Sheela Foam Limited (SFL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Sheela Foam Limited Q3 FY '20 Earnings Conference Call hosted by Edelweiss Securities Limited. [Operator Instructions] I now hand the conference over to Mr. Nihal Jham from Edelweiss Securities Limited. Thank you, and over to you, sir.

Thank you, Vikram. On behalf of Edelweiss, I would like to welcome everyone for the Q3 FY '20 conference call of Sheela Foam Limited. From the management today, we have Mr. Rahul Gautam, Managing Director; Mr. Tushaar Gautam, Director; Mr. Rakesh Chahar, Director Sales & Marketing; and Mr. Dhruv Mathur, CFO. I would now like to hand over the call to the management for their opening remarks. Over to you, sir.

Good evening, Nihal, and thank you very much for introducing us. I don't need to go over that again. So 4 of us are here to attend to this call and to answer all your questions. Let me begin first by apologizing a little bit because in the last call, I had said that we will have the investor call the following day to give a little more time to all of you to study the results. Unfortunately, it could not be managed this time, but we will keep it to evaluate it the next one that we have. However, I think these results was uploaded by about 3:45 or 4:00. So I hope that you've all been able to have a good look at it. Let me begin by talking a little about the economy, and I'm not prophesizing anything. It's only how it is impacting us and the budget, which is impacting us. So as we see it, we see it as still low and stable. The activity in the markets are still very low. We measure something called footfalls into our stores and they have not been increasing or decreasing, but have been on the lower side and steady. The budget is -- I would say, as most people have likened it, that it's for long term. But the expectations which were for kickstarting the economy, probably, it did not do, at least not for us. However, some good points in the budget were that there was an increase in the custom duty for 3 items, which impact us: One is mattresses; second is furniture; and the third is footwear. It increased from 5% to 10%. All these items consume a lot of polyurethane foam and special foams that we make and therefore, our expectations are that it would be a stress or -- and extra custom duty, which should really work in the consumption going up. And therefore, we welcome that these duties have kind of gone up. The other point which happened before the budget was this SEBI requirement of breaking up the CMD post and saying that the Chairman post should be a nonexecutive one and the MD should not be related to the Chairman. So this has been deferred by 2 years. However, we, at our end, still would like to review that. And in the Board meeting today, we did discuss that we will see that how do we kind of see and be prepared for that or maybe even prepone that decision. The highlight of the last quarter has been the acquisition of Spain, which got completed on the 14th of October. The results from -- of that quarter had been added to those of Sheela Foam. Both the turnover has been of the order of -- in the Indian rupees of the order of about INR 50 crores. The EBITDA has been high. It's been 20%, while I think what we've forecasted and prophesized earlier that it should be of the order of 15%, 16%. So the -- this just being the first part of the first quarter, it's possible that a little bit of correction there, it may take place. The whole process of acquisition is getting implemented. And the first thing for us is to extend our ERP to Spain, and we expect that by 1st of April, it will be completely integrated into the Sheela Foam system, into the Sheela Foam ERP. And they have -- we would also be changing the financial year from -- their financial year, which is the annual year to April to March. Another phenomenon, which definitely requires some talking is on the raw material side. So these have been low and steady. Some little movements in the TDI prices and a little downward movement and a little upward movement on the polyol side. We expect that for at least another quarter, the prices will remain low and stable. Those 2, 3 things have happened, which may impact it either way. One is that the TDI people have approached for an anti-dumping, but to our experience, it takes at least 6 to 8 months before anything like that happens. The second is about China. The China is both the largest producer of these chemicals in the world and it's also the largest consumer of these chemicals. So whatever is happening, starting from the trade spat between U.S. and China to the latest one, which is the coronavirus, how exactly is this going to play out? Will the raw materials start overflowing? And therefore, the rates will -- or the prices will be under stress? Or because the consumption is going to go down, but at the same time, the raw material exports are going to go down because those plants are impacted and therefore, there may be a little bit of a shortage globally? So which way it's going to play out, it could either be, and my expectation or our expectation is that it will be a very small impact this way or that way. Coming to our performance. As far as the last quarter is concerned, as a consolidated position, the sales, of course, have gone up by around 16%. And a big contributor to that is the addition of Spain sales, which is of the order of INR 50 crores. But even if we take that away, we would still be a little higher than the corresponding quarter of last year. The EBITDA impact, of course, has been very positively impacted, both hovering around 60% increase. And even for -- not only for the quarter, but even for the 9 months that have gone by, there is a sizable increase in both EBITDA and PAT. And as I said, a little bit of a contribution to the top line is because of Spain. Australia, our other subsidiary, is holding up well in spite of all the bushfires and the subsequent rains and whatever little disruptions here and there have been. The top line has been moving up, and the bottom line has been moving up rather well. So all in all, it's been a good quarter. We are all satisfied with the progress. We have to do a little more as far as the top line is concerned, and some of the steps which we have taken are underway. And we look at the coming quarters to bear that fruit. So with these remarks, I hand you back to Nihal, and we are all ready to take all the questions that you may have.

