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Hedging loss to impact Welspun India's margins in next two quarters

The company has another $170 – $180 million of hedge at about Rs 67 – 68 for the balance part of the year

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Rajesh Mandawewala
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Home textile maker Welspun India, which reported 18.7% on-year growth in profit after tax at Rs 114.8 crore for the July-September quarter of this fiscal, saw its margins getting impacted owing to depreciating rupee against the dollar. A part of the $2.3 billion Welspun Group, the textile firm has taken a hit of around Rs 37 crore due to currency fluctuation in the second quarter. In fact, the top management expects the margins will continue to shrink by almost similar figure over the next few quarters.

Responding to analysts' concerns about the sharp reduction in the earnings before interest, tax, depreciation and amortisation (Ebitda) margin, Rajesh Mandawewala, managing director, Welspun India, said the company's hedging policy has been holding in good stead for the past four to five years. "Unfortunately, this is the time when payback time has come, so about 2.5% to 2.8% of margin was lost actually on account of our hedging rate. If we were not in our hedge position, we would have realised Rs 70.2 as against the Rs 68.25 that we are currently at. This translates to about 2.8%," said Mandawewala during the earnings call.

In fact, all the hedges between FY15 to FY18 had helped the company maintain a decent level of margin in the past. "Consequently, this year we are down by 2.5% to 3% in this quarter on account of the weak rupee. So the impact of hedging is about Rs 37 - 38 crore on a net basis. In fact, our profit and loss (P&L) could have looked better by that sum in the absence of hedging gains," said Altaf Jiwani, global chief financial officer, Welspun India, during the call.

He added that the (hedging) pain is likely to continue for the next two quarters as the company's hedges were less than Rs 66 and there was a point when the currency came down to Rs 63. "We sell our exchange every week. In fact, there was a long period when the currency was languishing at about Rs 63 and with a 4% kind of a premium, we were selling exchange at Rs 65 - Rs 66. Unfortunately, this is the period when it is hitting us the most," said Jiwani.       

While the exchange rate has had its impact on the margins, the company had various other one-off expenses that added pressure on the business, company executives said. "Besides, there are a few one-off expenses including about Rs 3 crore provision on our investment of Rs 10 crore in IL&FS. Legal fees of about Rs 10 – 11 crore was provided in the second quarter. This is on account of the class action suit that we have in the US. As the activity is intensifying, the charge is likely to continue in the next couple of quarters. That apart, we lost some cotton in a small fire in our godown. We had to take a hit of Rs 4 – 5 crore, which is net of insurance," said Mandawewala.

All put together, the one-off expenses have reduced the margins by 1% – 1.1%. "So if we add all this up, the business has still generated between 20% and 21% ebitda. And in absolute numbers, it is in excess of Rs 350 crore on a total revenue of Rs 1,797.8 crore. So the underlying business remains intact and it has grown quite well at over 10.8% in the current quarter after adjusting the drawback rates that came down," said Mandawewala adding that the company's growth trajectory will continue for the rest of the year and it should see close to double-digit growth going forward in the coming years as well.

Offering further clarification on the hedging side, Mandawewala said the company has another $170 – $180 million of hedge at about Rs 67 – 68 for the balance part of the year.

"So we are likely to realise around Rs 69 or thereabout for the third and fourth quarter of the current fiscal. But the next year hedges are good and we have hedged about $160 – $170 million at an average rate of about Rs 73.5. Based on our current policy, we continue to hedge about 50% – 55% of our annual exports one year forward," said Mandawewala.

"For fiscal 2020," said Mandawewala, "we are hopeful that at the current rate, our realisation, which in the current year is over Rs 68, should be in the Rs 74 range as there is a fair bit of currency tailwinds that we should be able to get in the coming year. So hopefully, it should help us regain some of the lost margins."

The company has also earmarked a capital expenditure (capex) of Rs 900 core for the current fiscal. While Rs 800 crore will be spent on the upcoming carpet/ flooring project at Telangana, the balance Rs 100 odd crore is for a new standby boiler for our power plant. "The boiler, which will come into the business in the March quarter of 2019, will help take some risk out of our captive power generation," said Mandawewala.

The total capex envisaged by Welspun India for the carpet/ flooring facility is Rs 1,100 crore. Of which, approximately Rs 800 core will be spent in the current fiscal and the balance Rs 300 crore over the next fiscal. Funding for the carpet/ flooring project will be through a mix of debt and equity of which 70% will debt at an average cost of 3%.

The facility is expected to be operational sometime in FY 2020 and will show traction in FY21. The project is likely to break even at 40% utilisation, which as per the company's projections will happen in the second or third year of operations.

MORE PAIN

  • The company has another $170 – $180 million of hedge at about Rs 67 – 68 for the balance part of the year
     
  • The company has also earmarked a capital expenditure (capex) of Rs 900 core for the current fiscal
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