
Fair Value (DCF) 83 the stock with LONG and a Mar’20 TP of Rs 77.
Reported PAT 3,850 4,359 5,570 7,007
Fair Value (DDM) 27 Leading home textile player, well-poised to benefit from changing industry Recurring PAT 3,850 4,359 5,570 7,007
Ind Benchmark SPBSMIP dynamics: WLSI is India’s leading home textile exporter to the US to the extent that Total Equity 26,057 29,102 33,584 39,140
Model Portfolio Position NA every 5th towel and every 10th sheet sold in the US is made by Welspun. WLSI has been Gross Debt 32,807 34,607 30,807 25,307
proactive in adjusting its business model to cotton traceability issues and changing Cash 2,661 2,771 3,292 5,033
Stock Information
customer buying patterns. With a series of steps taken to respond to changing industry Rs. Mn YE Mar FY18A FY19E FY20E FY21E
Market Cap (Rs Mn) 61,138
dynamics, enhanced focus on increasing revenue share from underpenetrated markets
Free Float (%) 31.52 % Earnings 3.8 4.3 5.5 7.0
and innovative product rollouts, we expect the company to post a 12% revenue CAGR
52 Wk H/L (Rs) 82.5/48.8 Book Value 26 29 33 39
over FY18-FY21E.
Avg Daily Volume (1yr) 25,45,278 Dividends 0.7 0.7 0.9 1.2
Avg Daily Value (Rs Mn) 156 Three pillars to next phase of growth: WLSI has carved out its vision Welspun 2.0 which FCFF 3.2 0.8 6.6 10.1
Equity Cap (Rs Mn) 1,005 articulates strategies for achieving growth. Apart from increasing its market share in the P/E (x) 15.9 14.0 11.0 8.7
Face Value (Rs) 1 US, the company will look at driving revenues by (a) launching new products/channels P/B (x) 2.3 2.1 1.8 1.6
Bloomberg Code WLSI IN (tile carpets, fashion & utility bedding, hospitality & healthcare), (b) entering new EV/EBITDA (x) 8.5 8.7 6.6 5.2
markets and scaling up existing markets (Europe & India) and (c) improving the share of ROE (%) 15 % 16 % 18 % 19 %
Ownership Recent 3M 12M
innovative & branded products (from 37% in FY18 to a target of more than 50% by 2022). Core ROIC (%) 7% 7% 9% 11 %
Promoters 68.5 % 0.0 % -5.0 %
DII 10.1 % 2.4 % 8.6 % Cashflows generated from FY20 to reduce debt levels, boost margins: By installing EBITDA Margin (%) 19 % 17 % 19 % 19 %
FII 7.3 % -0.1 % -4.4 % the flooring plant by FY20, WLSI is expected to end its multi-year capex cycle. Post Net Margin (%) 6% 7% 8% 8%
Public 14.1 % -2.3 % 0.8 % 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
Price % 1M 3M 12M
a gradual pickup in flooring operations, debt repayment and lower depreciation should
Absolute 1.0 % 9.5 % -14.5 % aid PAT margins. We have built in an 50bps/185bps expansion in EBITDA/PAT over
Vs Industry -1.9 % 1.4 % 1.7 % FY18-FY21E with a ~380bps /385bps expansion in RoE/RoCE.
Trident 0.2 % 18.4 % -26.0 %
Indocount -6.2 % -6.7 % -53.2 % Initiate with LONG, Mar’20 TP Rs 77: WLSI currently trades at 6.5x FY20 EV/EBITDA
Consolidated Quarterly EPS forecast
and a P/E of 11x FY20E EPS. With uncertainties settling down, volumes picking up and
Rs/Share 1Q 2Q 3Q 4Q 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.
EPS (18A) 1.3 1.0 0.8 0.9
EPS (19E) 1.3 1.2 0.9 0.9
January 6, 2019 Analysts: Vikas Jain vikas.jain@equirus.com (+91-7574885492)/ Maulik Patel maulik@equirus.com(+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 23% ATR in 15 Months
Company Snapshot Key Triggers

• Quick settlement of uncertainties, strong acceptance of flooring products, rise in
How we differ from Consensus
Comment
penetration in Indian & European markets.
- Equirus Consensus % Diff
FY19E 4.3 4.5 -3 % Debt reduction in FY20 and a pick-up in Sensitivity to Key Variables % Change % Impact on EPS
EPS efficiencies of recently-expanded
FY20E 5.5 5.8 -4 % Revenue 1% 2%
capacities to boost earnings growth
FY19E 65,649 66,560 -1 % EBITDAM 1% 8%
Sales
FY20E 74,183 74,935 -1 %
- - -
FY19E 4,359 4,496 -3 %
PAT DCF Valuations & Assumptions
FY20E 5,570 5,782 -4 %
Rf Beta Ke Term. Growth Debt/IC in Term. Yr
Our Key Investment arguments:
7.4 % 1.3 11.8 % 4.0 % 31.1 %
• 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
- FY19E FY20E FY21-23E FY24-28E FY29-33E
attaining the next phase of growth.
Sales Growth 9% 13 % 9% 8% 8%
• Capex cycle would end by FY20E, and cash flows generated thereafter would
NOPAT Margin 7% 8% 9% 9% 9%
significantly bring down debt levels.
IC Turnover 0.98 1.11 1.45 1.44 1.30
• Expect RoE/RoIC to expand ~380/ 385bps over FY18-FY21E.
RoIC 7.5 % 9.1 % 13.7 % 14.4 % 12.6 %
• At 6.5x EV/EBITDA and 11x P/E for FY20 EPS, valuations are attractive for a market leader.
Key Assumptions: Years of strong growth 1 2 5 10 15
Particulars FY18 FY19 FY20 FY21 Valuation as on date (Rs) 32 40 67 71 72
Capacity Utilization Valuation as of Mar'20 37 46 76 81 83
Towels 80% 87% 93% 88%
Based on DCF, assuming 15 years of 8% CAGR growth and 13% average ROIC, we derive our
Cotton Sheets 80% 85% 90% 88% current fair value of Rs 72 and our 31 Mar’20 fair value of Rs 83.
Rugs & Carpets 65% 70% 80% 85%
Flooring - - 10% 30% Company Description:
Welspun is India’s largest home textile company with a presence in cotton bedsheets,
Gross Margin (%) 50% 49% 50% 50% towels and rugs & carpets. It is Asia's largest and the world’s 2nd largest terry towel
Capex (In Rs Mn) 2,873 9,000 5,000 2,000 producer. It exports more than 94% of its home textile products to >50 countries, with >68%
Risk to Our View: Extended uncertainty related to customer shift towards the online of production to the US, 23% to Europe and the balance to Middle East, Australia & Japan.
platform, low acceptance of flooring products, sluggish cashflow generation & subsequent It supplies to 17 of the top-30 retail chains in the world.
delay in debt reduction, INR appreciation & rise in cotton prices.
Comparable valuation EPS P/E BPS P/B RoE Div Yield

