Investors target Welspun India after Target severs business ties

Investors targeted Welspun India Ltd after retail giant Target Corporation, one of its largest customers, announced it is terminating its business contract with Welspun for alleged failure to ensure product quality in its supply of bedsheets.

Welspun lost over Rs2,000 crore in market capitalisation in early trading today after Target Corp said it is in the process of terminating its business relationship with it. Target said in a statement late last week that Welspun substituted Egyptian cotton with a cheaper variant of cotton while supplying bedsheets.

Target accounted for about 10 per cent of the company's revenues, while bedsheets accounted for about 10 per cent of the total Target business.

For Target, however, besides the loss of supplies and reputational issues, there will be a huge liability in terms of refunds to customers who bought these sheets in the past two years.

For both Welspun and Target, this can result in loss of business from other customers as well.

Welspun, which sells the same product to a few other customers as well, said it will appoint an auditor to probe the charges. It did not clarify on the issue or assuage fears of concerns.

Welspun said the product accounted for 3-6 per cent of the company's revenues. But the collateral damage that can ensue could be much bigger.

About two-thirds of Welspun's business comes from the US. Compliance issues with one large retail client can create reputation issues, weighing on future contracts.

Welspun shares, despite the current fall, is currently ruling at 14 times its trading earnings and is still in double digits.