Sheela Foam Limited (SFL) Earnings Call Transcript & Summary

Good morning, everyone. It's a pleasure to host the Q2 FY '21 conference call of Sheela Foam Limited. We have with us today from the management Mr. Rahul Gautam, Managing Director; Mr. Rakesh Chahar, Director; Mr. Tushaar Gautam, Director; and Mr. Dhruv Mathur, Chief Financial Officer. With that, I pass the call over to the management for the opening comments. Over to you, sir.

Thank you, Vismaya. Thank you very much for hosting this call, and I really welcome all the participants who are there. I understand that there is a large number of you there. I know that we continue to be in these crazy and endless corona times, but I think the whole country in general, and we, in particular, have found our ways to go around it and continue with the economic activity. The best of my understanding and knowledge and specifically to our industry, most of the markets are open and completely approachable, and there is normal activity that is going on there. I know that there is a talk of a second wave and third wave that is happening across the world. In some cases, it's already peaking in those areas. In India, we -- at least in the northern part of India, we do look at winters coming in, and somewhere there is a belief that in winter, the virus grows or expands better. It may be because of people clustered together into rooms or the temperatures are more suitable for it. But whatever may be the reason, we are well prepared for it, at least in the company. I can assure you that both at the manufacturing side, as well as our exclusive outlets, we have taken out special initiatives to ensure that we do not support the spread of virus. I'm also aware, and this is something which is redeeming, is that the vaccine appears to be in sight. There are a couple of announcements made that by the end of this year or by the early part of next year, the vaccine will be out in the market. I know that the next level of challenges begin which is distributing it, reaching it out, the cold chain to be created, et cetera. I would also like to share with you the 2 geographies that we are present in and how is corona faring there. So Australia is relatively mild. They have 8 to 10 cases coming in every day, and they have completely sort of insulated themselves from the world. And so that's very well in control. At no point of time, did the factories close or the markets close, but the life within the continent is normal. Spain, on the other hand, is not that good. It's part of the European Union. It has just experienced a lot of visitors which who come to Spain for the summer holidays. And the culture there is a little more loose or weak compared to the more disciplined countries. People are far more tactile and therefore, the corona is spreading good and fast. And now I understand that there is a curfew, which is in most of the cities and all the intercity travels are bad. But we are fortunate to be in a very small city called Yecla, and that city is well in control and everybody is good and fine on that. This corona, what kind of impact it would have us -- I just want to say that it's not over as yet, and therefore, there is no conclusive thoughts on it. But one thing for sure, the global trade will go down, which means that whether it's the movement of imports or it's a movement of products, they will be lessened because each country has spent a lot of money into job protection, which has created deficits in the countries. And I'm sure that people would like to stay like this for a while and not really that money kind of goal. So that's 1 impact as we see. Another impact at least in our own business is that there is this new concept of bed-in-box where home mattresses are kind of compressed and transported and reach to the areas which saves on transportation costs, as well as it saves on the middle -- the middle channel cost. So they are involved. They used to be about 10%, 15% of, let's say, the U.S. economy. And I understand that now it's gone up to almost 25% of the -- not the economy, the mattress economy. U.S. has been importing a lot of these products from China. And all other areas where the Chinese manufacturers went like Vietnam and Cambodia. However, recently, China has put some kind of restriction -- sorry, U.S. has put some kind of restrictions on these products, and there is an additional dumping duty which has been levied. And therefore, we see that as an opportunity opening up for India. We already have received many inquiries. We are catering to some of them from India as well as from Spain. So that's a good thing that has happened, and we expect that market to grow in the coming times. We continue to have a strict vigil in all our promises. And this, I just want to assure you that even in the coming times when the vaccine is also out, we will continue with the social distancing and with all other kind of protections that is needed so that the factories continue and the exclusive channels continue. We are practicing work from home or a hybrid culture at the moment, which is 3 days from home, 3 days from -- but these are also guidelines or guiding principles We are not fast up on that, and we leave it to the heads of departments. This is just to reconfirm and restate that safety and human safety, personal safety is absolutely up at most in our mind. I just come to the next big one, which is creating a lot of waves in our industry, and that is the raw material prices. So undoubtedly, the raw material prices have shot up. In fact, right now it in the last 3 months have almost doubled. The primary reasons for them is a continuing lazy kind of supply chain. And the belief of the raw material suppliers was that the pickup of the foam industry as well as the mattress industry will not be so quick and so fast. There are also mismatches between the 2 major chemicals across the world and which is a part of the supply chain. But I think it's all beginning to come into some kind of an order. Our understanding is that up to the end of this calendar year, that is up to December, there should be a high price. And then from January, February, it should really start going down. And as you would have seen in our postings that this time it was not TDI, but it was polyol which used to always be reasonably stable, of course, moving in a small brand. And that is that's shot up and it's at the same price as TDI. As a response on our side, we are trying to indigenize We are trying to tell the raw material guys to have packages here, and even discussing with GNFC, which is our local TDI producer, like how do we get -- how can we increase our share with them and to see that we are less and less dependent on this supply chain. One thing which has further happened in the raw material side, and that is that there is a there is an application by the local raw material producers to -- for the levy of an additional dumping duty. That has been contested well at the courts, and at the moment, it is in between the -- or just before the final hearing and the final book that is given. But the government has been constrained to not to issue the notification. So let's see how that. In these uncertain times, the -- our response has been -- or our actions at our end have been just better and tighter management, closer management, more centralized decision-making, continuous contact with both our vendors and our customers. And even at our showrooms, we have been holding webinars and informing them and keeping in contact with them so that this period is not a complete blackout or a washout as far as networking is concerned, the relationship is concerned or net cost or any kind of interactions are concerned. Whatever has been this increase in the prices, we have been able to pass on some, I would say, majority of it. Markets have taken it well. We have also absorbed something. But let me say that these high prices, they tend to have a long-term not so good effect. But fortunately, we all believe that this is going to go away quickly, and it is only a little bit of a blip that is there. We are being old and in this industry have also interacted with our entire supply chain, raw material suppliers, processors, formers, customers, just to say that let this raw material blip kind of pass away. Please absorb whatever you can. And let's ensure that there are no irreversible or permanent impacts happening on account of this sharp increase in raw materials. Coming to our results of the second quarter FY '21, they are better than expectations. Now that all markets are open, all activities are on, we believe that the response from the market has been better than what we thought. On the B2B side, there is a kind of a mixed response. The auto industry has done very well. On the other hand, the shoe industry has been languishing. And I think that is because most people have been spending time that home schools have not opened, plus probably for most of us who has like an impulse purchase and we are holding on to that. Just on the macro numbers, of course, you have received the details, and we would be happy to answer any questions, but on a macro level, on the consolidated side, the total sales have gone up by 22%. A reasonable contribution is also from Spain, which was not there last year. Spain was -- the company was acquired on 14th October, and therefore, any kind of comparisons would begin only from the coming quarter on it. So sales -- total sales going up by 22%, EBITDA also going up to 17.5%. The Indian sales remained reasonably flat, I mean a little bit of a percent, 2% increase, but the EBITDA went up to 14.8%. Australia did extremely well. The top line went up by 20% and the EBITDA has also gone up to 20.44%. Spain, I just said that top line will only come in the coming quarter. That would be additional. But the EBITDA percent was also high at 24%. Some of these EBITDA percentages may appear as a little bit high at this point of time. Of course, we are making all our efforts to put that forward or push that upwards. But the impact is that there is a hard closure to a quarter while the price increases and the raw materials and the stocks and the selling price increases. All these things happen. There is an interplay of all these things, and these things happen at different times, and therefore, there would be an impact, which would be kind of carried forward into the coming -- or the ongoing quarters. We, on our part, have not forgotten the CSR activities. And our foundation continues to work on that. Our contribution to the society as far as quarantine beds and et cetera are concerned, those continue. The webinars on the -- from the foundation on emotional wellness, that continues. And even we have had some online classes more for the lesser fortunate people as well as for areas which are very remote for the northeast part of the country, et cetera. One part before I close and open up for questions, one thing I just want to say on the mattresses, which are our major products, that we believe that mattresses are a nonessential type of a product. But our information from Australia, from Spain and now from India is that people have become more conscious during the corona times of the mattress that they sleep on. Of course, there is a pent-up demand, of course, there is a little more money in the pocket because of not traveling because of not vacationing as is probably in Australia. But the time that has been spent at home, a realization on the home improvement products are on home products like mattresses and sofas and televisions and all that. The consciousness has gone up. And that is good for us and... [Technical Difficulty] corona would also go away quickly, and we are able to handle that. So thank you very much, and we are now open to questions.

We have a first question from the line of [ Naresh Vaswani ] from Sameeksha Capital.

Sir, in your mattress, how much percentage of volumes came from low economy products, which we have [ have ] our light and Feather Foam? And what kind of gross margins will we make in this low-price products versus our premium Sleepwell brand?

Dhruv, can you please take that question of Naresh, please?

Yes. Actually, we are not categorizing it in different kind of categories. We report the consolidated numbers. We were doing that earlier, but that has some impact on our competition. So we can only share the numbers on consolidated basis. Saying that drop of cost on gross margin, the gross margin is higher in Sleepwell. However coming to EBITDA level, the EBITDA levels are almost same in all the categories.

And volume data you don't share?

We don't share on the low price, high price something that we discontinued long back because of our business reasons.

And maybe Dhruv you can just give a general overview on it. I know the specific numbers we don't share, but a general overview of how it has been moving.

So I think there is an increase of low price mattresses. Generally, because the shift is taking place from unorganized to organized. So the movement in terms of volume is more on low-priced products.

[indiscernible].

Your voice is not very clear. Can you repeat your question?

I'm asking do you plan to aggressively market these products versus our premium brand which is there and volumes in market would be much higher than these low-priced products?

We are aggressive in both the segments. I'm just answering that from the market point of view, since there's a shift from unorganized to organized, within our share, the increase in low-priced products is slightly higher. However, we are aggressive in both the areas.

[Operator Instructions] Next question from the line of Nihal Jham from Edelweiss. .

Congratulations to the management for the wonderful performance. Sir, I had 2 questions from my side. First was on the demand recovery. If you remember our last conversation during the Q1 call, we mentioned that in August, I think the recovery was around 80%, 85%. So I just wanted a sense that specifically what has driven such a sharp improvement for the quarter, and I would assume that a lot of it has come in, in September? And how sustainable is this? That's my first question. I'll take the second one after your response.

So yes, you're quite right that the major part of that has come in September. And as I said that very little of it, to my mind, is pent-up demand. More of it is the consciousness which has happened regarding the mattresses, about people sleeping at home, not going out, not traveling, et cetera. And of course, the extra money that they had in pocket. And probably the last contributor to this would be the shift from the unorganized to the organized so we have been talking about this unorganized to organized from the time of demonetization and GST, et cetera. But here, it is just the feeling that people are having that I must get a better product. I must get a product which is delivering more benefits which are being guaranteed, which is from a good brand, et cetera. So I think that shift is happening. Clearly, it is happening. And therefore, on the sustainability part, I would say that most of it is absolutely sustainable. I see that happening in Australia, which is a completely mature market. And probably a saturated market, but they are, too, because of the consciousness that has come in while staying at home, the sale of mattresses et cetera have gone up here.

Just a follow-up on that, sir. So is the sales at end retail, not just the distributor level, similar in September to what we did at the company level or there is some kind of stock building which happens because of limited stock in business?