Mkt Cap Price
Company Reco. CMP Rs. Mn. Target Target Date 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 Exhibit 2: WLSI contributes ~50% of India’s total towel exports to the US
One of Asia’s largest home textile players 55%
50%
WLSI is Asia’s largest home textile company with a presence in cotton bedsheets, towels 50%
and rugs & carpets. The company has a towel manufacturing capacity of 80,000 MTPA, the 45%
41%
second highest after Trident India which has an installed capacity of 90,000MTPA but at a
40%
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). 35%
30%
WLSI operates two state-of-the-art manufacturing facilities in Gujarat (Anjar and Vapi)
CY13 CY17
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 Source: Welspun Investor Presentation, Equirus Securities
in the US, the UK and Germany, which ensure quick delivery to retailers.
Exhibit 3: Every 10th sheet sold in the US is made by WLSI
Almost 85-87% of WLSI’s revenues come from B2B channels with supplies to large retailers 12%
10%
in the US, the UK, Europe and others. The remaining 13-15% of revenues come from B2C 10%
sales under the brands Spaces (domestic market) and Christy (largely UK market).
8% 7%
Lion’s share in world’s largest home textile market 6%
4%
India is the largest home textile player in the US market with a ~38% market share in US
2%
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 0%
CY13 CY17
a dominant position with the company contributing ~50%/~21% of India’s towel/bedsheet
exports to the US. Source: Welspun Investor Presentation, Equirus Securities
Exhibit 4: WLSI contributes ~21% of India’s total sheet exports to the US

Exhibit 1: Every 5th towel sold in the US made by WLSI
25%
19% 21%
20%
20%
18% 16%
16% 15% 15%
14% 10%
12% 5%
10%
CY13 CY17 0%
CY13 CY17
Exhibit 5: Industry home textile players — A snapshot

Backward Integration Total Revenues Home textile Revenues EBTIDA Margins
Companies Home textile segment & capacity
level (FY18, In Rs Bn) (FY18, In Rs Bn) (FY18)
Bath linen (Towels - 80,000 MT, Bed linen (Sheets - 90mn metres)
Welspun India Largely Integrated 60.5 60.5 (100%) 18-19%
& Rugs - 10mn sq. metres
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 Egyptian cotton issue a thing of the past, but lessons well learnt
supplies to almost all big retailers which account for majority of home textile sales in the
Egyptian cotton is considered to be the best type of cotton in the world because of its long
US. These market share gains were achieved despite high competition from Chinese players
fiber that makes it softer and stronger. Lack of Egyptian government’s intervention on
in the US and from a number of home textile players in India as well. This was achieved
regulation of cotton and rapidly declining supplies of authentic long-staple quality Egyptian
due to the following:
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)
Factors driving WLSI’s market share gains in the US
who on the basis of technological advancements, are able to produce long-staple cotton
• Wide range of products offered in the home textile segment — bath linen (towels, bath robe),
on similar lines as Egyptian cotton with similar quality and strength. Multiple procurement
bed linen (sheets, basic and fashion bedding) and flooring solutions (carpets & rugs).
sources and large number of suppliers have led to fraudulent varieties making their way
• World class manufacturing facilities capable of serving bigger orders in terms of order sizes
into world markets.
and SKUs at competitive prices.
• High customer satisfaction leading to repeat business from retailers; 80% of WLSI’s orders are
In Aug’16, Target, one of WLSI’s major customers discontinued its entire business with the
replenishment orders.
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
These qualities make WLSI a preferred supplier of home textile products among most of its
on an audit conducted by Target which could not determine the traceability of cotton used
customers, thus leading to a higher wallet share.
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.
To deal with the traceability issue of cotton, WLSI developed a complete end-to-end fiber
Series of steps taken to integrate processes post the Egyptian cotton issue tracking process that verified fibers from the origin and at every stage of production,
WLSI took a number of structural, technological, procedural and people steps based on the ensuring rigorous process control of the fiber’s physical parameters. Additionally, WLSI has
recommendations of E&Y — appointed as an individual consultant to improve WLSI’s production and
also tied up with Oritain Global, a world leader in the use of scientific traceability. This
procurement processes. 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
• Structural steps: Improvement in the procurement process through vertical integration of products. This exclusive tie-up with Oritain’s traceability technology supplements Wel-
manufacturing units (including ancillary units) along with procuring cotton from certified Trak, and demonstrates WLSI’s commitment to full transparency and traceability of its
sources to ensure that only genuine cotton enters into the system via better tracking — right home textile products throughout the supply chain.
from procurement to the finished stage. WLSI also deployed personnel at Egypt to oversee
buying activities. Apart from these production process-related changes, WLSI also carried out a number of
• Technological steps: Using SAP-based of material and usage of RFID to track cotton through steps to reach out to its retailers and address their concerns — ranging from product recalls,
the entire manufacturing process. product replacements, product reviews and product relabeling.
• Procedural steps: Separating planning & verification of Egyptian cotton, keeping buffer Right measures pay off — All customers barring Target retained
stock to manage rush orders, obtaining Gold seal certification from Cotton Egypt Association
With unfolding of the Egyptian cotton issue, along with Target (which contributed ~10% of
(CEA), increasing audits and surprise visits to vendor facilities along with 3rd party DNA
revenues), business from other customers was also impacted to the extent of product
testing.
supplies which were claimed to be fake; this led to an overall impact of ~13% on revenues.
• People steps: Segregating the duties of personnel to avoid any procedural lapse. Barring Target, business from other customers was restored to earlier levels by adopting a
series of corrective steps and addressing their concerns.
Exhibit 6: WEL-TRACKTM: A traceability solution process supplemented by OritainTM is

Well-poised to leverage on changing business dynamics
the most comprehensive end-to-end fiber tracking process
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.
Source: Welspun Investor Presentation, Equirus Securities 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 WLSI also adjusted its retail model in commensuration with big retailers. For instance,
this trend of online buying picking up from current 10-15% levels to 20-25%, and then some retailers trimmed on inventory levels and pushed manufacturers to carry inventory
stabilizing at those levels. European markets, which are comparatively more mature than on their behalf. Another change included retailers asking manufacturers to ship goods
the US, had experienced similar changes and settled at these levels. Additionally, home directly to customers. WLSI, being a large-scale manufacturer, was able to adopt to such
textile products warrant the element of touch & feel and are totally different from changes as it owns three warehouses in the UK, the US and Germany where it could store
electronics like mobile phones wherein 70-80% of sales can move online. finished goods on behalf of retailers (at an extra carrying cost) while having tie-ups with
Welspun makes amends, effectively takes on the ecommerce challenge! 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
WLSI, being the largest exporter of home textile products to the US, was also impacted by
operate with such changing needs will have to curtail business from these retailers, leading
this shift and the subsequent destocking by almost all retailers. In accordance with
to incremental orders to players like WLSI who would gain market share.
retailers, manufacturers like WLSI had to make significant changes in their business models.
Three pillars for next phase of growth

