Sheela Foam Limited (SFL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Sheela Foam Q4 and FY '20 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vismaya Agarwal from ICICI Securities Limited. Thank you, and over to you, sir.

Thank you, Faizan. Good morning, everyone. It's a pleasure to host the Q4 FY '20 conference call of Sheela Foam Limited. We have with us today from the management, Mr. Rahul Gautam, Managing Director; Mr. Rakesh Chahar, Whole-Time Director; Mr. Tushaar Gautam, Whole-Time Director; and Mr. Dhruv Mathur, Chief Financial Officer. With that, I pass the call over to the management for their opening comments. Over to you, sir.

Thank you very much, Vismaya, and good morning to everybody. I must say that this is -- this call has many firsts to it. First of all, we are having it on the following day after declaring our results. However, it happens to be a Saturday, and therefore, apologies to -- for pulling out everybody, but I guess it's not pulling out, it's still making you work on a Saturday. But as we all know, these are very unprecedented and unforecastable and unusual times, COVID times. And we are joining through the process of technology even at our end, which never has happened before. So I have another 3 people who are here to assist me and will be there to answer all your questions. Actually, so much time has elapsed from Q4 and FY '20 closing, that one feels a little awkward talking about it. It's probably not so much of time, but it is the kind of disruption that has happened at this moment, where almost for 3 months, virtually no work, everything got to a standstill, and we are now back to business [Technical Difficulty]

Your voice is lost, sir.

Sir, this is the operator. Sorry to interrupt you. Sir, there is an audio loss from your line. So I would request you to please repeat yourself.

Okay. So let me begin again, which I'm just saying that there are many firsts as far as this call is concerned. First, it's the following day after declaring our results, and it's also on a Saturday. And I must apologize for getting all of you to work on a Saturday. I did check with Vismaya, and he said, it is unusual to have a call on Saturday. So therefore, thank you very much. But in these times, where everything has been unprecedented and not forecastable and very unusual, maybe this is a first that we can continue for the following times. At this time, to talk about Q4 and FY '20 is a little awkward, as so much time and not only so much time but so many changes have happened from the time that the year got closed. And it almost has been a disruption, where from that we -- from a high peak level, we have all brought down -- with the lockdown, brought to a level of 0. And after the gap, we are starting again. So we have actually even forgotten that during March or the time before that, there was a slowdown in the economy. And if you remember that in our meeting on the 10th of February, we had mentioned that there is actually a kickstart that the economy needs and -- especially on the demand side. And now I think even a bigger kick is needed to start that. Let me begin talking about whatever happened in Q4 FY '20. Even though the connectivity is broken and some of it may appear as out of context, but still a few comments. And I think all of you would be more interested in what has happened during the COVID times and what do we see immediately after that. So if I go back to the March period, I would say at least 15-plus days, 15 to 20 days were completely washed out because of the corona setting in. Our estimate -- the results have already gone to you, but our estimate is that close to INR 100 crores would have been an extra sale that we lost out on and an EBITDA of another INR 30 crores that we would have lost out on. The numbers that have been received by you, there is one more impact from Australia, which is a foreign exchange impact because the rupee moved favorably compared to the dollar. Spain, of course, continued -- for that quarter continued to do well and has contributed immensely to our results of March 2020. With those -- with that, even without the INR 100 crores that I talked about, our EBITDA for the year improved compared to the corresponding year. We had a level of INR 300 crores, which was about 42% higher than the previous year and as a percentage of the sales was at 13.8%. Of course, I say that because there was an exceptional expense, which I'm going to talk about it now. We have -- we -- in 2016, we did have a fire, for which an insurance claim was lost. Everything, absolutely, the claim is good and nice, but it is just that the insurance company is dragging its feet and not setting -- not clearing it. We have taken the help of IRDA over this period of last 3 years. They have brought about a review to the process, but still, there is nothing positive that is coming out as far as decision by the insurance agency is concerned. And we have filed a couple of RTIs, but [ we do get a roundabout answer. We feel good, substantial time has gone ] and our auditors were also keen and our directors were also keen that we should write it off and then take it up. Of course, we will keep pursuing it. We'll pursue it in the court if it is required. And whenever it comes back to the company, it will be added back to the profits. I must say that during these COVID times, there has been virtually -- not virtually, actually no impact as far as the revaluation of the assets are concerned. So there is no devaluation, and the assets remain completely intact. A little change that has happened is in the Australian accounting standards, where the long leases have been converted to -- or have been capitalized. And there is no change on the PAT side, but there is a change as far as the EBITDA is concerned. So those numbers look unusual, but that is just because of the change of standards. One more point about this last year that I would want to mention, and that is about dividends, which has always been a point of discussion amongst us. So somewhere in March, when the laws were about to change, I know many companies decided to give a part dividend or a pre-dividend. However, we chose not to take advantage of any kind of a tax issue at that time. In any case, 75% of the dividend was to only come to us. Therefore, we chose not to take that advantage. Post that in our last Board meeting, the directors have again discussed and have proposed that because we do not know how long this period is going to last, how much cash is needed and required, we are not even aware whether it's the beginning, middle or the end of the tunnel, and therefore, it is better to retain this money. And as I keep repeating, in any case, 75% is with the promoter group. And therefore, we are -- we have decided or the Board has decided and recommended that at this time, we should not be declaring any dividends, we should retain cash. Coming back to the period beyond that, which I said I would want to spend a little time. Please do not treat it as any kind of a guidance. In fact, I cannot give any kind of guidance for this Q1 or even for the years to come. But I just thought that this major disruption