So Nihal, for us and our products, whether it is foam or it is mattresses, they're all voluminous products. Plus, please also accept that we have a lot of diversity as far as the sizes are concerned. And therefore, for anybody, of course, there is still a little bit of stocking that can happen. But beyond a certain limit, they can't, they can't stop. And I would agree with you that during the period and the time that we were not manufacturing, whatever bonds, some kind of stocks in the channel and the markets may not have opened, but they were slowly depleting. And therefore, there is a bit of stock filling that may have happened. But in our case, beyond a certain level, it just cannot. And we do have systems of measuring the sales from the distributor -- from the company to the distributor to the primary sales, then the secondary which is distributed to the dealer and also the dealer's tertiary sales. And there is a positive movement in all of that. They are comparable.

Last question from my side, sir, I think you've been pretty accurate in terms of your raw material price outlook earlier also. So in the opening remarks, you already mention that until December, you expect prices to be high. But if I were to ask you what would be the idle sustainable level both for a TDI and polyol? And a follow-up to that would be that how are you planning to negate that in the longer term? And that would be it from my side.

So listen, the raw material prices that we had many months back, let's say, before the lockdown was also not sustainable. And the what is today is also not sustainable. The correct -- I won't say correct, because there's nothing like that, but let's say the band that TDI should be where it is beneficial to the producers to produce and for us to consume is 150 to 170 number. So let's take INR 160 a kilo as something which should work. For polyol, it is lower. It should be somewhere around 115, 120 level. 115 would be a good level for the suppliers as well as for the goods consumers. They would be economically viable and that's what it should be.

We have next question from the line of SivaKumar from Unifi Capital.

Sir, the good traction that we got to see in September, has it continued in October? And is the festive season looking really good this time?

Siva, thank you for that question. We may be constrained to give exact numbers or answers though October has finished, but let me say that the good work is continuing, and we are expecting the season to be good.

Sir, and given the current prices of TDI and polyol, is there an immediate factor to a 14% EBITDA margin in Q3? Because you're also taking some [ pricing ] parallel that's why I'm asking this question.

We have taken the...

I think your voice is gone, Rahul.

Dhruv, sorry for that. Dhruv, can you answer that question?

So we -- again, Siva, we can't answer in terms of what is going to happen. But as Rahul has already stated, that we have taken a price increase. And we also realized that this increase in raw material cost is not permanent. And in branded stuff, you cannot reduce the prices. So we are very conscious of this fact. And you can interpret it your way, how the EBITDA will move, but I would say that this will go back to the normal situation once the raw material prices are stabilized.

Sir, last time, you promised to quantify the export opportunity in the Q2 call. Would you be doing it now after the trial shipments that you are done?

So let me just say that it's still very early times here. It's still very early times. The inquiries are there, some 1 or 2 shipments have gone both from India and Spain. It looks very promising. But to try to quantify it, and when I say quantify it, I would probably need to -- I think what you are expecting is some kind of numbers for the January quarter as well as some kind of numbers for '21, '22 year. Give us a little more time on it. I mean it's looking promising, it's gone. It's -- we are getting used to it. From -- I mean why I'm hesitant to speak that there are challenges which keep coming, which you cannot even foresee. For example, today, finding a ship to send is difficult there. I mean India is certainly the availability of containers and ships has gone. So just let all this kind of stabilize a little bit, and I'm sure that you can also foresee that the high raw material prices tend to be a little bit of a -- better. And in the lack of foresight to know when exactly would it go down and when exactly a particular consignment will look. So I think that, that stability come in, but still the whole world is oscillating quite a bit, yes. When there’s stability, we will of course share with you, absolutely, but it looks promising, that's all I can say.

Sir, and some sense on the online channel, how is it faring? Last time, you said we are 2 online, right? So how are we placed now?

Rakesh, can you please take that question?

Yes. So online channel started much earlier than offline. And it is seeing a bigger growth than offline. We are faring well. In fact, we are growing higher than the market growth.

And currently, what is its share, sir, in the overall sales?