Steps taken by WLSI to tap the ecommerce opportunity
WLSI has a strong growth track record stemming from organic expansion with increasing
• Key ecommerce platforms
Key e-commerce platforms have increased the share of private labels to capture more value,
penetration in the US market through its wide range of quality products. Over time, WLSI
cater to increased volumes and have a better control over products. WLSI is increasing its has changed its offerings as per customer needs, thus remaining a preferred supplier to
focus on being a preferred sourcing partner for private labels of such ecommerce platforms. 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-
• Big-Box retailers’ website
WLSI has been a preferred supplier to almost all giant retail chains and shared strong
level destocking) with EBITDA margins expanding from ~11% in FY11 to reach a peak of 27%
relationships will them for last many years. With buyers moving online for purchases, these in FY16; margin expansion was the result of a number of steps taken by the company
retailers have turned aggressive in online sales. WLSI as adopted to sell its products with a towards backward integration and enhancing the efficiency of operations.
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. As a preferred supplier to many retailers with a strong track record, WLSI has gained market
Welspun has also signed a deal with Amazon to supply its products under Amazon’s private share in the US (~19% in towels, ~10% in sheets) over the years. While there is further scope
label, Amazon Basics, with shipping to happen in the next 1-2 quarters. for WLSI to grow its revenues by gaining market share in towels, sheets and rugs, this may
• WLSI’s own website, Shopwelspun.com not be sufficient to achieve the next phase of growth in the coming years. In FY16, WLSI
WLSI has become aggressive on its own website to sell branded products. It also tried to worked out its vision for Welspun 2.0 with a financial target to achieve revenue of US$ 2bn
increase its brand presence through its website across key markets. by 2020, which was later revised to 2022 due to many one-off events (duty drawbacks,
• Exclusive online D2C players dealer de-stocking) in FY18.
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 As a part of the vision ‘Welspun 2.0’, WLSI has identified the following three broad areas
stake (for US$ 4mn) in two start-up firms to understand their functioning, strategy and which would drive the next leg of growth:
financials. Learnings gathered will be helpful at the time of launching new brands or a new
a) New products/categories along with new channels
online channel.
b) New markets/scaling up existing markets
c) Improving share of innovative & branded products
a) Pillar 1: New products/categories along with new channels • Untapped opportunities in bedding category
• Increasing share of flooring products with ongoing capacity expansion 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
WLSI entered into the carpet category in FY14 with an initial capacity of 6mn sq. meters
untapped opportunity in categories like basic bedding, comforters and quilts.
with product offerings in decorative carpets and area rugs. Initially, it invested in
Currently, China dominates this market but with an increase in China’s cost of
building rugs capacity as many customers preferred buying rugs of similar patterns and
production and rising preference for quality, India is gradually making inroads into this
colors as towels, and accordingly retailers also sold towels and rugs in combos. Later, as
segment. WLSI, being the largest player, is expected to benefit from this shift. Bedding
a category extension, WLSI started manufacturing carpets for living areas and under-the-
contributed ~3% of sales (~Rs 1.8bn) in FY18.
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.
• Technical/advanced textiles: Another big opportunity
As a part of its vision, WLSI has identified the flooring business as an important driver In the past, there has been strong demand growth for technical/advanced textiles with
for revenue growth. Apart from the existing offerings, the company is venturing into specialized applications such as healthcare, fire departments, aerospace, defense,
tile carpets. The domestic market size for tile carpets is estimated to be ~US$ 100mn automobile, railways and others. These products are made with specialized features
with a potential to grow to US$ 500mn. Target customers for its flooring products such as being fire retardants, stain resistant, anti-bacterial, PET resistant and soil
would be both institutional and residential. resistant.
WLSI ventures into tile carpets — the story so far 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
• Despite a growing market for tile carpets, there are no big domestic players in this segment
medical wipes. Recently, the company’s products were approved by a major
in India; most home textile players are evolving with a major focus on using existing
automobile company, and its fabric by an airline industry in US and Europe. WLSI also
capacities for bedsheets and towels to serve the global market.
won a contract to supply pillow covers and napkins to Rajdhani trains in India. The
• WLSI, being one of the most evolved players, has identified this space and planned a capex company currently derives ~2% or Rs 1.2bn revenues from this segment, which we
of ~Rs 11bn to set up a carpet manufacturing plant of 27mn sq. meters in Telangana, AP; believe can surely scale up owing to its R&D and product development capabilities.
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
• New channels: Entering healthcare and hospitality sectors
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 Though WLSI has a large customer base operating on a global scale, it has continued to
contribution from this plant should start flowing in from 3QFY20. 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
• The new facility will cater to wall-to-wall and tile carpets. In contrast to traditional floor
hospitality and healthcare as new channels to drive revenues.
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. 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
• In India, a large proportion of tile carpets are imported, which attract 25-30% import duty.
currently earns ~US$ 50mn from this category, indicating huge growth potential. It has
WLSI, being one of the first players to have such a carpet manufacturing facility, would see
tie-ups with hotel chains like Starwood, Hilton and the Taj, and is further looking to
a significant boost to its revenues and margins.
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 b) Pillar 2: New markets/scaling up existing markets
from various places. WLSI wants to replace these traders by dealing directly with
WLSI has a formidable presence in the US market (for sheets & rugs) which has been
hotels and suppling to their branches globally. This will benefit (a) hotels, by
achieved over three decades, with most of the growth coming in the last decade. While
maintaining consistency in products (sheets & towels) as well as (b) WLSI, by creating
there is scope for WLSI to further grow and increase its market share in the US, we
a new sales channel. Ingredient brands like Hygrocotton bring some differentiation to
believe incremental double-digit revenue growth that will fulfill its vision of attaining
products and thus are preferable to be used by high-end hotels.
US$ 2bn of revenues by 2022 will come from penetration in non-US markets (Europe,
Japan, Middle East countries, Russia, South Africa and India).
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
Europe
infuses wellness into hotel rooms with features and programs to maximize the guest
After the US, which contributed 66-68% of WLSI’s revenues in FY18, Europe/India are
experience and minimize the impact that travel has on the human body. Typically, these
the next major countries with a revenue share of 17-18%/6-7%. Despite the FTA
are premium rooms (10-20% pricier than normal rooms) with facilities like air purifier,
agreement of Europe with countries like Pakistan, Bangladesh, Turkey and Egypt which
Hygrocotton sheets, suitable lights, aroma therapy and yoga sessions (by Deepak
gave a duty-free access to the European market, WLSI’s revenue share from Europe
Chopra). This arrangement is a win-win deal for both parties as hotels receive their share
has increased from 13-14% in FY14 to 17-18% in FY18 led by the sale of innovative
from Staywell and manufacturers like WLSI get dedicated orders.
products. The company believes this strategy of selling innovative and premium
products wherein price sensitivity is lower will increase its sales from Europe.
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
India
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. 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
On the e-commerce front, WLSI plans to sell products on its own website 2014-21 (to US$ 8.2bn in 2021 from US$ 4.7bn in 2014) mainly due to (a) the
(shopwelspun.com & shopwelspun.in), on retailer websites (e.g. Walmart.com), and government’s policy on ‘Housing for All by 2022’ to boost domestic consumption, (b) GST
that of e-commerce players (like amazon.com). 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% obtained a license to sell its products with brands of Wimbledon, Minions, Disney,
Royal Ascot, Manchester City, FCB & FIFA World Cup – Russia 2018.
Indian Home textile Industry (US $ Bn)
9
Exhibit 9: Presence in leading LFS stores with license to sell products of top brands
8
7
6
5
4
3
2
1
4.70 5.50 8.20 Source: Company, Equirus Securities
0
2014 2016P 2021E
The company derives ~6% of its revenues from the domestic market (estimated to be
Source: IBEF, Technopak, Equirus Securities ~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
India’s home textile market is largely dominated by unorganized players with a share of the SPACES brand along with a new flooring capacity should help WLSI achieve its
of >85%. There are no major players with credible brands in India. Very few names like target of ~20% revenue share from the domestic market by 2022.
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
c) Pillar 3: Improving share of innovative & branded products 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
WLSI’s innovative product basket includes ingredient innovations like Hygrocotton,
smart device in which characters from the sheets pop out in the app and the entire story
Nanocore, Wel-Track products and innovative products like SpinTales.
plays out like a fairy tale. It is more like a game/story book and is targeted towards kids.
• Hygrocotton contributes more than 20% of overall sales Rising demand for innovative products due to high acceptance has led to their share rising
As most products sold in the US markets are through private labels, the only way to from ~25% in FY14 to ~37% in FY18.
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 Exhibit 11: Increasing share of innovative products in overall revenues
thus naturally maintains an even temperature, soaks up moisture, facilitates airflow,
and is softer. Products based on this technology have witnessed strong traction among Revenue share of Innovative Products (%)
retailers and created a pull factor for WLSI’s products. Sales of Hygrocotton products 40% 37%
36%
34%
have crossed more than US$ 175mn annually for WLSI, forming more than 20% of its 35%
30%
overall sales. 30%
25%
25%
Exhibit 10: Hygrocotton products have various ingredient qualities
20%
15%
10%
5%
0%
FY14 FY15 FY16 FY17 FY18
Source: Company, Equirus Securities • Launching Christy brand in other parts of the world
Apart from innovative products, WLSI expects to increase the share of branded sales in its
Nanocore is another ingredient brand from WLSI’s innovative product portfolio which
overall revenue mix. Its branded product portfolio includes Christy and Spaces; while
prevents dust mites and other allergens from entering the product. After stringent
Christy will be launched in other countries such as the US, China and Middle East, the
testing, Nanocare has received asthma and allergy-free certification for bedding
company intends to keep Spaces for the domestic market only.
products in the US.
In Jul’06, WLSI had acquired Christy, a dominant brand in the UK with a small presence in
• Moisture sensor sheets: WLSI is developing moisture sensor sheets in which a the US and Ireland markets. While it continues to be a major brand in the UK (~22% share
conductor wire is stitched along with the yarn so that if it gets wet, the moisture will of branded market), it has also seen some early success in the US market. Of late, WLSI
increase, which will set off an alarm. This type of arrangement is very useful in places has been revamping the Christy brand to entice a younger customer base; its marketing
like old age homes or in US homes where kids (who generally sleep in separate rooms) campaign includes running new advertising campaigns, opening new stores in the US,
wet their beds and require immediate parent attention. 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
36 stores in China and 18 stores in the Middle East. In the US, where Christy is at a nascent Financial profile
stage, opening new stores and going aggressive on the e-commerce channel will help push
Revenues to grow at ~12% CAGR over FY18-FY21E
sales.
WLSI has a strong revenue growth track record with an 18% revenue CAGR over 10 years
All these initiatives seem to be playing out as Christy saw double-digit volume growth over
ending FY17, with FY18 impacted by several one-offs. This growth was driven by timely
the last few quarters, mainly driven by aggressive store expansion and a pick-up in its e-
expansion of capacities, entry into new product manufacturing, expanding business with
commerce sales (~10% of UK sales; maximum revenue contributor for Christy).
retailers around the world, serving new business segments through new channels,
Exhibit 12: Strong growth in Christy revenues over last few quarters acquisition of the Christy brand and subsequent expansion to other geographies.
3QFY17 4QFY17 1QFY18 2QFY18 4QFY18
FY18 revenues declined 9% yoy largely due to the traceability issue coming up followed by
Christy Sales Growth YoY (%) 35% 12% 24% 15% 18%
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
Apart from SPACES under which products like rugs, sheets and towels are sold in the
restocking at the retailer level, rising e-commerce sales driven by several initiatives taken
domestic market, WLSI plans to launch carpets and other flooring products under the
by the company, and a pick-up in domestic sales of SPACES. Exhibit 14 shows quarterly
Welspun brand itself, which is quite well known and would be easier for customers to
recovery details shared by management over the conference call.
recognize and associate with.
Exhibit 13: Increasing share of innovative products in overall revenues Exhibit: 14: Key excerpts from last few quarters’ concall signal demand recovery
Revenue share of Branded Products (%) 4QFY18:

18% 17% • Strong domestic business growth (SPACES).
16%
16% • Impact of destocking almost ending and restocking taking place.
14% 13% • E-commerce business now at 10% of Christy sales in the UK.
12% 11%
10%
10% 1QFY19:
10%
• Volume growth for the quarter stood at 8% on restocking by retailers.
8%
• Adjusting for high ROSL and duty drawback rate in 1Q18, revenue growth stood at 8%.
6%
• Domestic business (SPACES) grew 18% yoy
4%
• An 18% growth in sales of Christy Wimbledon towels.
2%
• E-commerce revenues of Christy grew by more than 2x yoy.
0%
FY13 FY14 FY15 FY16 FY17 FY18
2QFY19:
Source: Company, Equirus Securities • Double digit revenue growth yoy.
• SPACES revenues grew 20% yoy.
Led by strong growth in Christy and SPACES brands, the contribution of branded products • Balance between Ecommerce & Brick & mortar sales achieved.
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.
While WLSI is witnessing a volume growth recovery, FY19 revenue growth would be modest Exhibit 15: Revenues to grow at 12% CAGR over FY18-FY21E
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. Revenues (In Rs Bn) Growth (YoY)
However, with hedges turning favourable, completion of entire restocking exercise, and 100 52% 60%
flooring revenues kicking in, we expect double-digit revenue growth from FY20 onwards. 50%
We have built in a 12% revenue CAGR over FY18-FY21E driven by: 80
40%
• Strong growth in non-US markets like Europe and India. Penetration in European 60 23% 30%
18%
markets would be through increased sales of innovative products where competing 14% 13% 15% 20%
13% 12% 12%
9% 8%
countries like Pakistan, Bangladesh and others do not have a strong hold. Revenue 40 3% 10%
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 -9% 0%
20
SPACES products through online channels. -10%
17 19 21 32 36 45 53 59 66 61 66 74 85
• Increase in sales of branded products, with successful acceptance of Christy in the 0 -20%
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E
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. EBITDA to grow at 13% CAGR over FY18-FY21
• Flooring, the next focus area for WLSI, will be another product to be served in the
Cotton is a key raw material for WLSI and volatility in cotton prices has a significant impact
domestic market. New plant (set to commence operations by 3QFY20) is likely to boost
on EBTIDA margins. In case of rupee depreciation, the domestic cotton-prices get aligned
revenue growth from FY21 onwards.
with global cotton prices, which in turn adjust with INR, thus mitigating the overall impact
• Increase in effective utilization of the newly-enhanced rugs & carpets capacity (from to the margins. But, rise in cotton prices without rupee depreciation has a direct impact
8mn sq. meters to 10mn sq. meters in FY18). 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.
• 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
WLSI’s gross margins have expanded from 50-51% in FY12-FY13 to 54-55% in FY16-FY17
of existing retailers, but also with giant online retailers and own websites.
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.
Exhibit 16: Gross margins expected to remain at current levels going ahead Exhibit 18: EBTIDA to rise post bottoming out in FY19E
Gross Profit (In Rs Bn) Gross Margin (%) EBITDA (In Rs Bn) EBITDA Margins
40 55% 56% 18.0 27% 30%
54% 55% 24% 24%
35 16.0
25%
54% 14.0
30 19% 19%
52% 53% 19%
52% 12.0 20%
25 52%
10.0
20 50% 50% 51% 17% 15%
50% 50% 8.0
49% 50%
15
6.0 10%
49%
10 4.0
48% 5%
5 47% 2.0
16 19 22 28 33 36 30 32 37 12.7 15.9 15.8 11.2 11.2 14.0 16.3
- 46% - 0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY15 FY16 FY17 FY18 FY19E FY20E FY21E
Source: Company, Equirus Securities Source: Company, Equirus Securities
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
Multi-year capex cycle expected to end by FY20
the flooring plant, employee expenses are again set to increase to 11% from FY21 onwards. WLSI has been under a capex cycle for last many years. Apart from vertically integrating
Other expenses as a percentage of sales will decline marginally over time with an increase its production process across the manufacturing chain, it has carried out significant
in utilization levels (of existing and new plants) and better operational efficiencies. Overall expansion across segments over the years to meet the strong demand inflow from retailers.
EBITDA margins as a result, after bottoming out in FY19E at 17%, are expected to again
increase to 19% in FY21E. Exhibit: 19: Capex cycle of Welspun over last few years
Exhibit 17: Operating expenses to largely remain at current levels

