­Timely achievement of Phase-I COD; further enhancement in installed capacity planned within a year of COD achieved
WFL achieved its full COD for Phase-I and the volumes have scale up as expected. WFL’s phase-I capex was down sized to Rs.990 Cr followed by Phase-II capex of Rs.217 Cr for doubling the Drylon capacity to 7,000 MTPA and outstretch the LVT capacity to 11 million meters PA. The capacity expansion has been planned in the second year of operations citing healthy demand from export markets like US, UK, Australia and Middle East. WFL continues to sell its products through Welspun Global Brands Limited; which is the marketing company for WIL as well.  Phase-II capex was a planned capex while undertaking Phase-I; subject to healthy demand from end-users. WFL has already incurred Rs.170 Cr of capex, of which ~Rs.75 Cr was incurred in FY2021 and remaining Rs.95 Cr until December 31, 2021. The debt for funding the capex is tied up with one of the existing consortium lenders – EXIM Bank of Rs.156 Cr. The capex of Rs.170 Cr until December 2021 has been funded through Rs.61 Cr of equity (in form of CCD by WIL) and remaining Rs.109 Cr from term loan. Hence, entire equity portion/promoter contribution has already been infused with balance term loan to be drawn down by April/May 2022. The phase-II is expected to commence from April end 2022. This manifests low funding risk for the capex. Moreover, the implementation risk is too low with capex achieving ~75 percent of physical progress. The demand risk is low as the phase-II capex has been planned due to higher orders from export markets as well as domestic.

Strategic location of the plant, partial backward integration and established distribution network
WFL's manufacturing plant is strategically located in Ranga Reddy district, Telangana State, which has proximity to the city of Hyderabad. It proffers location advantage with Southern region being textile hub; with ease of access for its raw materials as well as expanding its distribution and dealer network in the southern region and Pan India. With the majority of Welspun groups' manufacturing base in Gujarat, WFL was planned in Telangana with the objective of accomplishing its manufacturing base in newer geography enabling ease of doing business. WFL is backwardly integrated in terms of tufted wall-to-wall carpet segment. WFL has bulk continuous filament (BCF) plant with an installed capacity of 7000 metric tonnes per annum (MTPA) to suffice the captive needs of yarn required for manufacturing tufted carpet W2W. BCF yarn is one of the major raw material required for manufacturing tufted carpets W2W. In-house BCF plant (at 100 percent capacity level) can suffice the raw material requirement of W2W tufted carpets plant running at 40 percent capacity levels. Once, carpet tufted W2W plants exceed 40 percent capacity levels, WFL will have to source BCF from outside/open market or expand its capacity to meet the higher production of W2W carpets. The in-house BCF plant is expected to save the total RM costs and yield over and above EBITDA margins of ~2 percent. WFL has solitary marketing arrangements with more than 50 distributors and 450 dealers in place pan India. Apart from India, distributors are being appointed in various other geographies. It has already appointed 10 in US, 5 in UK, 5 in Australia and 7 in Middle East. WIL's presence in USA and Europe (WIL derives almost 80-90 percent from exports to these geographies) will help leveraging the brand presence of 'Welspun' for WFL. It has a presence in more than 100 retail outlets in India in very short period of time, amid pandemic and recently tied up distributorship with MS-International in North America. MS International is the leading importer and distributor of natural stones, landscape, tiles etc. Many such tie-ups with top distributors across geographies are under way. Acuité believes that key factors like strategic location, partial integration and established distribution network will assist WFL in scaling up its operations and report relatively better operating margins.

Strong parentage; demonstrated track record of fund support from WIL
Welspun India Limited (WIL), is a leading company of the Welspun group promoted by Late Mr. G.R. Goenka, Mr. B.K. Goenka and Mr. R.R. Mandawewala. WIL is the largest home textiles company in Asia and amongst top 5 home textiles manufacturers in the world. WIL is the largest exporter of home textile products in India and derives more than 80 percent of its revenue from exports. The Company supplies to top global retailers from its manufacturing facilities at Anjar and Vapi, both in Gujarat, India. WIL's portfolio comprises a wide range of home textile products such as terry towels (cotton and blended yarn), bed linen (basic bedding and decorative bedding), bath rugs (cotton, nylon or micro fiber) and bath rugs. While enumerating the support extended by WIL to WFL, Acuité takes cognizance of WIL's resourceful promoters (WFL along with Welspun group), extensive experience of the management, WIL's leading position in home textiles segment with global reach, established relationship with leading global retailers, well-diversified product portfolio, strong brand image, integrated operations and healthy financial risk profile; albeit constrained by deteriorating operating margins and exposure to inherent industry risks, such as volatility in raw material prices and fluctuations in foreign currency. WIL has demonstrated a strong track record of fund support to WFL. Erstwhile WIL, had provided an unconditional and irrevocable corporate guarantee to all the bank facilities of the company for a tenure of one year from commercial date of operations, i.e. December, 2019. The same is has been extended until tenure of the debt. There is assurance given by WIL to extend fund support in case of any additional funding requirement in the instance of cost over-runs or insufficient cash flows that may arise during the initial phase of operations. Besides financial support, WIL will reinforce WFL in terms of brand leveraging and distribution network in India and other geographies. Acuité believes that WFL will benefit from the operational and financial support from its parent, WIL over the medium term.

High demand prospects for LVT and tufted carpet and tiles
Vinyl flooring market in India is witnessing rising demand due to innovation and adaptation in recent flooring techniques. An increasing preference for a luxury lifestyle coupled with inflating income levels has stimulated the entire Flooring market growth. The major players in the flooring market players are engaging in a wide range of innovations to reach new customers and expand product portfolios. Luxury Vinyl Tile is a hard-surface flooring which imitates the appearance of natural materials. LVT is the most popular type of vinyl flooring, accounting for a market share of 52.6% in the global vinyl flooring market. LVT represents the largest segment as it is a low-cost alternative for tile or planks. LVT market is untapped in India, which accounted for a mere 11.2 percent share in Indian flooring market of about 4.5 mn sqm in FY 2018. Multiple factors like untapped market, consumer's appetite for designer houses and high-end commercial spaces in India and 'Make in India' initiative to boost the indigenous production, fewer number of organized players, dependence on expensive imports are paving way for high demand prospects for the LVT and tufted carpet segment. Additionally, 80 percent of carpets are being supplied by China to different parts of the world. The recent disruptions with China provides an added advantage to WFL to capture the market share. Demand prospects are evident in long term strategic arrangements entered with one of the largest distributors for hard flooring by WFL. Acuité believes that Welspun's brand leveraging will aid WFL in capturing the potential market of LVT and tufted carpets over the medium term.

­Moderate Demand/Offtake risk
Luxury Vinyl flooring and tufted carpet is relatively new concept and an emerging market segment in India; the potentiality of WFL to market the product and capture the demand well will remain the key rating sensitivity factor. Given the strengths or potential of the LVT and tufted carpet market, WFL has headroom for ample growth. Besides, WFL is prone to face stiff competition from the larger and established players in India and other countries like the US, Europe, amongst others. Acuité believes that WFL will remain susceptible to intense competition outside India and exposed to offtake risk over the medium.

Exposure to volatility in raw material prices
The raw materials required by WFL include Nylon 6, PET, polypropylene, nylon, polymers PVC, amongst others. These will be sourced domestically and imported too and the company is susceptible to volatility in raw material pricing risk. Withal, this risk can be mitigated to an extent through re-negotiation of price with customers. The forex risk too is expected to be naturally hedged as it is expected to export around 40-50 percent of its products.