[Operator Instructions] We have a first question from the line of Keyur Pandya from ICICI Prudential Life Insurance.

Hello?

Nihal, we could not hear anything at all. This is blacked out.

Yes, sir, we are not able to hear anything from the line. So we take the next question. We have next question from the line of Abhay Agarwal from Piper Serica PMS.

This is Abhay Agarwal. I just have couple of questions. One is you mentioned that the anti-dumping duty on TDI is expected sometime in the near future. So what would be like quantum of this anti-dumping duty, you think?

So Abhay, it will be very difficult to assess that. They have asked for something and which is different numbers for different areas. What will be accepted will be varied. I mean I wouldn't want to hazard a guess, but I would still say that it's not going to be something exorbitant. It's not going to be that it will double the price of TDI or something like that.

Okay, that's great. And sir, are you using this softness in the TDI prices and chemical prices to lock in your supply for the long term? Or you will just continue to see how this market goes?

So Abhay, unfortunately, unless you start trading in it or punting in these raw materials, it's not a practice to buy and sort of forecast the future. Generally, you have a pipeline, and especially if you are importing, you could have a gap of some 15 to 30 days. Otherwise, if the prices change, they change right away. And we have followed a system of having adequate raw materials but not really forecasting on the prices. And therefore, we don't carry stocks here.

Okay. I have last one question, sir, which is that you have 100% subsidiary called Divya IT. And can you just tell us what does that company exactly do? Is it just only for holding the land and building?

So we actually bought the land through the company by acquiring the company. And that holds the land for where the office is built. It does nothing else. And it's 100% subsidiary of Sheela Foam.

We have next question from the line of Gaurav Jogani from Axis Capital.

Sir, my first question is with regards to the other expenses. They have risen quite a bit during this quarter. Sir, any particular reason for this?

So Gaurav, I will ask Mr. Mathur to respond to that.

Gaurav, the other expenses have largely gone up because of the schemes, which we offered during this quarter. So INR 22 crores are the increase in selling expenses. So that is the reason.

Okay, okay. And sir, my other question is with regards to the sales that we have done in this quarter. So this quarter also we did see a decline in the realization for the mattresses segment. However, the volume growth have been robust at like 38-odd percent. Sir, we understand that this process has started in the 3Q FY '19. So it has completed a cycle -- a year now. So how do you see the realization now with the [ unauthorization ] going ahead to move in the future?

So Gaurav, we cannot answer this in any positive manner because it all depends how the market is behaving. What is -- what trend we have seen for the last 2, 3 quarters that the preference for low price products is much higher. So we are striving hard that the ASP should increase, but it cannot be predicted. See that we have also started some online sales. So if that catches up, you never know it remains at this level, slightly goes down. So it's difficult to answer at this moment.

Sure. And sir, one last question from my end is with regards to the Spain acquisition. Sir, like we have completed now some time post the acquisition of Spain now. So how has been the experience? What is the potential low-hanging fruits that you have seen, that could help you going ahead that you would have liked to share anything, sir, in that front?

So as far as the performance is concerned, we've -- for the last quarter, we've already displayed that. That probably in previous conferences, we have talked about that a few things that we can do straight away, which is the introduction of some specialized foams as well as looking at some new customers as far as that territory is concerned. That process has begun. And it will really catch pace once the ERP system is in place. I think there are a few basic hygiene matters, which -- whatever is there -- functioning there, needs to sort of completely dovetail into the functioning of Sheela Foam. So I would place another 2 to 3 months for that to happen. And post that, we would really see the efforts giving fruits. But let me just say that already, whatever one has done in the last quarter or one is doing on the ground, there are positive results coming out, which we see it in whatever has happened in January or part of February. And the exact numbers we can talk, of course, the next quarter. But these are all positives.

[Operator Instructions] We have next question from the line of [ Shailendra Kumar ] from Unifi Capital.

Congrats for a good set of numbers. Sir, can you revisit that explanation you gave for the rise in other expenses? There were some schemes for additional sales, right? That's what you said.

That's right. [ Shailendra ], we gave additional schemes, consumer schemes in this quarter. And the total selling expenses increased by INR 22 crores on that account.

Right. And do you see that continuing in Q4 also, sir? Or was it a very limited period of time for which you extended these schemes?

No. We are continuing this scheme in Q4 as well.

Okay. Sir, what is your sense from the ground, sir? Is the EBO strategy starting to give dividends? Or is it still clouded by the current economic situation in the country?

The EBO and MBOs both are impacted by the economy. It's not that one is better or the other as far as the economy is concerned. I think the EBO strategy is the better one, as far as we are concerned, our brand is concerned, and our segment of -- which is the mattress segment is concerned. But that's where people want to come, people want to experience the product, people want to lie down, people want to choose. It is an involved line. It is not an MBO kind of a product where everything is done on price. And it's a bigger than chances of the MBO. So I think even in these economic conditions, the EBO strategy is the preferred strategy and for our brand. And it's -- I think it's a better one. And thankfully, that we started on it long time back. It does take time to establish our distribution system like that. So I think it's a good thing that, that's there.

Right. That was helpful, sir. Sir -- and any comments on your current market share, how it has moved over the last 9 months?

You see, there is one research on the mattress, which was done of the 3 months there?

Yes, second round.

So -- and with a gap of about 6 months. And in fact it shows that our market share has gone up...

28%.

To 28% from a 23% earlier -- in the earlier report. That is of -- and that's a third party research as far as mattress is concerned. As far as the other business is concerned, it's very difficult to know. We only have some numbers from the very different associations, and those numbers are really not validated. But I would say, I mean, for the lack of any better judgment, let's say, we are flat here on market share. This is the same as before. But on the mattress in the last week that, for sure, we've gone up by 5%.

Sir, and one question on the online channel. Often, I am seeing SleepX being very aggressively promoted on the online channels. Any comments on that, sir, as to how much headway you have made? What is the market share? And what are your targets going forward?

Okay. I'll let Mr. Rakesh Chahar, who heads the Sales & Marketing, he'll respond to that.

So we've been at it for last 8 months now. So the traction is good. And so the numbers are also coming in. Right now, as far as the market is concerned, it is still a small market, and there is a lot of competitive pricing which goes on to it. So we are also learning as we are going ahead. But so far, we got the numbers and the play out that we had decided is working well.

And the newly incorporated subsidiary in U.S., what are your plans for that? Would you use the Spanish subsidiary to actually support sales in that geography?

It's a possibility because the primary business there is bed in a box, which is sold, and Spain happens to be geographically closer. I mean that still has to evolve here. And that subsidy is there to support the sales through Amazon end of year sales.

Only through Amazon sales?

Yes, only for Amazon sales. And so now where would the supply point be, I think, it could be a tossup between India and Spain.

Sir, one last question with regards to China. Now that there is stress from -- on the Chinese production, are you seeing increasing -- increase in queries from U.S.-related retailers for supply of mattresses or foam?

Tushaar?

Yes. We are so -- there are a lot of inquiries for change of supply chains for bed in a box mattress manufacturers of North America. That's what Rahul Ji was just saying. That's the primary role of the subsidiary that we've opened in the U.S., is to have access to those customers. And then depending on East Coast, West Coast, product, pricing and all that, we will decide the supply side either from India or Spain. But the inquiries, the number of inquiries and the competitiveness with which we are able to quote is quite promising.

[Operator Instructions] We have next question from the line of Amarjeet Maurya from Angel Broking.

Sir, just wanted to understand on the domestic front, like your 9-month sales number is almost flat. So is there any sign or any revival strategy, like how you'll drive growth in next 2 years? Like as of now, the growth is around consolidated 4%. And if you see, stand-alone is flat. So what is your strategy for FY '21?