So overall share in the macro sales, so it would be close to about maybe about 5%, less than 5% right now. The macro sales to online?

I think in Q1, it was around 4%, right?

Yes. So it is around that. Yes, but looking going forward, I mean, the rate of growth are much stronger than the offline, for sure.

[Operator Instructions] The next question from the line of Manan Shah from Moneybee Investments.

Congratulations for the numbers. Sir, my question is on the raw material side. In a recent interview, we had indicated that TDI prices have moved up from 120 to 200 plus. So I just wanted to know if they have pulled off from then on or they continue to remain elevated. Also as per our understanding, there has been a planned shutdown for TDI in Europe which has led to this sudden surge in prices. So if that understanding is correct, and if we have any indication when that plant is expected to start? And are you facing any supply side issues in respect of TDI?

So you're right that it's 200 plus at the moment. It's actually precisely INR 230 a kilo. But in the initial phases, the way it was rising, that has stalled for the last 2 weeks. And our belief is that it has reached some kind of a national [ topic ] level. The other piece of information that you say about the plant in Europe. So even in the past, I mean, some plants going off, some plants coming in, somebody impacted by maintenance schedules and somebody impacted by a hurricane, et cetera, all this was there. But in cases where there is a short supply, all this gets accentuated or gets bigger than the other or really what it should have been. This is the one that you are referring to is the schedule maintenance, which was probably decided a year earlier and will be over in the next 10 or 15 days Therefore, as a globe, whatever was the installed capacity, let's say, a year back and what it is today, it's not very different. But it's a supply chain issue and a mismatch issue. And until the time that kind of stabilizes, all these small little news will have a lot of impact. But otherwise, if I think it's reached its peak. Maybe another INR 10, INR 15 sometimes, some trader can push that up a little bit. But otherwise, it's history just speaking.

Just a follow-up on that, the maintenance -- the plant closure for maintenance, what capacity would that be? So should the prices correct a bit once that capacity comes online?

So look, that capacity will come online, then some other capacity would be on scheduled maintenance, somewhere, something or the other will happen. But by and large, it's -- as I said, the current capacity, whatever is running and whatever is being consumed is reasonably well matched. It's just the supply chain. And as I said, the mismatch in the supply chain is really the issue here.

So we don't tie not like an issue, right? Because you spoke about increasing our share with GNFC for locally procuring TDI.

That is right. But GNFC also gets a little better on that and they have certain antidumping duties which have been levied. And they also increased the price when the global price increases. Because for them, the opportunity is also then to export. And therefore, it's -- as I said, it's could be -- let's say, the quantum remains constant for us or at least shortages are not there, but the prices are of what would it be if imports happened or what would it be that if they were to export and realize the price.

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

Congratulations on a great set of results. Sir, I have a couple of questions, first one being that we have now this particular quarter have hit the lifetime high margins on a consolidated basis, and the largely contribution is from the international subsidiaries, both Spain and Australia. So first, wanted to know how sustainable are the margins. And I'm not talking about the short term, maybe quarter 2 maybe on a 3- or 4-year basis. I mean, what measures have we taken for hitting these high margins.

So undoubtedly, the majority contribution to the high margins has been, as I said, the interplay between stock and selling price and purchase price and what happens first and what comes later. But to keep increasing the margins on a regular level, that is our endeavor, and let me say this that once margins go up, the benchmark for your changes, for your changes, and for us, it changes. But the current status definitely, I mean, if you were to ask me straight away, is 24% of Spain sustainable. Of course, not. But will it come down to 15 or will it come down to 18, I mean on that part, I cannot say right now. But I can definitely say that those are -- so it's that interplay which is there. And we should -- probably the next quarter will tell us a little more into everything here. We'll have to wait until then.

Sir, just a follow-up on that now. I mean, we are operating the Spain operations now for almost 3 quarters. So if you would like to highlight what cost efficiency measures you would have taken in this while once we have taken over the operations, and how much costs you were able to save on a sustainable basis there?