Dreary days for Indian giant

Welspun reeling after Target flub

Welspun Group Chairman Balkrishan Goenka earlier this month celebrated his 50th birthday in style, with a bash at the five-star St. Regis Hotel in Mumbai. Partygoers hit the dance floor to the pulse of classic Bollywood tunes and feasted on Indian and Western cuisine as well as a cake in the industrialist's honor.

The past week has been far less festive for Goenka and Welspun India Ltd., the textiles unit of his conglomerate that's run by his wife, Dipali. The maker of bedding, towels, rugs and carpets is now caught up in a spin cycle of negative publicity.

On Aug. 19, Target Corp. said that Welspun had mislabeled 750,000 sheets and pillow cases sold under the Fieldcrest label as premium Egyptian cotton products.

Target took action, terminating all business ties to Welspun and offering customers refunds. In response to the news, Wal-Mart Stores Inc., the world's largest retailer, and J.C. Penney Co. have announced reviews of the company's products and cotton certification records. The mishap comes at an inopportune time for Prime Minister Narendra Modi, who in June unveiled a nearly $1 billion package for textile and garment makers to drive job growth under his "Make In India" campaign.

"The Welspun issues show the whole industry in a very bad light," said Sanjiv Bhasin, executive vice president for markets at India Infoline Ltd., a Mumbai brokerage. "The overseas retailer will now be very discerning."

Welspun India's stock tumbled more than 40 percent over three days after Target said it had pulled the supplier's products off shelves. In all, $650 million in market value has been vaporized along the way. Welspun Corp., an affiliate that manufactures pipes, has lost about 7 percent.

"There has been a failure on our part, without an ambiguity," Welspun Managing Director Rajesh Mandawewala told analysts during a conference call Aug. 22. "The error is on our side, so we have to take responsibility for it."

Welspun has launched an internal audit into its manufacturing process and sourcing. Analysts pressed Mandawewala about why Target was severing its entire business relationship with Welspun -- worth $90 million a year -- over a dispute about a premium sheet product that only made up 10 percent of the goods it sources from the Indian manufacturer.

"It's very difficult for me to react to this," Mandawewala said.

Welspun is a big player in Indian textiles, and says it produces one in five towels sold in the U.S. It supplies the biggest retailers there, including Bed Bath & Beyond Inc. and Macy's Inc. It's part of the Welspun Group, a $3 billion conglomerate headed by Goenka with interests spanning textiles, steel, pipes, energy and infrastructure. About 95 percent of the unit's sales last fiscal year came from overseas exports, with the U.S. a key market, it said.

Modi's stimulus package for textile and garment makers include subsidies for hiring, tax refunds and relaxation of overtime rules. He hopes to create 10 million jobs and boost exports by $30 billion in the next three years.

At the moment, India is locked in a pitched market share battle with its Asian neighbors in the global textiles market. India's overseas textile shipments reached about $36 billion in 2014, compared with $27 billion for Bangladesh, $25 billion for Vietnam and China's dominant $298 billion, according to the latest World Trade Organization data.

Meanwhile, manufacturers face rising prices as the global cotton supply tightens. While futures in New York have retreated from a two-year high reached Aug. 5, prices are still heading for a second annual advance. Cotton futures closed in New York at 68.44 cents a pound on Tuesday, up 8.2 percent for the year.

Goenka skipped college, according to a CNBC-TV18 report, and started Welspun in 1985 with a textile manufacturing plant in Palghar near Mumbai. By 2000, the company had a production facility in the U.S. and a joint venture with Vincenzo Zucchi SpA in Italy. Six years later, Welspun diversified into oil and natural gas exploration through a tie-up with the Adani Group.

These days, Goenka is something of a business luminary. At the Aug. 12 birthday party, pictures of the industrialist over the years were put up on a life-size board and the two-tier cake was topped by a vintage automobile, according to an Economic Times account of the celebration.

Target didn't mince words in its Aug. 19 statement in which it ended its business ties to Welspun, nor did it reveal how it uncovered the problem.

"This was a clear violation of both Target's Code of Conduct and our Standards of Vendor Engagement, and was contrary to the high ethical standards to which we hold ourselves, and our vendors," the statement said.

Last week, Welspun's Mandawewala said the company is rigorously reviewing what went wrong.

"We are taking this issue very, very seriously," he said. "We want to make sure that our supply system and processes are extremely robust going forward."

-- Information for this article was contributed by Shannon Pettypiece, Candice Zachariahs, Ravil Shirodkar, Rachel Chang and Phoebe Sedgman of Bloomberg News.

SundayMonday Business on 08/28/2016

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