Mumbai: Welspun India Ltd lost over ₹ 2,000 crore in market capitalisation on Monday, after one of its largest customers, 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 it bedsheets. 

With a large number of shareholders queuing up to sell Welspun shares at the lowest permissible price for Monday’s trading session, it looks like the damage may end up being higher.  A 20% circuit filter applies to Welspun shares in each trading session. 

Target accounted for about 10% of the company’s revenues, with the product in question accounting for about 10% of the total Target business.  The reason its supplier’s shares are falling by a much higher rate is the incident will lead to reputational issues, which can in turn result in loss of business from other customers as well.  Welspun has said it will appoint an auditor to probe the charges. 

But as can be seen from the reaction of investors, the clarification did little to assuage their concerns. 

Also Read: Welspun stock down by 20% after Target snaps business ties

In addition to the fact that a tenth of the company’s revenues will soon vanish, the Indian company may have to bear some of the liability Target is facing in terms of refunds to customers who bought these sheets in the past two years, points out an analyst.  The company was vague about the possibility of this on a call with analysts. 

Also, the company is selling the same product to a few other customers.  According to Welspun management, 3-6% of the company’s revenues come from this product.  It is not clear how other customers will react to the development, although the prognosis by analysts is understandably grim.  They feel these customers may ask Welspun to either reduce product prices or compensate them for the compliance issue.  In a worst case scenario, they may cut ties with the company as well.  The collateral damage that can ensue is what is making investors jittery. 

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

The revenue loss will mean that the company will not be able to achieve the “mid-teen" revenue growth guidance for the current year.  At best investors can how hope for a flat revenue growth, provided other products baskets make for the loss of the revenues, an analysts with a domestic broking firm says.  Thanks to these healthy growth projections, the stock traded at around 14 times trailing earnings.  Now, even after the 20% drop, valuations are still in double-digits. 

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