WIL is among the top 3 home textile manufacturers in the World enjoying strong vendor status with

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1 backward integration and higher leverage of existing markets WIL is among the top 3 home textile manufacturers in the World enjoying strong vendor status with top global retailers. In early 2013 it was ranked as the No. 1 Home Textiles Company in US. With a distribution network across 32 countries, the Company offers the entire range of home textile products, mainly terry towels, bed linen products and rugs. Majority of these products are sold in the key markets like USA, Canada, UK, Europe and Japan. Supplier to 14 of the top 30 global retailers, the Company has marquee clients like Wal-Mart, JC Penny, Target and Macy s to name a few. About 95% of WIL s production is exported to various countries across the world. India continues to enjoy cotton advantage over the rest of the world. The prices and availability of cotton in India is the best as compared to competing cotton textile supplying countries like China, Pakistan and Bangladesh. This encourages customers to source more out of India. Apart from this, India has a fair supply of yarn with 4 million tonnes of yarn production, out of which about 30% is currently getting exported. So, as a country India enjoys a huge advantage over competing countries and this, coupled with the escalating cost of production in China, the geopolitical challenges in Pakistan and the safety security concerns in Bangladesh, really puts India in a very advantageous position vis-à-vis the other cotton textile supplying countries. The business can be expected to move from these countries to India over the next several years.

2 BSE SENSEX/S & P NIFTY 25580/7655 Sector Textiles Market Cap./Free Float (` Crs.) 1428/384 Market Price as on 7/6/14 `(FV `10/-) Week High/Low ` /46.5 Equity Shares Outstanding (in Crs.) P/E Ratio (Times) (for FY 14) 3.4 P/B (Times) (for FY ' 14) 1.29 EV/EBITDA (Times) (for FY '14) 3.70 ROE (%) (for FY '14) 37.8 Note P/E Ratio & ROE without considering additional depreciation. Shareholding Pattern as on Mar 14 (%) Highlights u Company is one of the top home textiles suppliers globally. Strong customer relationships, efficient supply chain and innovative product development are its key strengths. It is expanding its spinning & weaving capacity to source about 75% of the yarn supply and fabric supply in house, from the current level of 30-35%. It has acquired a group thermal power plant with a capacity of 80 MW which is dependent on imported coal. With this, Company will be able to get uninterrupted power supply at competitive rates. u WIL has always had a strong focus on innovation. For FY 13, WIL derived ~30% of its sales from innovative products. 11% 16% Promoter DII Others u As a part of growth strategy, Company is focusing on greater penetration in US & Europe markets across products. It continues to geographically de-risk operations by focusing on new markets. It also has strong focus on high growth domestic market, especially through shop-in-shop in large retail stores involving limited capex and low risk. 73% PE Band u Since Company has provided for high depreciation, the net profit has been reported lower. Without considering additional depreciation, net profit and EPS will amount to ` 420 Crs. and ` 41.8 respectively, resulting in P/E ratio of 3.4 x. P/BV was 1.3 x as of March 14. We believe that the stock should give decent returns in view of better demand environment and higher profitability due to backward integration. 2

3 Background C ompany belongs to Welspun group of companies, headed by B K Goenka. Starting with synthetic yarn business in 1985, the Company emerged in its present avatar in The promoters hold 73.1% stake in the Company. Its product range covers the entire gamut of bedding and bath textiles like bed sheets, pillow cases, comforters, quilts, and mattress pads, pillows, bath rugs, towels and bath robes. Plants are located in Anjar & Vapi in Gujarat. In FY 13 WIL consolidated its business operations under one roof. This is in continuation of the efforts which it began in FY 12, of exiting the laggard businesses, starting with the closure of its loss making operations like Sorema, Mexico and a significant part of the Indian standalone store retail operations under the brand Welhome. The consolidation of these operations resulted in significant improvement in profitability. WIL also acquired 13.03% equity stake in Welspun Retail Ltd (WRL) a subsidiary Company, raising the effective shareholding in WRL to 98.03%.This will further help in consolidation of the retail business under the Shop-in- Shops concept adopted by WIL to increase domestic sales. 45% of total import of towels in America is from India now, as against 30-35%, 1-1 ½ years back. Bed sheets have crossed 50% of imports from 25-30%, 2 2 ½ years ago. With US economy on revival mode, Indian exports to US are expected to grow. The Company is continuing to grow its market share in Europe. From 12% of revenues in FY 12, in FY 13 it was about mid teens. In FY 14 it went up between 18% and 20% of revenues and Company plans to increase it up to about 24% to 25% of its overall revenues for FY 15. So, despite not having any duty advantages and competing with countries like Bangladesh, Pakistan and Turkey, who have duty free access into Europe, Company s share is continuing to grow in Europe. Customers in Europe are seeing the advantage of working with companies which offer end-to-end solutions to them and come out with innovative products. Company expects very strong market share gains in Europe if India- EU Free Trade Agreement (FTA) is signed. Other key markets, such as Japan, Korea, Australia and South Africa, also present huge potential for growth. India has signed an FTA with Japan, Korea and the SAARC countries, which could be leveraged to increase Indian exports to these countries. The domestic market is also growing at a fast pace, presenting strong potential for growth. Welspun Group has commissioned in April 2013, an 80 MW thermal power plant in Anjar based on imported coal. Company acquired 68% stake in Welspun Captive Power Generation Ltd. during FY 14. This will ensure continuous availability of power and reduce power costs for WIL. Welspun India Ltd.h is also available on 3

4 Products Terry Towels WIL is one of the largest terry towel manufacturers in the World and the largest supplier of towels in the US. The range offered includes beach towels, kitchen towels, baby hood towels, hand towels, face towels and bath sheets. These are made out of 100% cotton or blended yarns, which has significant hygroscopic property, with a capability of quick water absorption. Bath Rugs WIL is one of the largest producers of premium bath rugs and is one of the largest suppliers to the US market. These bath rugs are generally made of cotton, nylon or micro fiber and can be latex-backed, depending on consumer preferences. The rugs come in various sizes, shapes and designs. WIL uses its multi-level cut loop machine to create multiple fiber lengths within a rug. Bath Robes WIL has ability to make piece dyed, yarn dyed, jacquard and velour bath robes in different designs, shades and weights with embellishments, embroidery and prints as per customer requirements. It manufactures robes in different styles such as kimono, hood, zipper, shawl and wraps. Bed Linen products In bed solutions, WIL manufactures bed sheets in different sizes, according to bed sizes and mattress depth. It is one of the largest suppliers of bed sheets in the US. These bed sheets are made from cotton or various blends, such as polyester cotton, cotton bamboo, cotton silk and cotton eucalyptus. Basic Bedding and Decorative Bedding WIL s basic bedding products include mattress pads, blown and garneted pillows and basic comforters while decorative bedding products include comforters, duvets, coverlets, bed skirts, shams, decorative pillows and bolsters. Most of these products are made of polyester fiber fill wadding, although the fill can be varied according to customer requirements. Carpet Company has commissioned its carpet project in Dec. 13 quarter with a small investment of about ` Crs. These carpets are used in living rooms under the tables and other furniture items. 4