that has happened, it may be worthwhile for the company and for the investors to really have a kind of peak into whatever changes that we foresee are going to happen as far as the company is concerned, as far as the industry is concerned and as far as the country is concerned. Your company, the factories, all of them have started with social distancing. Of course, there are fewer people. However, we work with complete SOPs laid down by the Ministry of Home Affairs. And there is total sanitization, everything. Safety of the people is absolutely upper most in our minds. On the market side, our estimate is about 80% of the markets have opened. And as you must have known from many others that the smaller cities have done better than the bigger cities. And as we know that bigger cities like Mumbai, Delhi and Chennai are also facing the brunt of the infections of COVID-19. If we took it -- if we take just a snap at today, I would say that about 80% of the markets are open, and our business is about 2/3 of the business which is back. And let's hope that it kind of ramps up very quickly to the normal levels. I must say a word about Australia, which did have a partial lockdown, but the factories never closed. And today, in fact, they are doing better than before. Similarly, for Spain, which went through a real bad time, a horrendous time, where they had close to 800, 900 deaths per day, but our factory, being located at a remote area away from the big cities, continued to work and at the lowest level was about 40% of normal levels. And today, it's back to better than before. And therefore, both those geographies are doing reasonably well. Another point that I want to make is about impact of China. So of course, even in the last meeting we did talk about it that the trade differences between U.S. and China were making things difficult for the other parts of the world. And subsequently, of course, the COVID impact, the little impact that we are experiencing on the northern parts of our border, et cetera, imports from China are becoming difficult. I'm happy to let you know that we are virtually nondependent on them, except for a container of TDI or 2 here and there and a few blankets that we would have imported. Virtually nothing. And that, too, now in a process of completely looking at other places. And we do not have any strong point of view on that, but the issue is that it's getting more and more difficult to get material from there. And there is, however, a positive impact of whatever is happening, which is that exports from India are looking very bright, at least at top of our industry. So China was exporting a lot to Europe and to America. And those places for whatever reasons they feel good for are looking at India as another source. So we have many inquiries. We have many opportunities, which are knocking at our door. And we would be growing that in times to come, both from India as well as from Spain. The few initiatives that we have taken, and we have been very vocal about those initiatives. One, that just to make our stores a little more, not little more but completely compliable with the SOPs of the Ministry of Health Affairs. We are -- we have converted the stores into what we call safe zones. So there is sanitization repeatedly being done throughout the day. People are completely corona-free who interact with the customer. And we also encourage people to take a special time, an appointment and come there and shop. The other thing is that we are extending those stores for the people who do not want to venture out from their homes. So we have a program called Sleepwell at Home, where the shopkeeper, along with our ASMs, would be visiting the pre-appointments, people at their house, showing them the products and making -- of concluding a sale. And I must say, it's at a very nascent level, but the results that we see are good. Our venture into the e-commerce side, because that's, again, another area where people would want to shop from home continues. We have a brand called SleepX, which is to be sold through Amazon and Flipkart. And we have our own website, mysleepwell.com, where products which are bed-in-box, et cetera, are being introduced in the market, so that people can buy them from the safety of their homes without anybody -- without interacting with anybody. If you remember, many months back or almost 1.5 years back, we had introduced a new technology called the Neem Fresche technology, which had its basis both in India as well as in Australia, and it was combining nature and science to combat all the microorganisms. Today, we have those -- that product in virtually all our offerings, and there is research going on by the Australian company to figure out what kind of a positive impact or a negative impact it has on the virus or the coronavirus. It is -- the report is -- or the prelim reports are encouraging, but I cannot say till we have the final report. So all these opportunities arising because of the corona, or the COVID-19, are being evaluated, and I will speak to you definitely in the next meeting about it. We have -- during this corona period, there have been many needs and requirements that the various government agencies as well as private hospitals have been looking for mattresses and quarantine centers. We have worked with them and supplied almost close to 9,000, 10,000 pieces across the country for the centers, which have been developed. What I'm very happy to share with you is that the biggest of these centers, which you must have read in the paper recently, is being set up by Radha Soami Satsang, and this is a 10,000-bed quarantine center ideally needed for a city like Delhi, where people who live in apartments or small homes cannot quarantine themselves even for the small period that they are required to not infect others. We have -- Sheela Foam is supplying the beds, which are made out of recyclable and natural product-based cardboard. They are assemblable in 5 minutes. They can be disassembled and moved around. We are supplying the mattresses and the pillows. As of today, 2,000 of them are already in place, and by the 1st week of July, another 7,000, 8,000 would be in place. And this 10,000 facility would be up -- the largest in the world and would be up in the shortest possible time. And as I said, I'm very happy to share that we have supplied -- or we have not supplied, we have supplied free of cost from our commitment or our contribution to the society. One last point which continues to bother everybody is on the raw material prices. I must say that at the moment, they are low and steady. Generally, these raw material prices are based on 2 things, the demand side as well as the crude price or the feedstock price. Both are low for the moment. And our estimate is that they would continue to be low, at least for the next couple of weeks or couple of months. And then -- but having said that, when I say it, I always bite my tongue because I'm never kind of correct. But all indications are that they will remain low and steady for the coming times. So with these words, I would hand you back to the -- to Vismaya for taking this conference forward. Thank you very much.

