Welspun India Ltd- Q1FY22 Analysis
Updated: Aug 4, 2021
During the quarter Q1FY22, Welspun India Ltd achieved highest ever quarterly sales of ₹2,227.2cr. Welspun India is an export oriented home textile company with the target market being North America followed by Europe. Company supplies to big box retailer such as WalMart, Bed Bath & Beyond, Costco, Macy’s, Carrefour, IKEA etc. Since there is strong economic revival in US and good revival is Europe( the end markets of the company) has led to increase in growth for the company. Another factor fueling the growth is the growing home based economy. Also, the decision taken by Indian Govt to continue providing them with RoSCLT adds a massive 4% to the company's EBITDA margin.
Welspun India has businesses in 2 major categories which are Home textile and then comes the recent one which is Flooring.
Home Textile business
In the home textile business, Bath Linen sales volume grew by 51% YoY, Bed Linen sales volume grew by 114% YoY and Rugs and carpets sales volume grew by 219% YoY. Just keep in mind that Q1FY21 was a washout quarter due to lockdown.
The EBITDA margin was robust 22.6% in Q1FY22 compared to 18% Q4FY21. This was primarily on account of the 6.4% RosTcl(explained below) by the govt for the current and the previous quarter combined.
If we take out this RoSCLT benefit, the EBITDA margin comes to just 16.2% which is lower than the previous quarter's 18%. In the concall the management highlighted that the margin was impacted by 2.2% on account of higher inventory due to logistical issues and then higher cotton prices as well as increase in other chemical prices is also impacting their margins. The company is in talks with its clients to increase their prices which is likely to happen soon.
The flooring business which came onstream in FY20 continues to struggle. Although, the business was meant to be for domestic market, the economic slowdown in FY20 and then the onslaught of COVID has led the company improvise and focus towards exports.
Revenue from Flooring division was just ₹121.4cr in Q1FY22 and a EBITDA loss of 26.3cr. The capacity utilization declined QoQ to just 30%. This business has the potential to reach ₹2500cr revenue at peak capacity.
The company is in advanced talks with some Middle east based retailers to supply them with their flooring solutions. Any new customer onboarding and then scaling revenue with them is a time taking process.
For the flooring business, the domestic business sales was in just single digit for the quarter due to severe impact of COVID. Though, the company has been expanding its distribution reach adding 15 distributors in this quarter taking the total to 400+ distributors. It looks like it is going to be long gestation business.
Due to the ongoing shipping crisis, company could not transport some amount of product. It led to increase in inventory. Coming to the debt, although the company has reduced the debt by ₹402cr YoY and ₹84cr QoQ, the net debt remained at ₹2249.5cr. The finance cost during the quarter remained close to ₹49cr. With the healthy cash flow generated by the company, they wants to prepay high cost debt.
Welspun India Ltd- Capacity & Utilization
Capacity Expansion Plans
Welspun India has 2 plants in Gujarat at Vapi & Anjar for its home textile business. Company's home textile plants are currently running at full capacity utilization. To cater to the increased demand the company has setup a ambitious expansion plan of ₹600cr for FY22 of which ₹172 cr was spent in Q1FY22.
Already expanded capacity of terry towel by 7% which will start generating revenue from Q2FY22.
Increasing bed linen capacity by 20% which will be commissioned by Q3FY22.
Expanding rug capacity by 80% in Q4FY22.
TAILWINDS FOR THE COMPANY/SECTOR
A number of factors are acting as a tailwind for the growth of the company:
RoSCTL continuation by the Govt. It will add 4% points to the EBITDA and thats huge.
Strong growth in the end markets of the company. US economy has grown by more than 6% in the last 2 quarters.
US Senate has passed a bill to ban imports from China's Xinjiang region. US has already banned imports of Xinjiang cotton. Xinjiang produces 80% of total cotton for China. Given that all retailers now require traceability of all the products. This is going to help companies who are sourcing from other geographies in particular India(Largest producer of cotton). According to the management, they are already seeing China+1 strategy by retailers play out helping them grow by 22% in Europe in the current quarter.
RoSCLT (Rebate of State and Central Levies and Taxes)-> In order to enhance the competitiveness of the labor-intensive textiles sector, the Govt on July 14th, 2021 announced the extension of rebate on central and state taxes on their outward shipments. This will be valid till March 2024.
In Q1FY22, the manufacturers were also reimbursed the dues for Q4FY21.
Good explanation on RoSCLT: Link
In the Q1FY22 Concall, Welspun management that this scheme will add around 4% to EBITDA margin and that's causing the massive rally in these companies.
Looks like good times ahead for Indian home-textile exporters. All brokerages are busy increasing the target price of these home textile exporting companies.
Excellent Interview with the the Jt MD:
One way of tracking the sector:
Since majority of home textile export is to the US, one can track the monthly sales of products to US.
Step 1:Goto Textiles and Apparel (trade.gov)
Step 2: At the bottom of the page you will find category of 'MADE-UPS'
Step 3: Select one of the sub categories 'COTTON SHEETS'. Click on $values
Here you can see that the value of Cotton Sheets exports to US from India increased 95.93% year on year and 33.7% quarter on quarter for the month of May 21.
Similarly, you can track the data for 'COTTON BEDSPREADS / QUILTS' and ' COTTON TERRY / OTHER PILE TOWELS' etc.
I have earlier written a blog on the numerous free available data sources: