What Welspun saga tells us: cotton by any other name isn't-:- Equity Research

Mumbai-based textile maker Welspun India lost more than a third of its market cap -- about 36 percent -- in two days following its US client Target Corp cancelling its contract on August 19. Its stock also fell about 20 percent, for the second day in a row, after the news broke. This 20 percent decline in stock was its worst since January 2008. Target alleged that Welspun had sold pillowcases and bedsheets with cheaper cotton and not with the premium Egyptian variety it was promised. Soon enough, Welspun's other global clients, Wal-Mart, Bed Bath & Beyond and JC Penney, also launched their investigations into the textile maker's product claims. For Welspun, the allegation is serious: it receives 95 percent of its revenues from international clients alone, and Target is a key part of it. To get to the bottom of it, Welspun has appointed consultancy firm Ernst and Young to audit its entire supply chain. Target, its second largest client, was important for Welspun as it contributed 10 percent of the textile maker's overall business in FY16. Target quickly removed all of Welspun's products from its shelves after rigorous investigations into the usage of non-Egyptian cotton came out positive. Target had been Welspun's client for about 2 years before it cut its ties.