Thank you, sir. Faizan, can you please start the question-and-answer session?

[Operator Instructions] The first question is from the line of Lakshmi Narayanan from ICICI Mutual Fund.

I have a couple of questions. The first is that given what we are facing, what are the few things in your way of doing business that you think will be kind of irreversible and it is going to be a good advantage for you, the way in which you do business in terms of your input, logistics, or how do you sell? Has there been something which you realized which you haven't known earlier, which can become a great advantage for you going forward?

Okay. Thank you very much, Lakshmi. I'm repeating the question, so that I have understood it correctly. You're saying the way that we were doing business, whether it was logistics, inputs, outputs, et cetera, with the impact of COVID, what to be realized has given us an advantage or has changed, which would become an advantage. Is that correct?

Yes. Yes, that's right. And something which you haven't, like, for example, like people have moved to doing Zoom calls, and they find that it's quite efficient, right? And this can be an irreversible thing the way in which people deal with [ clients side ]. And it is for good. Now in that context, has it something which you have -- which -- in your business, anything similar to that? It could be technology, it could be the way in which you deal with your employees or what -- it could be anything.

So 2 things. One, which we have already said, which is as far as communicating with people is concerned, we suddenly have realized that you don't need to just get onto a flight and go to a place or you don't need to get into a car and move 10, 20, 30 kilometers to go and meet somebody. You can actually do it, and you can do it better from home. And I must share that we have recently had a Board meeting with Australia, and we concluded that from now on, as far as Board meetings are concerned, we will do it this way, even if -- when travel and everything opens because it's so much better focused and all that. Similarly, traveling for our salespeople, which was visiting shops and visiting the retailers, we can curtail that down a lot and the communication with the dealers can even become better through the newer audiovisual means, which are being used. The other part that we are -- I would say, is an advantage is to say that -- no, that's again related to travel only, and our expectation is that we would travel far, far less. So e-learning and traveling, these are 2 things. Yes, one more thing, which is as far as our factories are concerned, we did find that -- when the social distancing has been put in place, there -- we find that we have to do with fewer people. And what we realized now is that you can actually do with fewer people and probably have as good a result. So these are a couple of things that are here to stay.

And the way in which customers buy your products, et cetera, is the thing which you see that the number of stores would -- can be rationalized or can be much more optimally utilized? And how the consumers are actually taking this, which can become an advantage for you?

Yes, sure. So as they -- as a thought at the moment, but no actions taken. But as a thought at the moment, it is true that the stores can be rationalized. You can use, I say, audiovisual means to connect up with the customer. You can probably do with smaller spaces in expensive commercial areas, so that you don't need to display everything. And you can take it to their home, et cetera. So definitely, the retail space is going to go through a change. But I must, in the same breath, add that the exclusive retail that we have has been a great advantage because whatever programs we wanted to unleash, which were like converting them into safe areas or reaching out to the homes of the people was far easier to do compared to competition, where exclusive stores are far lesser. And going back to the factories working, contractual labor, which was being used for just moving stuff around and which was creating quite a bit of a crowd, now with automation and with simplification, et cetera, we can work much better.

Got it. I have one -- just 1 more question related to the numbers which you have published. When I look at your FY '19 numbers, stand-alone on cost of materials and the other manufacturing expenses and when I compare to the one which you released today, there has been a change in both these line items of cost of materials as well as other manufacturing expenses alike. So what -- did you reclassify that?

So Dhruv, can you please do that?

Sorry, can you come with the -- yes, this has been slightly reclassified. Other manufacturing expenses, some material has been shifted to the raw material, which was earlier classified in other manufacturing expense.

Okay. Okay. So that is -- and what is the rationale to do that?

Just the auditor's suggestion that it is better to reclassify a particular item from consumable to raw material, nothing else.

Yes. And there's another thing, export of IT services in your thing, right? So what this pertains to and what is that number for this year?

Please come again.

There is a line item called export of IT services, which has been around INR 4 crores every year on stand-alone...

Yes, that's the IT services exported to Australian subsidiary. The entire IT support is provided from Sheela Foam, so we charge services from Australian subsidiary. That's the line item.

And that would be around INR 4 crores for this year also?

That's right.

The next question is from the line of Rahul Ranade from Goldman Sachs Asset Management.

Just a few questions. So on this insurance claim of around INR 12 crores, has it been complete or provided for or something like that?

Yes, Rahul, this is -- we have written out as far as this year is concerned. However, the pursuance of it, we will still continue and whichever year that we get the claim, we'll add it back to the profit.

Sure, sure, sure. Okay. Okay. And just 1 more question on the stand-alone balance sheet. Actually, the loans amount seems to have gone up. So it used to be around INR 2.5 crores, INR 3-odd crores, which has gone up to around INR 50 crores, INR 55-odd crores.

Sorry, can I answer?

Yes, yes.

Sorry. The loan is to be -- for acquisition of Spain when we invested EUR 40 million. Out of EUR 40 million, EUR 20 million is the loan from Citibank. And of the balance EUR 20 million, EUR 12 million is equity and EUR 8 million is the loan. So that loan is represented as the investment in the same subsidiary.

Okay. Okay. Okay. So -- and EUR 12 million was equity that we took it?

Yes.

Okay. Okay. And so just on the mattress realization, I was looking at it on a quarter-on-quarter basis, so from Q3 to Q4, it seems to have gone down. So I just took the revenue and divided it by the volume to get the realization. So it seems to have gone down from around INR 3,600 to INR 3,300. So is there a price cut over here? Or has the mix kind of shifted adversely in favor of the Feather Foam and Starlite?

Dhruv?

Should I answer this?

Yes, yes.

Okay. This is not only for Starlite and Feather Foam, even in the Sleepwell, the consumer behavior is changing towards low-priced products. So it's a mix of -- it is all the categories that we are experiencing it.

Okay. Okay. So there was some bit of down-trading that happened in the March quarter, you're trying to say?

Yes. The preference is towards low-priced products.

Understood. Understood. And just 2 general questions. So I just wanted to get a sense of what do you think is the dependence of our mattress business on the overall wedding segment? Because in times like this as in where again weddings are getting postponed, et cetera. So just wanted to get a sense of what proportion would it be for our revenue.

Rakesh, do you want to answer that, please? Rakesh, are you there?

Yes. Can you please repeat the question?

Okay. I'll repeat it for him. He's saying that because of sale of mattresses are dependent on the wedding season and now the weddings are getting postponed, so what impact will it have on the mattress sales?

So right now, what we are experiencing is there is a pent-up demand, the customers who were intending to buy but could not because of lockdown, there also have been consumers who have used the mattress during the lockdown and realized that it's the time to change. The wedding demand has definitely gone down, but that, to some extent, has been compensated by, I mean, the new realization that there's a time -- because mattress being a very low involving and ignored category, so it has come to the limelight during the lockdown period. So as far as sale is concerned, the marriage is getting postponed, but this new sale is coming up to the retail.

I just want to add to that. Rahul, I just want to add to that. And these weddings where the mattresses are sold are weddings in the middle-income group, lower-income group, et cetera, where they are the masses and those weddings are not getting postponed. The buzz that we hear or the noise that we hear is these are what we call as the large weddings, where people want 1,000 guests and 2,000 guests, et cetera, in the bigger cities. Those are definitely getting -- but the -- in the middle-income group and the lower-income group, so if I would take a village, if a wedding is scheduled for that particular time, the wedding is taking place. All that is -- so the impact will be there, but it will be very minimal.

Understood. Understood. And sorry, I just missed that part of where you said that because of lockdown, actually, the mattress category is coming into the spotlight from, earlier it was ignored. I didn't catch that part. Why are you saying that?

So this is our feeling, or this is our experience, both from Australia and Spain and whatever we are seeing in India is that when people have been at home in the lockdown period, I think they are realizing the importance of mattress and importance of furniture far more and therefore are going out to buy something good and nice because of spending more time on their [ health ]. That's why...

Okay. Understood. Understood. And just 1 last question. So what is our e-commerce contribution in general? And are we seeing a spike up because of this whole lockdown thing and people are like in other categories very comfortable in ordering over the e-commerce. So is it also happening for us?

So I just want -- I mean, there is no doubt that e-commerce will go up and it is going up in all the other geographies, for sure. At this point of time, the only number that I can say is -- when I said that about 65%, 66% of the business is back, on the e-commerce side, more than 100% of the business is back and therefore is at a faster recovery route and probably will go ahead. But maybe by the next time, we would have full numbers to support all that.

Sure. Sure. Sure. And pre-COVID, it would have been how much percent of our overall revenue? Or what would that be?

Rakesh, you want to answer that? As a percentage of revenue, I mean, the e-commerce sales?

Yes. As a percentage, it would be, say, last year would be around 4% of monthly sales.

The next question is from the line of Nihal Jham from Edelweiss.

Sir, I had a couple of questions. The first one was that you mentioned the figure of INR 75 crores, which was the impact on the stand-alone revenues to the period. How much of that was specifically to the Mattress segment?

So Dhruv, you are the one who's made that number.

Yes. That's correct. Around INR 35 crores is the Mattress segment.

Yes. INR 35 crores. So just related to that, you mentioned that 80% of the network is operational currently. I first wanted to understand that currently because of the fact that sales did not happen for the first -- for the last 15 days of March, is there a possibility where there was a lot of inventory which was lying with a lot of your dealers and distributors, consequently that is still to be liquidated?

So you're -- you're quite right. We do track the primary sales, which is from us to the distributor; the secondary sales, distributor to the retailer; and then the tertiary sales. So our finding is that the tertiary sales are higher than secondary and secondary is higher than the primary. And therefore, the -- whatever was the inventory is being liquidated -- first is being liquidated.

Okay. And just a last question on this side is that you did mention earlier about there being a pent-up demand. And despite wedding season being postponed, we're seeing some demand, need to replace mattresses. But generally, mattress as a category is a little on the expensive side, and currently, a lot of people are speaking up and a lot of discretionary items being postponed. My only thought is that in this scenario, possibly mattress as a category will be a little later in terms of replacement than some of the other items, basically. So I just wanted to know your thoughts based on what you've seen after the reopening and also your experience of how the industry is evolving in such challenging period.

So I can only say that our understanding was also that mattress is a nonessential item and the essential items would be first to recover. But the little experience that we are getting from our other 2 countries, Australia and Spain as well as whatever a few days that have gone by in India, it appears that, thankfully, mattress is not so nonessential. I mean it is -- people do recognize its importance. I'm not so sure if additional factor may be impacting it, which is the unorganized sector taking a little longer time to get into action and maybe the preference of people to go for established brands rather than for anything. Those 2 factors may also be playing in there.

So I may also add, this increase in immunity, sleep is coming as one of the big reasons for it to improve immunity. So that and plus this Neem Fresche campaign that we are doing, which basically also elevates the importance of mattress and good sleep and sleep being very good for immunity. So the response to this campaign is also positive. So the consumer is open and is kind of willing to look at the health angle of the mattress.

That's right. That's correct. Okay.

Sure, sir. That's helpful. Just 1 last question from my side. Obviously, e-commerce is a channel where a lot of the sales are shifting. And specifically for SpaceX (sic) [ SleepX ], is there a plan or thought process to significantly drive those revenues by, say, additional advertising or more visibility on the marketplace website? Just I wanted to understand that.

Rakesh, can you answer that?

So I think this is related to Spain. So I would suggest if you can...

Okay. Sorry, I mistook that. So if it is Spain. So yes, you see, in Spain, we are...

It's related to SpaceX (sic) [ SleepX ] sir, not Spain.

Related to?

I mistook it probably.

SpaceX (sic) [ SleepX ].

Yes, Nihal, can you just repeat the question, please?

Yes, sir, I was asking...

I think you mean SleepX.

Yes.

Not SpaceX, SleepX.

Sorry.

Okay. So absolutely, the advertising for e-com or to drive sales through that channel, both for Sleepwell and for SleepX, both are going to go up, coupled with the right focus on the product mix and the products available through those channels. So both are kind of online, I think SleepX went online a couple of weeks ago, Sleepwell has gone online a couple of days ago. Online, when -- I mean with the increased focus on advertising as well as the product mix and the channel mix itself in the sense that earlier we were only on Amazon and Flipkart, where, of course, there is a large marketplace, there is a large consumer footfall, but also the margins are a bit tight. So we've also started to develop our platform sales through both the brands, where we are seeing and putting more resource behind the stand-alone website, where the consumer interaction, the consumer experience and our ability to get better margins is also there.

The next question is from the line of Pankaj Tibrewal from Kotak Mutual Fund.

My question is more from a medium-term perspective. Always, as a company, you have been mentioning in your annual report about Organized Mattress segment being about 35% of the total industry size. We saw a trend emerging out of GST. Now post COVID, are you getting some sense that the movement of unorganized to organized because bank credit and other things have become really tight for the smaller guys, is that a trend probably that could accelerate? And what would have been our share in the organized? We have seen the market share increase. Last time, you alluded about 26%, 27% of your market share in the Organized Mattress segment. So some data points would be helpful there. The second, you mentioned in your opening remarks about some encouraging opportunities emerging from a China player strategy or demand coming out of Europe and U.S., can you elaborate a bit? And if you were to crystal ball gaze next 2, 3 years, how big this opportunity could be for us when you look both from India and [ Spain under? That are the 2 questions from a growth side that I'm looking for ].

Thank you, Pankaj. So I think the first question was on the unorganized sector and the impact of COVID on the unorganized sector and what do we believe that will happen. I think it's a little too early to crystal gaze on that. We have -- in the last 30 days, we were seeing that there was initially a cash crunch for them. Then somewhere, somehow, some money was arranged, some movements are there. My feeling is that the entire impact of all this will really be in the next 2 to 3 months. When the business contracts, actually, a lot of cash also gets unleashed because the working capital is -- comes in. But when you get back to peak levels, that is when really the shortage will be felt. I think there would be a few people falling over or a few people closing down businesses, but that will happen in next 3 to -- around 3 months' time. And therefore, for us to really make a judgment on that, that what is the impact of the COVID on the unorganized sector, I think it's a good idea to wait for a while. That's one side, which is the cash side, there is the brand side, there is the immunity side, there is the distribution side or safe zone side. So I think there are many aspects to it. I would request that if we do it maybe off-line to a couple of months down the line or we do it in the next call, it will be good. On these opportunities that you talk about, so just to elaborate on that, there are -- I would bucket them into 3 opportunities. I will start with the smallest one first, which is Australia importing a lot of stuff from China. And even through our company there, where a brand called Sleeping Duck used to import all the covers, et cetera, from China and we would complete that mattress in Joyce and give it to the market. So they have specifically said they want to completely shift that base to India. And because it's -- eventually, the company remains the same, et cetera. So that's a business which is about to be concluded for -- or not the business to be concluded, but the agreements to be concluded, and I see that happening quickly. The second part is material which was going from China into Europe and America but more into America. That part, the number of inquiries have been actually huge is an understatement. How many of them will convert into supply positions? I would say that even if 10% concludes, the numbers would be large, both in quantum as well as in value for us to take care of. And when I say us, it means 2 places that we would supply from. One is Spain and the other is from India. From Spain, closer distances, European base, all the certifications like Oeko-Tex and Europur, [ Maserati Pure Marks ] and the far greater comfort that America has, those things are on the verge of getting concluded. Few, small little orders have come in as far as trials and pilots. But on the rates and the products and the grades and all that, absolutely in place. As far as from India is concerned, which will be more like bed in a box, which is more like spring mattresses, all those which were happening from China. As I said, that if we -- of the inquiries that we have, if we conclude 10% of them, it will be a large number. But maybe in due course, I'll be able to give you better feel for that -- of what the volume would be.

Any thoughts on -- I'm not asking you very near term. But from a business opportunity as a company, can it be INR 100 crore, INR 200 crore, INR 300 crore, over a medium-term perspective. I'm not saying this year or early part of next year, but 2-, 3-year period, can that be a sizable portion of our business, which is today there?

So I would put it a little -- I mean in medium term, let me put it in 2 years' term. And in 2 years' term, it should be closer to INR 500 crores, INR 600 crores.

INR 500 crores, INR 600 crores...

I mean I'm just saying what -- I'm saying it conservatively. But of course, everything has to play out and -- as I said, but it will be, that much for sure.

Okay. Great. The third and the last question is that when we are interacting with all the brand companies, one interesting trend we are watching is the collection in the last 2 months, which is April and May and early part of June, has been quite good. And actually, distributor retailers have paid that in terms of the overdues, which were there in March or early part of April, how has been our collection efficiency during this lockdown phase and where are we on the debtor side, if you can just give us some sense?

So I think we've been reasonably good on that part. We have the distributor in between, whose main job is to provide the credit in normal times as well as unusual times. And he generally has some credit with us. So -- and ahead, most of the channel has been exclusive. And their intention is to conclude -- sort of to continue with that exclusivity. Therefore, as far as any bad debts, I won't say there have been any, but any delays? Probably, yes. In fact, we did offer to the trade that we can arrange for finances at lower rates of interest. And we do not want that any business should be lost on account of nonavailability of funds. But by and large, there has been no requirement of us. And that part has played out well here.

The next question is from the line of Resham Jain from DSP Investment Managers.

So just on the export side, which you mentioned, a lot of -- has got a lot of answers. But just from the size perspective, how big is the U.S. market? That is number one. And what is the price differential between, let's say, what the import from China versus what they'll be doing from India? Is the price difference material from that perspective?

Sorry, Resham, could you just say the first part of your sentence, which you said size of...

Opportunity in the U.S., how big is the market over there for the products which we manufacture?

So I can say about $5 billion is what is the numbers which have been quoted in the various magazines and the agencies which provide this data. Now all of it or part of it or whatever is going to come has come. But the size of that market is about $5 billion. The second question you were -- was regarding the price difference. Resham, it's been very difficult to right now say that what's the price. But I would say that it will be absolutely comparable prices. Otherwise, the business will not happen. And those prices are comparable there or we have to make them comparable.

Okay. Right. So I was just asking from the business point of view, whether to conclude the businesses, which we are seeing currently. Is price one of the major variable? Or are there other variables to win these businesses, which we are seeing on the export side?

So our price is, of course, an important factor, but there are a whole lot of other factors, which are certifications, which are shipping times, which are grades and qualities of foams that will be available or the bed in a box that would be available. And let's not ignore the fact that from China, is a well-oiled, well-established supply chain, which has been there. And therefore, the others, whether it's out of India or it happens from Spain, it will take a little bit of time, but it will be there. And I'm very encouraged by the response to the Spanish offers that are there. So price is important, but it's not going to be the only determining factor. And price, we will have to be comparable, there is no choice from that. All current indications are that we will be comparable.

Okay. Sir, my second question is with respect to Spain. When we acquired the business, I think we doing around 12% to 13% kind of margin, but when we see the margins in this quarter, it is closer to 19-odd percent. So -- and you mentioned during the acquisition that there are certain changes, the mix of the business and other things which you are going to change. So is the margins showing the changes which you have done? Or is it still to be done over the next few quarters?

Resham, to be honest, I think it's too early to see any changes that we would have done. I would only say that we have provided them the flexibility to operate and a little bit of global connections and maybe supplier raw materials, et cetera. But the real impact of us bringing in whether an IT system, bringing in -- facilitating their business, bringing in product changes, all that has not happened as yet here. We acquired it in October, and then the impact of COVID has been almost on February, end of March [ a bit ] onwards. So whatever you see as the numbers are naturally happening, they may be a bit cyclical or cyclical in nature that the raw materials and the impacts and all that that is there. So I mean, I would put that as a sustainable number is whatever I've always been saying, which is a 14%, 15% number that will be sustainable. But from our side, whatever we had to do, we've done very little here.

