Ventura Securities initiates coverage on Welspun India, sees 79% upside in 2 years; 5 reasons why

Despite an around 60 percent jump in the last 1 year, brokerage house Ventura Securities sees a 79 percent upside in global home textile major Welspun India (WIL) in the next 2 years. The brokerage has initiated coverage on the stock with a buy call and a target price of ₹218 as against its current market price of ₹122 (as of August 24).

Estimates

Over FY23-26E, the brokerage expects WIL’s revenue/EBITDA/adjusted net profit to grow at a CAGR of 19.5 percent/46.7 percent/94.2 percent to ₹13,800 crore/ ₹2,374 crore/ ₹1,457 crore, respectively, while EBITDA and adjusted net margins are expected to improve by 791 bps to 17.2 percent and 810 bps to 10.6 percent, respectively, by FY26. Subsequently, return ratios – RoE and RoIC – are expected to improve by 1615 bps to 21 percent and 2266 bps to 28.2 percent, respectively by FY26E, it predicted.

Bull and Bear Case Scenarios

The brokerage has also prepared likely Bull and Bear case scenarios for FY26 price, based on revenue growth, net margins and P/E multiples.

Bull Case: In this scenario, the brokerage has assumed a revenue of ₹15,000 crore (CAGR growth of 22.8, FY26 target given by the company) and a net margin of 11 percent at a P/E of 20X, which will result in a Bull Case price target of ₹328 per share (an upside of 169 percent from CMP).

Bear Case: In this case, the brokerage has assumed revenue of ₹12,000 crore (CAGR growth of 14.0 percent) and a net margin of 7.0 percent at a P/E of 12X, which will result in a Bear Case price target of ₹84 (a downside of 31 percent from CMP).

Stock Price Trend

The stock has surged 57 percent in 2023 YTD, giving positive returns in 5 of the 8 months in this current calendar year. It has surged 10.3 percent just in August after an 18.6 percent rise in July.

The stock has given positive returns for 5 straight months between April and August, rising 90 percent in this period.

Meanwhile, in the first 3 months of the year, the stock shed 17.5 percent.

Investment Rationale

Net debt-free by FY26: As per the brokerage, lower capex requirements and an improving outlook for revenue and profitability are expected to enhance future FCF, which could be utilised to repay the outstanding debt of the company. As on 31st Mar 2023, WIL had a net debt of ₹1,534 cr and the management is upbeat about achieving a net debt-free balance sheet by FY26. This will significantly reduce the interest burden while enhancing cash flows.

Strong growth prospects for domestic business: WIL is focusing on brand building and improving its retail reach across India. With a presence in 500+ cities and 11,200+ retail outlets (increased from 6,600+ in FY22), WIL has emerged as the largest home textile company in India. Furthermore, the unorganised market contributes 70 percent to the domestic home textile industry and is majorly present in Tier II & III cities. Post GST, the demand trend has been shifting increasingly in favour of organised players and the share of the unorganised segment is expected to dwindle to 60-65 percent by FY26. WIL with its go-to-market strategy already in place is expected to be the biggest beneficiary, Ventura stated.

Overseas brand acquisitions: With its portfolio of marquee brands – Martha Stewart & Scott Living in the US and Christy in the UK, WIL has established a strong brand presence in the developed market. Normalisation of the supply chain has led to demand recovery for these brands. With the global brands having achieved profitability, going forth, good contributions are expected from the overseas B2C initiatives, said the brokerage.

Domestic brands scaling up nicely: Domestic brands – Spaces and Welspun, are at the takeoff stage and marketing spends (A&P) at 7-8 percent of the branded revenue will ensure that the expected targets are met. Axis is expecting the overall branded revenues to grow at a CAGR of 19.6 percent to ₹7,219 crore by FY26 and the branded business is expected to achieve an EBITDA margin of 18 percent by FY26E.

Existing capacities sufficient to cater to demand till FY26: The company has world-class vertically integrated manufacturing facilities at multiple locations. Only recently it concluded its INR 2,150 crore of capex plan (during FY19-22).

In the flooring business, WIL has a production capacity of 18 mn sq meters with the ability to enhance it to 27 mn sq meters as and when required without incurring significant incremental capex.

Valuation: The brokerage initiated coverage with a BUY for a 24-month price target of INR 218 per share (15X FY26 P/E).

"Demand recovery from global brick-and-mortar retailers is expected to drive WIL’s B2B revenue, while the focus on branding/e-commerce is expected to improve the company's brand equity and revenue potential from the high-growth retail segment. The strategic diversification into advanced textiles and flooring is expected to add more impetus to the top line. Favorable market conditions, including the stabilization of cotton and polyester prices as well as the normalization of the supply chain, have contributed to an improved margin profile for the company. We initiate coverage on WIL at the CMP of INR 122 per share (8.4X FY26 P/E) with a price target of INR 218 per share (15X FY26 P/E), representing an upside potential of 79 percent in the next 24 months," it explained.