5 Capex Company has decided to augment its spinning and weaving facilities in order to improve vertical integration. This backward integration project (Phase 1) was expected to be completed by end- FY 14. The debt for the project will receive 5-7% interest rebate from the Gujarat state government and 4-5% from the central government (under TUFS), resulting in an effective interest rate of 2-3%. Post this capex, internal supply of yarn and greige fabric is expected to reach 75% of requirements from the current levels of 30-35%, thus reducing the Company s dependence on external suppliers. Apart from ensuring quality and availability of key intermediate products, the backward integration will also contribute to improve the profitability of WIL significantly. Out of the total capex programme of ` 2,400 Crs., Company has spent about ` 1,000-1,100 Crs. in FY 14, towards setting up a new spinning mill of 1,70,000 spindles and new open end yarn capacity of 20 tonnes a day and also upgrade one of its existing spinning mills from about 12 tonnes a day to about 25 tonnes a day. Over and above this, it has added 140 looms for bed sheets. Some of these facilities have already started production and the rest are expected to be commissioned by end of June 14. In FY 15, Company wants to take up modernization of its Vapi factory, which is years old, at a cost of about ` 300 Crs. Also, ` 100 Crs. will be spent on balancing equipments to improve towels and bed sheets capacities. It is also planning to promote an industrial textile park, inviting some investors to set up spinning and weaving mills, with intent to create supply chain in future. Company will also be doing some debottlenecking in dye house and cutting and sewing facilities with small investments. In bed linen, capacity will go up to 60 million in FY 15 and 72 million in FY 16. Capacity in towels will go up from 45,000 MT to 50,000 MT in FY 15 and 60,000 MT in FY 16, bulk of it with Vapi modernisation. For the carpets and rugs present capacity is at 12 million, going up to 15 million in FY 15 and 20 million for FY 16. Rest of the expenditure of about ` 1000 Crs. planned for FY 16 will be incurred as and when the need arises. Out of this, about ` 300 Crs. will be on setting up 60,000 spindles of course count. 140 looms addition will involve capex of about ` 150 Crs. Another ` 200 Crs will be incurred on worker s facilities and automation. Rest of the expenditure will be on increasing towel, Capacities Product FY '14 FY '15E FY '16E Terry Towel (MT) Bath Rugs (million) Bed Linen Products - Bed Sheets (million meters) Cotton Yarn (tonnes) Note: All expansions in FY 16 will be undertaken depending on demand. 5

6 bed sheet, rug and carpet capacities. New fully automated cutting and sewing unit for bringing down labour costs should involve another ` 150 Crs. investment. On an average, Company is looking at 18% return on capital on the investments. This is barring ` Crs. of investments (worker s facilities etc.) which may not bring that kind of returns. Input costs Of all the major textile supplying countries, India is a major Net Exporter of cotton. Other major suppliers like China, Pakistan and Turkey have higher cotton imports than exports. This puts India at an advantage against other major exporters in terms of raw material availability and costs. In terms of labour, India s position is improving vis-a-vis China as average monthly wages as well as wage inflation are much lower in India. As far as power costs are concerned, power costs from the grid are slightly higher in India compared to China. But for companies which have captive power plants and uninterrupted fuel supply, costs are lower or comparable to China. Cotton, cotton yarn and Power are the main input costs which impact the total cost of production. On the cotton front, WIL secures a significant part of its requirement during the cotton season, when prices are the lowest during the year. Apart from this, the Company has worked out an indexing formula with its key clients, which allows it to pass on any rise above 5 % to its customers. Cotton yarn prices are also volatile and could rise on the back of increased demand from China. WIL s backward integration which is underway would increase the proportion of captive yarn to ~70% from the current levels of ~35%. This would mitigate price or availability risks to a large extent. WIL has set up a captive power plant at Anjar to reduce power costs and to ensure continuous availability. After starting at ` 39,000 a candy, Management reported cotton prices to be about ` 43,000 a candy in January 14. In line with Company policy it was planning to cover 75% of its whole season requirements by March 14. WIL is on price variance formula with most of its large clients, so increase in revenues in FY 14 has happened partly on account of the rupee depreciation. 60% of Company s sale price is dollar denominated cost. So when the rupee depreciates, rupee cost of 60% of sales price goes up and vice versa. Over and above that, costs like wages and salaries also go up every year. Rupee has 0.3% kind of impact on PBT either way with 1% change in rupee. All these things get factored in renegotiation of prices with clients. 6 Welspun India Ltd.is also available on