Okay. Right. And sir, my final last question is on online. So on online business, specifically Amazon, Flipkart, in the last 2, 3 months, you mentioned there is a lot of traction. But is our back-end supply chain, is it all set to have a higher quantum of sales? And what are we doing for that? Because it's a slightly complex supply chain compared to what we do in our other channels.

So Resham, I think that supply chain was well-established over the past 1 year and that has not changed. Whereas directly going from our factory to their warehouses or [ go downs ], that's pretty well established. It was just a question of enhancing the volume, but all the teething troubles and all that, they were sorted out last year itself here.

The next question is from the line of Vishal Chopda from UTI Mutual Fund.

Firstly, I would like to compliment the entire team on the good set of disclosures with respect to the product price, volume, value that I think that's very useful and hope we continue with that. The question I had was on exports. I think we largely covered most part of it. Just 2 things here. If you could just share in FY '20, the year gone by, what would be the export in the stand-alone business, absolute amount or percentage of revenue whichever works? And as a margin at the EBITDA level, not at the gross level but EBITDA level, will the exports margin will be similar to the company average?

You are talking of the year that's gone by, right?

Yes. On the exports proportion, I was talking for year gone by and exports margin the year gone by and going ahead also, what is the view on that exports margin?

So I think going ahead, I would be a little hesitant to put an exact number to it. But the year gone by, Dhruv, can you answer that, both on the volume of business and EBITDA?

Yes. So the volume was not too large. It was around INR 20 crores only. And EBITDA levels are much lower as compared to the normal EBITDA level, which is normally the EBITDA level is between 13% to 14%. In export, the EBITDA level is close to 8% to 9%.

Okay. And going ahead, difficult to say, it will be higher or similar to this at this stage?

The volume...

Yes. So I'm just saying that going ahead, the EBITDA level will be higher. This is 8%, 9%. It's actually the quality of export that you do. I mean, what you pick up and what you do. So I mean big large opportunities like this always will tend in to bring in the efficiencies, which are necessary for improving your -- for improving our EBITDA. Right now, the INR 20 crores of export that we are doing is all small numbers. And probably, the variety was just too much. You were just sort of trying to take whatever it was, keep your ship running as far as exports was concerned, et cetera. But I think when you look at these kinds of things, of course, they will be much higher.

Correct. Understood, sir. Second question was on the CapEx. What would be -- what is the planned CapEx for FY '21? And again, more from a medium-term point of view, if we have to, obviously, explore this export opportunity, will that lead to some increase -- meaningful increase in CapEx?

Hello. Vishal, we lost you for a moment, your voice.

I'll repeat my question. I was saying, second question was on the CapEx side. Firstly, what would be -- what would be our planned CapEx for FY '21, the current year? And secondly, from a medium-term point of view, to take -- to explore this export opportunity, will there be any meaningful increase in our CapEx?

So as far as CapEx for FY '20 is concerned, again, this period has been completely reset, and we would like to get back to any kind of budgeting or forecasting activities in another month's time. And once we are done, we will definitely share with you. On the export side, I would say that there are some machines for sure that will be needed, required, which would be for compressed packing, making these bed and -- or the mattresses into kind of boxes and ship it, but it will be very small. But these are machines, which are making of the foam and all quality is a great foam. And then sort of making -- converting to matters, et cetera, all those kind of things exist. But the new ones would only be compressing them and putting them in a box and sending the boxes out. Yes, some machines would be required, but [ less ]. And therefore, the CapEx, I don't expect it to be a very high CapEx.

Okay. Okay. And just to clarify, the exports, what we are -- I mean, the opportunity, what we're talking about is largely mattresses? Or is it foam?

[ Mattress ] from India and definitely from Spain. From Spain, there is also blocks of foam, which was also again shipped from China. And those are the simplest things to do. And the third thing that I added or gave an example was of mattress covers with springs inside them, which we will be doing to Australia, which at the moment, they were buying from China.

The next question is from the line of Tejas Sheth from Nippon India Asset Management.

I have 3 questions. One, starting with a lot of EBOs, we had converted -- I mean a lot of MBOs we had converted to EBOs over last 2 years. Most of these EBOs will be under severe pressure right now, and they would be jittery about their whole business plan or they are -- maybe even their decision. How are we handling that part at present?

So quite a few of the EBOs, I think the major expense of the EBOs has been -- is really the rental value of their place. But in our case, the majority of them are -- where they own the place themselves and some of them run the premises, and therefore, salaries are also not the biggest of things to ensure solvency to continue. Wherever there are rentals we have offered, and we will be supporting them for a while to ensure that the expenses are taken care until the time that the volume kind of comes back. So I don't see any major issue there. There may be some structural changes, which may happen down the line, where one of you did say in the beginning that you could do with a little bit of a smaller store or you could do it because of the newer technology... [Technical Difficulty]

Your voice has gone.

This is the operator. Sir, we're not able to hear you. [Technical Difficulty]

Yes, yes. Back, but yes, we did drop for a while here. So am I audible at the moment?

Yes, sir, you are audible.

Okay. So I think I was trying to answer the question of Sheth from Nippon, right?

Yes. Yes, that's right.

So as I -- and I think your question was on the on the solvency or the continuation of the EBOs. And I did mention that most -- in our case most of the EBOs are self-owned buildings and they work themselves. And therefore, there is not a big stretch on rentals or on salaries. And if there are any structural changes, that will probably happen that smaller stores are -- will suffice that we will see the next 1 year or 2 years, we will see anything.

Okay. Sir, my second question was again on the China opportunity. How are these typical imports done? I mean, they are long-term contracts. The clients are the large departmental stores where you will be doing white label for them. I just wanted to get some color on the client side. I mean, who are the clients? And how are the contracts placed? I mean...

No, no, no. There are no contracts as far as -- are you talking of us importing stuff from China?

No, no, no. U.S. imports from China. So are the -- who are the U.S. clients typically and are they having long-term contracts with China? How does it work? I mean, is it very much volume take-or-pay kind of contracts? Are they exclusive contracts? How that sourcing pattern is?

