BREAKINGVIEWS-India's Welspun is in a tangle of its own making

(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)

HONG KONG, Aug 26 (Reuters Breakingviews) - Welspun India’s crisis has been anything but well-spun. The Mumbai-listed textile firm, which says it supplies one in every five towels in the United States, has seen its shares almost halve this week after customer Target Corp alleged Welspun passed off cheap sheets as Egyptian cotton for the past two years. Markets tend to assume the worst in such situations. Fuzzy language and other missteps amplify the problem.

Investors have wiped around $700 million off the market value of the company, which is part of a wider pipes-to-energy conglomerate run by Balkrishan Goenka. Target terminated its entire, long-standing relationship, even though the problem affected a small fraction of the products supplied by the Indian firm. Welspun’s overall business with Target accounts for one tenth of its total. The fear is that other customers like Wal-Mart, J.C. Penney, and Bed Bath & Beyond, which are now probing Welspun’s products, might take similar action.

Welspun has ticked some of the right boxes in dealing with the fallout. It held a conference call, albeit three days after the crisis began. The company has also admitted “a failure” and says it is appointing one of the Big Four auditors to review its supply chain and processes. These are good first steps.

But Welspun has not really tried to explain publicly what went wrong with its supply chain or why a big customer refused to give it the benefit of the doubt. The company itself does not use the phrase “Egyptian cotton” in referring to the controversy and, instead, refers to it vaguely as an issue around the “provenance of the fiber”.

A final oddity is the notable absence of the chief executive, Dipali Goenka, from public communications. She was recently elevated to the position, and is the wife of the group chairman, though she is respected in her own right. Investors are used to primarily dealing with the textile company’s longer-serving Managing Director Rajesh Mandawewala but anyone with the CEO title should be more visible during a crisis.

It is early days yet - Welspun still has time to put a better spin on things.

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- Shares of Welspun India have almost halved since Aug. 19 after customer Target Corp said it was terminating its relationship with the Indian textile firm. The fall has wiped 49.4 billion rupees ($737 million) off Welspun’s market value.

- Target said that it had confirmed that Welspun had substituted another type of non-Egyptian cotton when producing Egyptian cotton 500-thread count sheets between August 2014 and July 2016. The New York-listed company added that the problem affected 750,000 sheets and pillowcases.

- On Aug. 20, Welspun acknowledged a “product specification issue with one client” and said it was appointing one of the big four external auditors to audit supply systems and processes.

- On Aug. 22, on a conference call, Welspun Managing Director Rajesh Mandawewala admitted that there had been “a failure on our part” about the “provenance of the fibre”, without elaborating.

- Other customers including Bed Bath & Beyond, JC Penney, and Wal-Mart have since said that they are also reviewing supplies from the Indian firm.

- The Wall Street Journal reported on Aug. 26 that Wal-Mart had investigated Welspun in 2008 for proof that its Egyptian cotton-labelled products were authentic. The newspaper said the outcome of that investigation was unclear.

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Editing by Quentin Webb and Katrina Hamlin