7 Financials Company reported 23.3% increase in consolidated revenues to ` 4495 Crs. in FY 14. Increase in revenues was due to strong volume growth in towels and rugs and higher realization across products. By and large higher realization is coming from rupee depreciation. While EBITDA increased by 54.9% to ` 921 Crs., net profit went down by about 60% to ` 92 Crs., mainly due to change in depreciation method from straight line to reducing balance method. Company provided for ` Crs. of additional depreciation during the year. But for this, net profit during the year would have been ` 420 Crs. a growth of 84.3%. March quarter is not a strong quarter seasonally. Revenues during March 14 quarter increased 3.3% q-o-q and 56.5% y-o-y to ` 1185 Crs. EBITDA for the quarter degrew by 8.2% q-o-q and increased by 91.1% to ` Crs. Net profit degrew q-o-q by 25.3% and increased by 29.3% y-o-y to ` Crs. Lower growth in net profit was mainly due to higher depreciation, interest and tax provisions. While raw materials constitute about 50% of sales, manufacturing expenses form 17% of sales and employees another 7.6%. Manufacturing expenses includes Power, Fuel and Water charges, Dyes & Chemicals and labour and job work charges. Selling administration and other expenses constitute about 10% of revenues, down from 12.5% plus in FY 12, mainly due to consolidation of marketing business WGBL with WIL, and closure of loss making businesses. Company had 18 subsidiaries as of March 13 investments in subsidiaries and associates ` Crs. Company has about ` 2,600 Crs. plus net debt as on March 14, working out to 2.36 x Debt equity ratio. Debt equity ratio would have been lower, but for higher depreciation provision during the year. Internally it plans to keep net debt under ` 3,000 Crs. and above 2.6x EBITDA. All term debts are TUF and get 5-7% interest rebate from Gujarat government and 4-5% from central government, with effective interest of only 2-3%. For working capital Loans Company gets interest subvention of 3%. Debtor days as of March 14 stood at 33 days. 7

8 Concerns u Company is not in a position to control certain costs like cotton and labour costs due to changing policies and rising inflation in the country. u It is dependent on large retailers in the US for its US business. u High competition in the home textile market results in erosion of margins. Also, new players flood the market with over supply. u Since Company derives over 90% of its revenues from exports, it is impacted by volatile exchange rates and strong rupee against major currencies. To curtail the impact, WIL has an internal hedging policy under which it hedges its position to the extent of about 60% of its sales. As of Dec. 13, it had hedge position of US $ 333 million at an average realization of ` 63.45/$. Comments u Company aims to improve its revenues to become leader in home textile manufacturing in the world in next couple of years. This growth will be driven by increased sales from innovative product categories. Currently about 30% of revenues have been contributed by innovative products in Bath, Bed and Rugs. u About 95% of revenues come from exports. While the US remains the biggest market, it has increased its presence in Europe and other markets diversifying the geographical risks. It is gaining traction in markets like Canada, South Africa, Japan, Korea and Australia. Company hopes to capture some of the new high-end markets in Europe, once the proposed India-EU FTA comes in to effect. u In the domestic market, WIL has been able to capitalize on the Shop-in-Shop concept in large retail chains with its brand Spaces. This model entails no capex and has minimal risk. It is also trying to boost domestic presence through other channels like wholesale distributors, institutional clients and e-commerce. u Indian textile players, especially the home textile players, have been able to increase their market share due to their superior quality and competitive prices and supportive schemes from government. With China s new cotton and yarn policy reducing the cost competitiveness of its industry, Pakistan being impacted by energy availability issues and Bangladesh facing scrutiny regarding workers safety, India is expected to further increase its market share in the medium term in the global arena. WIL with its global scale and reach, as well as innovative product development, is well-positioned to capitalize on this opportunity. 8

9 u Since majority of sales revenue comes from exports, the Company s ability to do business is affected by the changes in economic conditions of consumer countries. Weak Consumer sentiment affects the sourcing plans of retailers which in turn can have an adverse impact on WIL s operations. The Company is trying to address this through diversification into newer regions such as Japan, Korea and Australia. u WIL is seeing the emergence of various developing economies becoming competitive in the home textiles space. However, Company is confident that its quality products will help in facing competition. Also, implementation of further vertical integration in the value chain will aid better efficiency & profitability. u While the business as a whole continues to be stable, replenishment business, which forms 80% of Company s business is continuing in the last few quarters. u Management feels that margins at EBITDA levels are sustainable. In the last 2 years Company has earned between 16-20% margins. With better integration, margins are expected to go up. u Companies in the industry have become conscious about spending money on capacity expansion, unlike in the period from Therefore, management feels that demand supply parity has been restored with pricing power returning to the industry. All Tier I producers are in their comfort zone, utilizing 85-90% of their capacity. 9

