Welspun tasks EY to review supply chain, but future uncertain
Welspun India on Friday appointed Ernst & Young to review its supply chain systems and processes, following last week’s termination of a contract with US retailer Target Corp, on grounds of shipping inferior quality goods.
The development had rattled investors who fretted the termination could spread to other marquee clients such as Wal-Mart, JC Penney, Bed Bath & Beyond, impacting revenues and profitability as two-thirds of Welspun’s business is from the US. Shares of Welspun ended Friday 8.6% down at ₹49.70 on the Bombay Stock Exchange (BSE), extending a four-day fall that has seen the stock lose 51.7% since Monday.
There are fears that reports of a similar review of quality by Wal-Mart and Bed Bath & Beyond, who also source Welspun’s products made out of premium Egyptian cotton and have already red flagged the company, may pull the shares further down and also dent the brand of India as a manufacturing giant. In 2008, a Wall Street Journal report suggested that Wal-Mart had conducted a similar investigation to check whether supplied Egyptian cotton sheets were authentic. The outcome of the investigation is uncertain and Wal-Mart still sources products from Welspun.
Welspun did not respond to mails on the issue.
“There is no clarity on Welspun’s future earnings as other key customers have also joined the audit and are reviewing the supply process,” said Siddharth Khemka, vice-president, Centrum Wealth Management.
Target, last Friday, said its investigations revealed that Welspun had used non-Egyptian cotton in Egyptian cotton bedsheets, which the retailer sells under Fieldcrest label. Target, which is Welspun’s second largest customer and accounts for 10% of its sales, said it had to give refunds .
“The audit will give us clarity on a number of questions, including where and how the issue occurred and what steps we need to tighten our processes,” Rajesh Mandawevala, MD of Welspun India said on Monday.
“As a supplier, we undergo many checks by all our customers . We remain committed to our customers and any concerns raised by them are addressed from time to time,” a Welspun spokesperson said on Friday.
But most analysts do not agree. “Management failed to assuage concerns on how internal audit and third-party quality checks appointed by it failed to raise any alarm over two years,” said Sumant Kumar an analyst at Elara Capital. “The risk to earnings may extend to the entire Egyptian cotton bed linen business (6% of total sales).”
Elara Capital downgraded its rating on Welspun to “sell” from “buy”. Centrum has put its rating “under review.”