FY14-FY15: Capex of Rs 11bn
RM costs Employee costs Other expenses • Installing 170k spindles in Anjar, taking the total count to 300K spindles.
100% • Addition of 140 looms
90% • Install a 20 tons/day open ended yarn capacity and upgrade spinning capacity from 12
80%
tons/day to 25 tons/day.
70% 20% 22% 20% 20%
20% 19% 21% • De-bottlenecking & infrastructure development
60%
11% 11% 10% 11%
50% 8% 9% 10%
FY16 Capex: Rs 11bn
40%
• Increasing towels capacity from 50,000 MTPA to 60,000 MTPA
30%
48% 45% 46% 50% 51% 50% 50% • Increasing bed linen capacity from 60 mn mtrs to 72mn mtrs.
20%
10% • Modernization of Vapi plant.
0%
FY15 FY16 FY17 FY18 FY19E FY20E FY21E
FY17 Capex: Rs 7.2bn In similar lines to the automobile industry, wherein small units are set up closer to a giant
• Increasing towels capacity from 60,000 MTPA to 72,000 MTPA automobile manufacturer and serve only to its needs, WLSI has many new small units set
• Increasing bed linen capacity from 72 mn. mtrs to 90mn. mtrs. up besides its Anjar plant that exclusively manufacture yarn according to the company’s
• Increasing rugs capacity from 8 mn. sq. mtrs to 10. mn sq. mtrs. 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
FY18 Capex: Rs 3bn utilization of 55-60%) while also saving on logistics and material handling costs. For the
• Increasing towels capacity from 72,000 MTPA to 80,000 MTPA. 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
FY19E Capex: Rs 9bn.
processes are controlled in terms of quality and processing checks, ruling out any quality
• Largely towards construction of flooring plant in Telangana of 27 mn. sq. mtrs.
issues.
FY20E Capex: Rs 5bn
• Remainder capex for flooring plant (Rs 4bn) and maintenance capex Exhibit 21: Regular capacity expansion has and will continue to boost revenues
Towels (In 000' MTPA) Bed Linen (In mn meters)
120 Rugs & Carpets (In mn sq. meters) Flooring (In mn sq. meters)
Exhibit 20: Barring FY18, capex intensity has been high; capex cycle to end from
FY20E with installation of flooring capacity 99
100 90 90 90 90 88
Capex (In Rs Bn) 80 80 80
80 72 72
12
60 60
10 60 50
8 40
27 27
6 20 10 10 10 10
8 8 8
4 0
2 Source: Company, Equirus Securities
11 11 7.2 3 9 5 2
0
FY14-15 FY16 FY17 FY18 FY19E FY20E FY21E 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.
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.
Debt reduction to drive earnings growth Exhibit 23: Net working capital to remain on higher levels
Most of WLSI’s expansion activities were funded through a combination of debt and internal Net working capital (In Rs Bn) - LHS Receivable Days - RHS
accruals. This resulted in mounting net debt levels (Exhibit 21) which jumped from Rs Inventory Days - RHS Payable Days - RHS
17.1bn in FY13 to Rs 30.1bn by FY18-end. The company has adopted a policy of calibrating 30 90
79
75 75 75
its capex to cashflows generated by the business and hence net debt levels are not 70 80
25 68
expected to increase going ahead substantially. 60 70
56 59 58
20 52 53 60
WLSI will incur a capex of Rs 9bn for the flooring plant in FY19 which will be funded via a 50
combination of low-cost debt and internal accruals (in ratio of 72:28). Additionally, cash 15
40
generated will also reduce some of the old high-cost debt; thus, overall debt levels will not 41 43 44 42
41 39
10 30
increase substantially. From FY20, the capex intensity would reduce and cashflows generated
20
would be used to fund the residual flooring capex (~Rs 4bn) and repay debt. As a part of its 5
vision, WLSI aims to be net-debt free by 2022 by using a major portion of cashflows to achieve 10
17 20 24 23 24 26
this target. 0 0
FY16 FY17 FY18 FY19E FY20E FY21E
Exhibit 22: Total debt to increase in FY19, post which it will start reducing from FY20E
Net Debt (Short Term & Long Term, In Rs Bn) Total D/E Exhibit 24: FCF generation to be healthier as capex intensity declines going ahead
35.0 250%
2.2 CFO (In Rs Mn) FCF (In Rs Mn)
30.0 13,280
200% 14,000
25.0 1.6
12,000 11,193
1.4 10,009
20.0 1.3 150% 10,141
10,000 9,391
1.2 8,895
8,322
15.0 0.9
100% 8,000
6,621
0.6 5,763
10.0 6,000 5,450
50% 4,453
5.0 4,000 3,196 3,248
26.2 31.0 30.3 30.1 31.8 27.5 20.3
0.0 0% 2,000 758
0
Source: Company, Equirus Securities FY15 FY16 FY17 FY18 FY19E FY20E FY21E

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.
PAT to grow at 22% CAGR over FY18-FY21E Exhibit 26: Return ratios to improve on rising profitability and debt reduction
WLSI has been following an accelerated depreciation policy wherein high depreciation is ROE ROCE
charged in the initial years of capacity expansion. This will come down in FY19E, post which
50%
the decline will be more than offset by additional depreciation for the flooring plant from 42% 43%
45%
FY20 onwards. Along with this, reduction of high-cost debt will bring down interest 38%
40%
payments. Despite these tailwinds, PAT margins for FY19 are expected to be muted due to
35%
(a) hedging losses, (b) legal fees related to the class action suit in the US, (c) provisions
30%
for advances to IL&FS, (d) high-input costs and (e) some one-offs expenses. However, from
25% 19%
FY20 onwards, higher operating efficiencies, declining depreciation (w.r.t to rising 18%
20% 24% 15% 16%
revenues) and falling interest expenses will lead to a 22% CAGR in PAT over FY18-FY21E. 21%
15% 19%
10% 15%
The company’s return ratios jumped sharply in FY16 and FY17 on the back of multiple 13%
5% 10% 10%
tailwinds of strong demand from retailers, favorable currency, low cotton prices and good
0%
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 Source: Company, Equirus Securities
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.
Key assumptions
Exhibit 25: Expect 22% PAT CAGR over FY18-FY21E on strong revenue growth, flattish Exhibit 27: Key Assumptions
depreciation & lower interest expenses Particulars FY18 FY19 FY20 FY21
Recurring PAT (In Rs Bn) PAT Margin (%) Capacity Utilization
9 14% Towels 80% 87% 93% 88%
12.4% 12.4%
Cotton Sheets 80% 85% 90% 88%
8
12% Rugs & Carpets 65% 70% 80% 85%
10.2%
7 Flooring - - 10% 30%
10%
6 7.5% 8.2%
5 8% Gross Margin (%) 50% 49% 50% 50%
6.4% 6.6%
Capex (In Rs Mn) 2,873 9,000 5,000 2,000
4 6%
3
4%
2
2%
1
5.4 7.4 8.2 3.8 4.4 5.6 7.0
0 0%
Investment risk & concerns Corporate Governance

• Trade wars: WLSI generates more than 90% of its revenues from foreign countries, Key highlights on corporate governance based on HSS’s recent Annual Reports:
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 • Company accounts were audited by S R B C & Co LLP, from FY18 prior to which Price
can hit the company’s revenues and earnings. In contrast, any materialization of the Waterhouse Chartered Accountants LLP were the auditors for the firm for a period of
ongoing talks between India and EU to enter an FTA can be a significant positive for thirteen years ending FY17. The change in auditors was as per the directions of ICI and
companies like WLSI. 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
• Customer concentration: A major part of WLSI’s revenues come from big retailers in periodically reviewed.
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. • Welspun’s Board of Directors has an optimum combination of Executive, Non-Executive
and Independent Directors, including women directors. The Board comprises one
• Cotton price volatility: The contracts entered into between WLSI and its customers chairman, two executive directors, four non-executive and Independent Directors and
are revised every six months (from the date of entry) to factor in any movements in one non-executive and non-independent director.
raw materials and pass them on to customers. WLSI buys its annual estimated cotton
• Welspun has a clear defined dividend policy according to which it pays at least 25% of
requirement in the cotton season (Oct-March). Any sudden spike in cotton prices can
its standalone PAT (incl. dividend tax) as dividend.
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. • 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
• New markets/products: As a part of its vision, WLSI intends to derive ~20% of its consolidated in one of the courts during the quarter ended December 31, 2016 and are
revenues from the domestic market (current market share 8-10%) by going aggressive proceeding as a single putative class action. The court proceedings are in a preliminary
on its SPACES brand and launch of new tiles carpet from its upcoming flooring plant at stage and it cannot be determined at present whether the consolidated putative class
Telangana. Non-acceptance of WLSI’s products by customers can slow down the action suit will be permitted to proceed as a class action and therefore the monetary
company’s growth trajectory. impact, if any, of the final outcome of the law suit is currently un-ascertainable.
• 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.
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
Bath linen (Towels - 80,000 MT)
Welspun India Bed linen (Sheets - 90mn metres)
Rugs & Carpets (10mn sq. metres)
Bath linen (Towels – 90,000 MT)

Trident
Bed linen (Sheets - 43.2mn metres)
Bed linen (Sheets - 46mn metres)

Himatsingka Seide
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

Welspun India Trident* Indocount Himatsingka Seide
Rs Mn
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 Exhibit 31:TTM P/E vs. 2 year forward EPS Growth

EPS Growth
WLSI, being the largest Indian exporter of home textile products to the US, is poised to 180 200%
benefit from changing buying patterns and further utilization of expanded capacities and 160
upcoming flooring capacities. Strong revenue growth coupled with an increase in operating 140 150%
20x
efficiencies will provide a boost to earnings. Additionally, cash generated by the business 120
100% 17x
100
will lead to significant debt reduction from FY20 onwards. We believe that with a rise in 14x
80
50% 11x
share of innovative & branded products, incremental revenues from non-US countries and 60
8x
debt reduction will drive business growth. We have built in a 12%/13%/22% CAGR in 40 0%
revenues/EBITDA/PAT over FY18-FY21E. 20
0 -50%
Mar/13
Mar/16
Mar/18
Mar/19
Mar/20
Mar/14
Mar/15
Mar/17
Nov/13
Nov/14
Nov/15
Nov/16
Nov/17
Nov/18
Nov/19
Jul/13
Jul/14
Jul/15
Jul/16
Jul/17
Jul/18
Jul/19
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 Exhibit 32:TTM EV/EBITDA vs. 2 year forward EBITDA Growth
target price, the stock will trade at 14x P/E & 2.3x P/B. EBI TDA Growth
3,00,000 60%
50%
2,50,000
Exhibit 30: Valuation Table 40%
15x
2,00,000
Particulars (In Rs Mn) FY18 FY19E FY20E FY21E 30% 12x
1,50,000 20% 9x
Target EBITDA 11,234 11,177 14,021 16,294
10%
1,00,000 6x
Target EV/EBITDA Multiple (x) 7.5 7.5 7.5 7.5 0%
50,000
Target EV 84,254 83,829 1,05,154 1,22,207 -10% 3x
Net Debt 30,146 31,836 27,515 20,274 - -20%
Mar/13
Mar/14
Mar/16
Mar/17
Mar/18
Mar/15
Mar/19
Mar/20
Nov/13
Nov/14
Nov/15
Nov/16
Nov/17
Nov/18
Nov/19
Jul/13
Jul/14
Jul/15
Jul/16
Jul/17
Jul/18
Jul/19
Market Cap 54,107 51,993 77,639 1,01,933
Shares 1005 1005 1005 1005 Source: Equirus Securities
Target Price 54 52 77 101
Exhibit 33:TTM P/B vs. 2 year forward RoE
CMP 61 61 61 61
250 RoE 50%
Upside -12% -15% 27% 66% 45%
200 40%
35% 5x
150 30%
4x
25%
100 20% 3x
15% 2x
50 10%
1x
5%
- 0%
Mar/13
Mar/14
Mar/15
Mar/16
Mar/17
Mar/19
Mar/20
Mar/18
Nov/13
Nov/14
Nov/15
Nov/16
Nov/17
Nov/18
Nov/19
Jul/13
Jul/14
Jul/15
Jul/16
Jul/17
Jul/18
Jul/19
Annexure 1: Company Overview Exhibit 34: Capacity expansion over years and its utilization rate
Particulars Units FY14 FY15 FY16 FY17 FY18
Welspun India started its operations in 1985 as a part of the US $3 bn Welspun Group, which
Towels MTPA 45,000 50,000 60,000 72,000 80,000
operates in sectors such as pipes, steel and infrastructure (through listed entities Welspun
Bed Linen mn mtrs 55 60 72 90 90
Corp Limited and Welspun Enterprises Limited). Welspun India was founded by BK Goenka
Rugs & Carpets mn sq. mtrs 6 8 8 8 10
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
Capacity Utilization
the cotton sheets and towels exports business. The second manufacturing unit at Anjar was
Towels MTPA 99% 102% 92% 97% 80%
set-up in 2006. It ventured into rugs in 2008. The current CEO, Dipali Goenka (wife of the
Bed Linen mn mtrs 89% 97% 92% 86% 80%
founder, BK Goenka) joined the company in early 2000 in its retail business and was
Rugs & Carpets mn sq. mtrs 68% 58% 76% 85% 65%
appointed as the CEO and joint MD in 2010.
Welspun aggressively expanded the business from the early 2000s to 2008. It acquired a Exhibit 35: Welspun’s journey over various phases
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, •Began operations in the textile industry as a part of the Welspun Group
1985
opening several retail stores under Spaces and Welhome brands. The company also did an
organizational restructuring by demerging its brands, marketing and investment unit •Set up towels facility at Vapi, Gujarat
1993
(Welspun Global Brands) in 2008 (post demerger, Welspun India’s products were sold to
this company, which in turn had all the customer relationships). •Set up sheets facility at Anjar, Gujarat
2005
However, not all these initiatives panned out as planned. In 2012, Welspun India merged •Acquired the most prestigious brand of towels in UK - Christy
2006
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, •Entered the rugs segment
2008
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
•Ranked No. 1 Home textile exporter to the US
brand). In FY13, the company initiated a multi-year capex program to improve its vertical 2012
integration (from 35% to over 70%)—it increased the spinning and weaving capacity,
•Started its capex cycle targetted towards vertical integration & capacity expansion
commissioned a thermal-based captive power plant, expanded its towel, sheeting and rugs 2014
& carpet capacities. Lastly its will also install a flooring plant at Telangana which will •Entered online space, launched: shopwelspun.com & .in
manufacture tiles carpets serving to domestic market. 2015 •Launched brand SPUN globally & Hygro brand in the US
•Commissioned India’s largest spinning facility under one roof

These measures reflected in improved operational performance starting FY13—the EBITDA 2016
margins have improved from 11% in FY12 to over 25% in FY16. The restructured retail •Foray in flooring solutions, smart textiles
business is also performing well in India as well as globally. Innovative and branded 2017 •Expanded to Middle East, Japan, Australia & EU
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. •Launched industry defining traceability solution Weltrack
2018
Source: RHP, Equirus Securities
Key Management profile Management Team

Board of Directors
Rajesh Mandawewala, Managing Director
B.K.Goenka, Chairman • In-charge of textile business; instrumental in growing reach over 50 countries
• Amongst India’s most dynamic businessmen • 25+ years of experience in industries varying from Textiles to SAW pipes.
• Ranked amongst India’s Most Powerful CEO by Economic Times • He is a Qualified chartered accountant
• Emerging Company of the Year Award in 2008
Dipali Goenka, CEO & Joint Managing Director
Arun Todarwal, Independent Director, Audit Committee Chairman • Driving force behind textile business, successfully led development of two
• 20+ years of experience in Finance, Audit, Taxation and Quality Management. brands – SPACES and Welhome
Member of ICAI, practicing since 1981 • Graduate in Psychology & completed Management Program from Harvard
Anisha Motwani, Independent Director Altaf Jiwani, CFO (Welspun India)

• 28+ years of experience in advertising, auto-manufacturing, financial and health • 25+ years’ experience in corporate finance roles across diverse industries.
services. Currently advisor to World Bank. Voted among ‘50 Most Powerful Women • Worked with RPG Group for 19years. Last role as CFO, Phillips Carbon Black
in Indian Business’ by Business Today for 3 consecutive years.
Julie McKenzie, CEO (Welspun USA)
Pradeep Poddar, Independent Director
• 35+ years of domestic and international experience in sales, merchandising,
• Technocrat & Corporate Leader with 30+ years of experience in consumer sourcing and licensing in the retail industry.
products industry and vast experience in brand building • Has been previously associated with Nickelodeon, Wal-Mart among others
Arvind Singhal, Independent Director Leigh Taylor, CEO & President (Welspun UK)
• MBA from University of California, founded Technopak, India’s leading • 30+ years of international experience across consumer products industry.
management & operations consulting firm with focus on Textiles, Retail, • Turnaround specialist with expertise in innovation & product development
Healthcare etc.
Manjari Upadhye, CEO (Domestic Retail Business)
Shalil Mukund Awale, Nominee Director
• 17+ years of experience across the consumer products industry
• Chief GM at IDBI Bank with nearly 22 years covering areas like Priority sector, • Significant contribution in brand building for FMCG companies
Retail Banking, Investment & Treasury, Venture Capital Finance, Audit.
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 &
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
Assoc.
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
Revenue/Capital
Tax Rate (%) 29 % 28 % 30 % 30 % 1.0 1.0 1.1 1.2 EV/EBITDA 8.5 8.7 6.6 5.2
Employed
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
EPS Growth EBI TDA Growth 250 RoE 50%
180 200% 3,00,000 60%
45%
160 50%
2,50,000 15x 200 40%
140 150% 40%
20x 35% 5x
120 2,00,000
30% 12x 150 30%
100% 17x 4x
100
14x 1,50,000 20% 25%
80 9x
50% 11x 100 20% 3x
10%
60 1,00,000 6x 15% 2x
8x
40 0%
0% 50 10%
50,000 1x
20 -10% 3x 5%
0 -50% - -20% - 0%
Mar/13
Mar/16
Mar/18
Mar/19
Mar/20
Mar/14
Mar/15
Mar/17
Nov/13
Nov/14
Nov/15
Nov/16
Nov/17
Nov/18
Nov/19
Jul/13
Jul/14
Jul/15
Jul/16
Jul/17
Jul/18
Jul/19
Mar/13
Mar/14
Mar/15
Mar/16
Mar/17
Mar/19
Mar/20
Mar/18
Nov/13
Nov/14
Nov/15
Nov/16
Nov/17
Nov/18
Nov/19
Jul/13
Jul/14
Jul/15
Jul/16
Jul/17
Jul/18
Jul/19
Mar/13
Mar/14
Mar/16
Mar/17
Mar/18
Mar/15
Mar/19
Mar/20
Nov/13
Nov/14
Nov/15
Nov/16
Nov/17
Nov/18
Nov/19
Jul/13
Jul/14
Jul/15
Jul/16
Jul/17
Jul/18
Jul/19
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
Revenue/Capital
Tax Rate (%) 28 % 30 % 17 % 29 % 1.5 1.3 1.3 1.0 EV/EBITDA 7.1 6.1 6.3 0.0
Employed
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 %

Equirus - Welspun India - Initiation

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Equirus - Welspun India - Initiation

Uploaded by

Copyright:

Available Formats

Home Textiles Sector

January 6, 2019 Vikas Jain (vikas.jain@equirus.com, 7574885492), Maulik Patel (maulik@equirus.com)

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

Key consumption markets of home textile products

US Population Employment Ratio (%) US House Sales (In 000 units)

Source: US Consensus Bureau

US Retail Sales (In tn $) EU's Home Textile Market Composition

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

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

US Home Textile Market: Disruption & recovery

Higher online buying forces industry players to transform business models

Company Snapshot Key Triggers

Comparable valuation EPS P/E BPS P/B RoE Div Yield

Lion’s share in world’s largest home textile market 6%

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

16% 15% 15%

Exhibit 5: Industry home textile players — A snapshot

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

Three pillars for next phase of growth

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

Source: Company, Equirus Securities

Source: Company, Equirus Securities

Revenue share of Branded Products (%) 4QFY18:

Source: Company, Equirus Securities Source: Company, Equirus Securities

Exhibit 17: Operating expenses to largely remain at current levels

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

Source: Company, Equirus Securities

Source: Company, Equirus Securities

Investment risk & concerns Corporate Governance

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

Exhibit: 28: Installed capacity of leading home textile exporters of India.

Bath linen (Towels - 80,000 MT)

Welspun India Bed linen (Sheets - 90mn metres)

Rugs & Carpets (10mn sq. metres)

Bath linen (Towels – 90,000 MT)

Bed linen (Sheets - 46mn metres)

Indo Count Bed Linen (Sheets – 90 mn meters)

Source: Equirus Securities

Exhibit 29: Peer comparisons of Welspun for various matrices

Valuations Exhibit 31:TTM P/E vs. 2 year forward EPS Growth

Source: Equirus Securities

Net Debt 30,146 31,836 27,515 20,274 - -20%

•Commissioned India’s largest spinning facility under one roof

Source: RHP, Equirus Securities

Key Management profile Management Team

Anisha Motwani, Independent Director Altaf Jiwani, CFO (Welspun India)

Consolidated Quarterly Earnings Forecast and Key Drivers

Historical Consolidated Financials

You might also like