Welspun India Rating: buy; revival of US demand boosts outlook for firm

We revise up Welspun India’s (WLSI’s) utilisation estimates and hence FY21/22e Ebitda 3%/1% given: (i) sustenance of uptick in US consumer spends spurred by state support; and (ii) lower inventory levels at global retailers driving restocking. Also, with the flooring business locking in capacity via tie-ups, we envisage the segment to achieve operational break-even next year.

The robust order book visibility and WLSI’s leadership in the home textile space compel us to revise up target EV/Ebitda to 7.0x (5.0x earlier)—its pre-covid five years’ average—with a revised TP of Rs 75 ( Rs 48 earlier). Maintain Buy. Sustained higher spends on bed/bath linen or shift in business from China could drive further rerating.

Catalysts in place to sustain strong traction in US: In our April update, given the widespread pandemic, we were uncertain of demand triggers for the home textile space. However, a combination of factors has spurred demand for bed/bath linen. WLSI, by virtue of being the No.1 player in the US in this category, has gained from this revival; in fact, the company has outperformed domestic peers as well. In addition, we envisage lower cotton costs to provide a margin tailwind in the coming one–two quarters.

Outlook: Normalisation multiple; maintain Buy— Though order book remains strong, sustenance of the demand will be key to further rerating. In addition, possible business shift from China could drive another leg of structural growth (similar to FY10-14); no signs of this yet in the home textile segment.