So I think it's a mix of everything. There are some of these big retail chains, which are importing directly from the suppliers in China. And some, there are agents and people who import and warehouse and do it. And the third type of people that we have seen is the Chinese companies have their own warehouses in China. So it's a mix of all these things that are going on. And I don't think that there are any contracts, which are very long-term contracts.

Okay. Okay. And this is typical B2C side of the opportunity, right? There would be a lot of B2B side of the opportunity in terms of car cushions -- car seats cushions, the furniture cushioning part, which also would be importing from China, and there, we, again, have a very good position in India. Is that also a good opportunity, which can play out for us?

Sheth, I am not aware of the auto seat opportunity. Anyway, auto seats, we don't do that ourselves. So I have not explored that part of it. But furniture cushioning, furniture is generally, what the U.S. has been getting is completed furniture from China and not really the cushioning part separately. So on the furniture is -- since we don't do completed furniture as of now, that it will be very difficult for us to say that what is that quantum of business. And I mean, all we hear is thousands of containers a day, but it's just a wild statement. Honestly, I won't know about that.

Okay. Okay. Sir, lastly, on the cost management side, are we -- have we done any cost management plans post-COVID to sail through this year on the profitability side?

Yes, sure. We have. So starting from what I said right at the beginning of labor reducing, automation happening, simplification of some of the products, simplifying the supply chain side, and even sourcing of raw materials. So these are regular cost-cutting measures, which have been there. But here, we have specifically taken up them and have achieved quite a bit. I mean, at the moment, I will not be quantifying all those, have achieved quite a bit on that. Similarly, we are looking on the sales side, improving the supply chain, improving the product, improving all that kind of things that we are already doing. [Technical Difficulty] So those costs, the regular cost-cutting measures are going on, but some very big ones have also been taken up here.

The next question is from the line of SivaKumar from Unifi Capital.

Revisiting the cost question. Can you quantify how much of it is fixed and how much of it is variable?

Siva, that's the most difficult question that you've asked because whatever changes -- I mean, if you look at the last couple of months post our, I mean, lockdown or from the time lockdown has started, most of it has been in the closed times. And whatever changes we are -- beginning to happen are going to happen only when we have restarted. So therefore, let me just say this that we have sort of reviewed every process and reviewed every material and everything that is going on. We had that opportunity for the 2 months that we're there. We have reviewed that, we have reset that. And only after that, we are restarting everything. And on this restarting, because it's been a very recent phenomena. For me to say that this much is fixed cost gone and this much is variable cost gone, it's a little early. Let's just give it another month or so, and then we'll be able to give you better handle on these numbers here.

All right. Sir, just 2 data points. What was the advertising expenses last year? And also, what were the sales incentives for last year, stand-alone business?

And Dhruv, please.

Yes, I'll be able to answer it. Can you hold on for a second? So marketing expenses for the year was INR 80 crores compared to INR 105 crores in the corresponding year. This last year was INR 105 crores. And this year were INR 80 crores. Selling expenses last year were INR 180 crores -- that is '18 -- '19, INR 187 crores. And this year, they are INR 205 crores. So more money was incurred on consumer schemes and promotions. That's it.

So incentives you said INR 205 crores, right, this year versus INR 187 crores in FY '19.

Correct.

Okay. Sir, what is the status of the ADD application on TDI, which was moved in the last quarter? Should we expect an ADD on TDI?

So that hearing is yet to come. And because of post-COVID times, no hearing took place. Let's see, since nothing has happened since then, people have replied to the questionnaire, but our expectation, what we are thinking, the way the things are going, there will be some levy of anti-dumping duty because of the low prices of the stock.

Right, right. Sir, coming back to the Q1, I know you said that you wouldn't be giving any guidance. But some of the other companies have been guiding in terms of how June was, especially, like June was 50% of last year or something like that. Can you guide along those lines? Because for discretionary consumption space, it's really difficult to gauge as to what will be the impact of the current lockdown. A more specific number from you would be really helpful.

So as I have mentioned to you, June would be about 65% of last year's June.

Okay. That's very good to hear. Sir, and what will be the business strategy for this year? You have very good margins, thanks to the low raw material prices. Will you use that to increase your market share? Or would you continue to focus on profitability? Or will it be somewhere in the middle?

Yes, sometimes some of these questions are probably a little early in the phase of this restarting. But let me say that at this point of time, we would want to do everything not to miss out on any sale opportunity. We will definitely be looking at profitability and definitely be looking at conserving cash, et cetera. However, in the next 15, 20 days or let's say, next 1 month, our entire focus will be on ensuring that we do not lose out any top line opportunity or a sale opportunity. But that does not mean that our eye will be off from the bottom line and we will sacrifice that. It's possible that there may be a bit of a cash outflow. It is possible that there may be a bit of an EBIT reduction or a contraction. But the -- I mean on a -- even on a midterm or a short-term basis, you will not -- you will find no impact on that. I mean, that focus will continue. But as I said, the entire company at the moment is working to ensure that we do not lose out on any sale opportunity. At the same time, most of our customers get started and get back to some kind of normalcy.

Right. Sir, one last question from my side. Since you're conserving the cash, would you again look at any merger opportunities during this year? Or it's a no-go zone for this year?

So I think I've always said that we're always on the lookout of opportunities, which are absolutely synergistic, which work well along with us. I do not assume opportunities to come up in the next 1 month or so. But the -- but with all the shakeup that the coronavirus has created, I think the opportunities will come up. And could be -- we should remain our eyes and ears open for those whenever they come.

Right. Sir, one last question, if I can squeeze it in. You gave a medium-term target opportunity for the U.S. market. How soon can you start shipping them, if at all, you do an agreement with any of those customers?

Again, as I said, it's not tomorrow, but it's not very long away. And I'm giving not a straightforward answer on this because some of it has already, I would say, in -- has the first sale happened? Yes, it has. So how do we see the ramp-up happening? For initial few months, it may be a bit slow, but then the ramp-up would be fast. That's what our feeling is. Just please wait for a while.

The next question is from the line of Paras Nagda from Enam Holdings.

I wanted to know of the INR 500 crores to INR 600 crores sales opportunity in export that you mentioned, how much can be from India specific?

Again, very early times for this kind of question. I've clubbed everything together. If I have to guess, I would say INR 100 crores from here and INR 400 crores from Spain.