I think it's a very provoking question. Amarjeet, I would say that all the things that are necessary for doing sales or increase in sales we are doing. I would not go through each step of that. But I think the important thing is that we are now not only looking at one segment as a macro segment. We are dividing that into micro levels and trying to focus on to each one of those segments. That's one. Second, we are looking at geographies, and we find that if we look at the map of India, there are areas which are very green for us, and there are areas which are absolutely yellow and red. We are uncertain there. So we are breaking that up and bringing in the extra focus that is needed to address those areas. And the last of all is, as far as the brand part is concerned, to ensure that its equity is maintained as well as there is enough excitement in the EBOs to increase the footfalls and increase the conversion that is happening. Something -- some of these things easier said, as I have mentioned to you, but they do take a bit of a time to implement on ground. And the process is on from a couple of months or almost a year, and we are seeing that the improvements are happening and will continue to happen.

Sir, how do you see domestic for FY '21? Like we can achieve at least single -- double-digit -- lower double-digit number?

Sorry, Amarjeet, we can't predict anything on the call like this.

But I can tell them what are that we pray for. I think short. I think all these efforts and I think there needs to be a little support that needs to come from the economy here. As soon as that little support comes in, we are preparing for it. Now when that support comes in, I know most of you were expecting it from the budget that there would be a kickstart to the economy, probably did not happen. Some of the things will come a bit slowly. Maybe most of this political situation calms down or cools down and then people would have focus on the economy and we would go. But we are continuing to do our work. If there is -- if and when there is this support from the economy comes in, it can be a very healthy growth there.

I would like to add one more thing, only that the sales difference which we are seeing, there is a difference of around INR 80 crore sales because of the reduction in raw material prices, and we have passed on those to the market. So almost 5% to 6% growth would have come from that only. So when you see the numbers, we have to see that we have reduced the prices in foam segment, which has impacted the number.

Sir, just wanted to understand, if I see margin for the 9 months consolidated basis, it is around 13.6%. So this is sustainable. And what can -- what kind of margin we can factor in FY '21?

So I think it's a perfectly sustainable number. Our forecast for the -- round figures -- the forecast for the other expenses remain what we have already mentioned, remains around the same time. We don't expect any great falls in the top line happening. And therefore, whatever has -- will be only on the positive side that will happen. And therefore, these are completely sustainable numbers there.

Sir, my last question, on dividend front. Like what is your dividend policy? Any comment on that?

So we -- I know there's been a big change in this budget, which has affected different people differently. But we -- as I said, we will be talking and discussing this in our next Board meeting. It will be a part of the agenda. And -- I mean I will not be able to say anything more than that because it's eventually a Board decision. But as a policy, we would want to share those.

We have next question from the line of Tejas Sheth from Nippon India Mutual Fund.

We had this whole strategy in FY '19 of converting a lot of retailers to EBOs. Now with the slow pickup of Sleepwell brand in FY '20, is there any resistance of these EBOs of them going back to the multi-brand retail model?

So not really because they understand the economic situation. They understand low footfalls. They are also present in the cluster. So -- but what definitely we are trying to do is that whatever is to be done at our end, in terms of improving the footfalls and the conversion, those initiatives we are taking with them. So they do see the effort being made by the company. So they are very well with us. In fact, we've also been expanding as we had planned for this year.

Okay. What would be the last number of EBOs as on Q3?

So the number of EBOs is 4,267.

Okay. Okay. On like-to-like comparison, how is this Spanish acquisition -- Spanish company has performed in Q3, on year-on-year basis?

Those numbers have been given, Tejas. INR 50 crores has been the turnover for this quarter.

Looking for the growth Y-o-Y basis?

So we have not given those numbers because we have acquired this quarter only. We can only say that compared to last year, the tonnage has been the same. We have sold around 11,000 tonnes last year. This year, it's almost the same.

Okay, okay. And lastly, this volume growth in this quarter has been really good. I believe that the growth would have come largely from the Starlite brand. Is it with the new stores, which have -- which we have reached out on the MBO levels, which are delivering this kind of volume growth? Or is it more like a price point perspective wherein your old stores are only selling more of this product?

Previous, we are not -- we are not distinguishing what is Starlite, what is Feather Foam as a category.

I just wanted to have the trend. Where the larger part -- I mean 38% of sales is very good.