10 Consolidated Quarterly Financials Year Ended (` Crs.) June '12 Sept '12 Dec '12 March '13 June '13 Sept. '13 Dec. '13 March '14 Revenue Raw Materials Employee cost Power fuel & water charges Other Exp Total Expenses EBITDA EBITDA Margin (%) Depreciation Interest Taxation Other income Exceptional Items 3.11 Share of Associates Net Profit Net Profit Margin (%) Equity Capital (FV ` 10/-) Equity Shares (in Crs.) EPS (`) Note: 1) During the quarter ended Sept. 13 Company changed the method of providing depreciation from Straight Line method to Reducing Balance method. Accodingly, additional depreciation of ` Crs. was provided in FY 14. If additional depreciation is not considered, the Net profit after considering tax would be about ` 420 Crs. and EPS ` ) If the depreciation method was not changed, the PBT for FY 14 would have been ` Crs. 3) On 1/4/13 Welspun India acquired 68% stake (increased from 49.9% in PY) in Welspun Captive Power Generation (WCPGL) which started production during June 13 quarter. Consolidated figures include WCPGL figures from June 13 quarter. 4) During Dec. 13 quarter, Company received ` 24 Crs. as one time benefit under SHIS (Status Holder Incentive Shcheme) Licence. 5) Company has merged Welspun Global Brands Ltd. (WGBL) with itself and transferred WGBL s marketing business to Welspun Retail Ltd. (renamed as Welspun Global Brand Ltd.). The merger was approved on 7/12/12. Earlier quarters does not include the figures of merged entities. 6) During FY 12 Company provided for ` Crs. in consolidated accounts for impairment of goodwill arising out of consolidation of CHT Holding Ltd. Also, ` 41.4 Crs. was provided towards loss on disposal of investment in Welspun Sorema Tapetes. 7) Company has provided for large sums in standalone accounts towards provision for doubtful loans given to Welspun AG, a wholly owned subsidiary. 10

11 Consolidated Annual Financials Year Ended (` Crs.) FY '11 FY '12 FY '13 FY '14 Revenue Raw Materials Employee cost Power fuel & water charges Other Exp Total Expenses EBITDA EBITDA Margin (%) Depreciation Interest Taxation Other income Exceptional Items Share of Associates Net Profit Net Profit Margin (%) Equity Capital (FV ` 10/-) Equity Shares (in Crs.) Reserves EPS (`) Book Value (`) ROE (%) Note: 1.) During the quarter ended Sept. 13 Company changed the method of providing depreciation from Straight Line method to Reducing Balance method. Accodingly, additional depreciation of ` Crs. was provided in FY 14. If additional depreciation is not considered, the Net profit after considering tax would be about ` 420 Crs. and EPS ` ) If the depreciation method was not changed, the PBT for FY 14 would have been ` Crs. 3) During Dec. 13 quarter, Company received ` 24 Crs. as one time benefit under SHIS (Status Holder Incentive Shcheme) Licence. Included in other income for FY 14 4) During FY 14 Welspun India acquired 68% stake in Welspun Captive Power Generation which started production during the year. 5) Company has merged Welspun Global Brands Ltd. (WGBL) with itself and transferred WGBL s marketing business to Welspun Retail Ltd. (renamed as Welspun Global Brand Ltd.) Crs. shares were issued to WGBL shareholders. 6) During FY 12 Company provided for ` Crs. in consolidated accounts for impairment of goodwill arising out of consolidation of CHT Holding Ltd. Also, ` 41.4 Crs. was provided towards loss on disposal of investment in Welspun Sorema Tapetes. 7) Company has provided for large sums in standalone accounts towards provision for doubtful loans given to Welspun AG, a wholly owned subsidiary. 11

