Fitch Revises Welspun Global's Outlook to Negative

Fitch Ratings has revised India-based Welspun Global Brands Limited's (WGBL) Outlook to Negative from Stable. Its National Long-Term rating has been affirmed at 'Fitch A-(ind)'

Fitch Ratings-Mumbai/Singapore-30 August 2011: Fitch Ratings has revised India-based Welspun Global Brands Limited's (WGBL) Outlook to Negative from Stable. Its National Long-Term rating has been affirmed at 'Fitch A-(ind)'. A list of additional rating actions is provided at the end of this commentary.
The agency has taken a consolidated view on Welspun India Limited (WIL) and WGBL on account of strong operating and strategic linkages between the two entities. WGBL accounts for almost 90% of total sales by WIL.

The Negative Outlook reflects WIL's high financial leverage (debt/operating EBITDA), exacerbated by the capacity expansion undertaken despite a recessionary environment in the end-user markets (mainly the US and Western Europe). The Outlook revision further reflects margin risks due to volatility in cotton prices and forex risks, which could make India's exports uncompetitive against other key textile supplying countries like Bangladesh, Pakistan and China.

In FY11, consolidated operating EBITDA margin declined to 9.4% from 14.5% in FY10 due to the company's inability to pass on rise in raw cotton prices. Consequently, the additional INR3.8bn capex (expensed as of date INR2.6bn) in FY11 was largely funded by debt resulting in a significant increase in its overall financial leverage to 7.3x in FY11 from 4.9x in FY10.

Fitch notes that WIL has a ballooning debt repayment profile, which would lead to a debt service coverage ratio of close to 1.0x in FY12 and FY13. However, its liquidity position is comfortable due to its INR1.6bn equity issuance in May 2010. At end March 2011, the company had cash balances of INR521m, INR1.1bn as restricted cash against term loan repayment and INR826m as investments in West Bengal State Electricity Board bonds.

The ratings also continue to reflect WIL's experienced management, well-diversified product portfolio (spanning across terry towels, rugs, bed sheets and other home decorative items), preferred global supplier status and its strong customer relationships.

The Outlook may be revised back to Stable should there be an improvement in the economic environment in the end-user markets, and consequently in capacity utilisations and margins, which results in deleveraging. Fitch had earlier expected the company to delever to below 5x from FY12 onwards. In this regard, revenue growth challenges coupled with low profitability resulting in consolidated financial leverage exceeding 5x for FY12 would result in a negative rating action.

WGBL is solely responsible for the sales and marketing of WIL's textiles. The company is one of the most preferred suppliers to 14 of 20 retailers across the world. It has some of the most prestigious brands under its banner and is considered highly in product innovation and design.

WGBL:
- INR3.8bn fund-based working capital limits (enhanced from INR 2.7bn): affirmed at 'Fitch A-(ind)'; and
- INR44m non-fund based limits (reduced from INR 924.5m): affirmed at 'Fitch A2+(ind)'.

In accordance with Fitch's policies, the issuer appealed and provided additional information to the agency that resulted in a rating action which is different from the original rating committee outcome.

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