Got it. Considering that transportation cost for these kind of bulky items is very, very high, do you think -- as you said, the margins can be slightly lower than third, our domestic margins, is that the right assessment here?

Yes. They are -- I mean, the transportation costs are there, but there are ways to surmount that. For example, I did talk of compressing the foam items, compressing the block or compressing our mattress and transporting it. Plus the manufacturing costs are far lower here compared to the countries that you are exporting to. So I think all put together, the margins being very low is not true. And I think the way they are, whatever our EBITDA percentages are, we would want to drag that down by just increasing the top line.

Got it. And sir, my last question is for Dhruv. Sir, can I know the net debt as of net debt or cash in India and overseas?

Of course, India, there is no debt. And overseas, let me open the balance sheet and tell you.

What will be the net cash in India, sir?

INR 259 crores as of 31st March. Very similar. The borrowings are INR 46 crores. And I think still it will be positive. And if you see the consolidated balance sheet, you have the numbers there. But it will remain positive, only [ loans, only big loans ].

INR 200 crores borrowings overseas?

Come again, please?

I'm saying close to INR 200 crores borrowing in the overseas and close to INR 50 crores odd cash on the net consolidated level?

That's right. It appears right.

The next question is from the line of Hiren Trivedi from Axis Securities.

Sir, you just mentioned a while ago that 80% of the markets have opened and smaller cities have done better. So is it possible to share like how much of your mattress sale is coming from the Tier 2, Tier 3 cities? And what are the plans, if any, for increasing your business in these Tier 2, Tier 3 cities?

So the Tier 2 and Tier 3 cities definitely opened up earlier. And they are opened -- at the moment, they are also open for a larger period of time. It's very difficult to break it up. But I would say that about whatever our levels of business are about, in general times, Rakesh, if I'm not wrong, about 60% business comes from big cities and about 40% comes from smaller cities. Is that correct, approximately?

Yes. Approximately correct, yes.

And the smaller cities, I have opened up earlier and are doing more business. So I think if today's mattress thing was to be broken up, so instead of a 60-40 break up, it may more be the 40-60 breakup. That means 40% is from bigger cities and 60% from the smaller ones here.

Yes. And any plans of further penetration or increasing your presence in these Tier 2 or Tier 3 cities?

Yes, sure. So recognizing that these cities have a nature or a characteristic of their own, which is very different from the bigger cities. So whatever it is, to be done differently. So earlier, we used to sort of paint the entire country with 1 brush. But now we know that the bigger cities behave differently. So there are more inquiries for visits at home in bigger cities than in smaller cities. Smaller cities, people are still clear to move around, et cetera. So our whole approach is a long compilation of all standard -- all procedures we will adopt. But at this point, I'll just say that we have different approaches for growing the businesses there.

The next question is from the line of [ Kedar from Composite BMS ].

My question is specific to the Spain business. So what explains the higher margins that we are seeing in the Spain business at the EBITDA level? Is it because of a more favorable product mix? Or is it that the cost structures are different? Or is it because of utilization going up? So what would explain the higher margins there?

There's 2 things. One is definitely the raw material advantage that we are seeing. From the time that they have become a part of a larger group, they are able to -- or we are to get in Spain, [indiscernible] percent of the European market, and therefore, were insignificant [ market ] I think their position has improved, and they're able to get better raw materials. That's one. And generally, the rates are a little bit lower. And that's the reason for the good margins, which are there.

Can you please let us know what are the utilization levels specific to the Spain market right now?

So Spain is -- the capacity is about 20,000 tonnes a year. They were doing -- when we acquired them, they were doing about [ 11,000 ] tonnes. At the moment, if you take the current run rate, we are almost at the peak level -- capacity level that we are operating. But in this business, capacity -- nameplate capacity has little significance because what is needed, required just to enhance capacity is a few more buildings and a few more curing area and a few more cutting equipment which is -- virtually costs very little. And therefore, as I said, the nameplate capacity is 20,000 tonnes, but to enhance that to 30,000 tonnes is not an issue at all because the land exists, creating a shed and creating some cutting equipment is a small expense.

Okay. Okay. Understood. My second question is on how the advertising spends might actually change going forward as the proportion of revenue you derive from the e-commerce channel actually starts to increase? So is that the right way of looking it? Or is there a better way of looking it?

So I think there is -- definitely has to be a different way of looking at it. We said that what [indiscernible] the brand equity standard exists, et cetera. And right now, as I said, for the next 1 or 2 months, the focus is going to get the sales back and to draw off our long-term strategy as far as advertising for the brand is concerned. And I would say that we should [ be ] looking at it 2 months down the line. And anything which will [indiscernible] which means the plan and all that happening will be in the H2 part of this year. So we'll just wait for a while to answer your question in detail here.

As there are no further questions, I would now like to hand the conference over to the management for closing comments.

Vismaya, thank you very much for holding this conference. And I think you took full [Audio Gap] Saturday, and you extended it by half an hour. So that's [Audio Gap] getting more time just [Technical Difficulty]

Sir, this is the operator. Sir, the audio is breaking, sir, from your line.

Hello. Is it better now?

Yes, sir.

Thank you very much for holding this conference and even on a Saturday, and I think you took full advantage of extending it by 0.5 hour to ensure everybody got their questions in while nobody had the paucity of time. I would close by saying that these are extremely interesting times. This COVID, nobody wanted it. However, it is here. How long it's going to be here, nobody knows, but it has completely reset the world. At least for us, it reset the world. And we have reviewed everything. We have reset everything. And now slowly, we are restarting everything. So in these interesting times, I think when we meet next, it will be a completely new flavor that would have emerged about every aspect of the business. So until that time, I just want to wish you all the well -- all the good that can happen at this time. I wish that none of you or your family members or your friends or people in your circle get infected by this disease. The good hope that I have is that the disease is spreading, but it is getting weaker. And therefore, the number of cases which are sort of getting out of it is increasing. So wishing you all the best, and thank you very much for joining in. And Vismaya, thank you very much for conducting the conference.

Thank you, sir. Thank you, everyone.

Thank you.

Thank you.

Thank you. On behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.