12 Industry The Indian textile and apparel market size (domestic + exports) is currently at around US$95 billion and is projected to reach US$ 223 billion by 2021, implying a CAGR of ~10%. The textile industry is in a consolidation phase on account of buyer s concentration towards few suppliers with larger market shares and growth potentials. India s textile growth has been predominantly due to the growth in its apparel and clothing sectors which collectively has 43% share in India s textile industry. The government policy of diversification of market and product base has helped industry and it has ventured into the newer markets, which paid huge dividends. The global home textiles market is estimated at around US $70 billion, of which cotton made-ups account for 50%. US and the Europe are the biggest consumers while India, China and Pakistan are the biggest exporters. India s share in the global home textiles trade is around 7% and US $3 billion specifically in cotton made-ups. Around 2/3rd of India s exports are into the US and EU, according to the Confederation of Indian Textile Industry. The home textiles market in the US is estimated to be approximately US $ 24 billion. China, India and Pakistan put together account for the majority of the exports to US in this segment. India, has been gaining market share from the other major competitors, especially in cotton home textiles. This is on account of several factors including - cotton advantage, superior quality and lower labour component compared to apparels. In addition to the competitive advantages on the production side, India is also benefitting from the increased access to various markets on the demand side. Europe is the second biggest market for home textiles in the world after US. India s share in European home textiles is much lower than in US primarily due to the duty preference available to some of its closest competitors. In Europe, currently Indian exports attract an additional 9% export duty which is not applicable to countries like Bangladesh. Pakistan also has a temporary exemption from these duties. However, this is expected to change once the Europe FTA comes in place, as the duty being imposed on textile exports from India will be removed. This will make India much more competitive and open up a huge market for Indian manufacturers. India has also signed FTAs with South Korea and Japan, which would provide better access to these markets. The other key market for Indian manufacturers will be the domestic market. The current Indian market, though small, is expected to grow at a very healthy pace. It is estimated that over the next 10 years, home textile will grow at a CAGR of 8% and market size will increase from ` 184 billion in 2011 to ` 408 billion in Domestic consumption is expected to grow, fueled by several factors including rising disposable income of the consumers, growth in organized retail, increasing brand awareness, rapid urbanization and increase in working age population. 12

13 The total global exports in the world trade are worth US$ 772 billion. The high level of trade in textiles is on account of the clear distinction between producing countries and consuming countries. Developed economies such as USA and Europe have emerged as major consuming hubs while developing economies such as China and India are the biggest manufacturers. India contributes 5.2% to the global textile trade. India has surpassed countries such as Bangladesh, Italy and Germany coming second only to China in textile exports. While the global textile industry s growth is about 4.7%, India has registered 23% growth rate which is significantly higher than China s growth rate of 11.4%. India s current textile export in the international scenario is US $ 40.2 billion. The export basket of the Indian textiles industry consists of a wide range of items - readymade garments, cotton textiles, handloom textiles, man-made fibre textiles, wool and woolen goods, silk, jute and handicrafts, including carpets. Other factors like China s new cotton and yarn policy, energy uncertainties in Pakistan and workers safety issues in Bangladesh will put India at an advantage against these major competitors. China is the world s largest exporter of Textiles. However, in recent years, due to domestic demand, it is also one of the largest importers of textiles. Due to its dominant position, Chinese policies play a major role in shaping trends in the industry. The Chinese Government in the year 2011 adopted a new cotton policy with the objective of protecting its cotton farmers and maintaining price stability of cotton. The cotton policy set a floor price of cotton that exceeded the market price and the government started stockpiling cotton at this price. The price floor was further raised in September 2012, resulting in Chinese cotton price being 40-60% higher than world price. The government has also placed quota restrictions on imports of cotton, forcing buyers to purchase most of their requirements from the state reserve. The policy has had a significant impact on the global cotton textile industry. The high cotton price has resulted in Chinese spinners, weavers and cotton textile manufacturers becoming less competitive. This provides an opportunity for Indian yarn and textile players to increase their market share in the global arena. On the flip side, China s yarn imports have jumped substantially (69% increase in 2012 vs levels), which could put pressure on yarn prices and availability. Hence it is imperative for Indian textile players like WIL to have backward integration to be immune to such fluctuations. The other key competitors for India in the textile industry are Pakistan and Bangladesh. Energy challenges coupled with the volatile geopolitical situation in Pakistan, has resulted in the competitiveness of the country being affected adversely. Similarly, concerns regarding workers safety norms in Bangladesh have affected the credibility of the country s textile industry. This has led to a standoff with the U.S and Europe, which have indicated plans to withdraw the concessions that it bestows upon Bangladesh. This could negatively impact competitiveness of Bangladesh s textile industry. 13

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