Sheela Foam Limited (SFL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Sheela Form Limited Q1 FY '22 Results Conference Call hosted by Edelweiss Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nihal Mahesh Jham from Edelweiss Securities Limited. Thank you, and over to you, sir.

Yes, sir. Thank you, Sasan. On behalf of Edelweiss, I would like to welcome you all to the Q1 FY '20 earnings 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 and Marketing; Mr. Nikhil Datye, Group CFO; and Mr. [ Devinder Roja ], CFO, Indian Operations. I would now like to hand over the call to the management for their opening remarks. Over to you, sir.

Thank you, Nihal, and thanks a lot for conducting this conference and for arranging this conference. I also want to thank all the participants for this first quarter FY '22 call that we are having. I know that the last call was on [ May ]. And that time, corona was completely at its peak. And now, of course, for the last many, many days and many weeks it has been down, and we are all praying and hoping that this so-called third wave could not come at all. Like always, we begin by our vision statement. Our vision, we will continue to be recognized as a leading organization in quality comfort products while practicing values of integrity, reliability, proactivity and transparency. We do business with a smile for customer delight and a commitment to society and [ pursue quality in this way ]. So my first comment is that the world is really moving so fast that from the time that the quarter closed, through our Board meeting on Saturday and through this investor call, already 45 days have kind of gone by. And in this 45 days, so much has happened. I mean raw material positions have completely changed. Corona acquisitions have completely changed. And one feels that there is -- that one is kind of out of whack. I would say that's why when we begin to compare our results, comparing them on Y-on-Y basis appears as -- extremely far away, though. And we will come to that when we talk about these [ sales ]. In the meantime, let me just say that 75% -- 75 years in the life of the nation may be small, but a lot has happened there, too, and quickly. As the country changes and moves and prepares for the next 25 years, I just wish all of you a very happy Independence Day, which was concluded yesterday. However, the 75th year would be continuing. And we pray that all chronic problems, which have been there in the country for a long time, are resolved as quickly as possible, like [ Ram Mondays ] and Article 370 , et cetera. And the country has all the energy and time and resources to attend to unfortunate things like the pandemic, which is going on or look at the positives like preparing for Olympics and of course, preparing for the for the economic opportunities that are coming back. Just staying on the Olympics, we all are fully aware that there was a good performance by India. And whether it was participation and the results thereof or the Indian hockey team, which after some years -- 40-odd years has got our medal and of course, the gold in athletics that was there for the first time. I just I'm happy to convey to all of you that from our side, we have rewarded [ definitely ] medal winner with our top of the line people -- mattresses have been given to them as an appreciation for what they have done. It's also true that Sheela Foam is in its 50th year, and this is a good time to reflect and prepare for the next 50 years, which we are doing. Unfortunately, we can only communicate through mediums like this. But soon as things settle down and ensure that we will be able to connect up on a face-to-face basis, and at least partake or participate in these celebrations and take all your good wishes and support and encouragement. Now reflecting on the quarter 1 FY '22 result. So there is a bit of dilemma as in said right in the beginning on this silde, y-on-y kind of comparison. If we go back to the quarter 1 of last year, FY 2021, we will see that -- as far as the Indian operations are concerned, almost about 1.5 months was in a complete lockdown position, complete lockdown. And the one operated only about a month, a month or so. And therefore, the sales were on a low level. When we compare that to this time, it's a great jump. It's more than 100% that Sheela has done. So it looks as if one has progressed a lot. And -- but to me, it's a mirage. We have to compare the sales to the adjacent period, which is really the quarter 4 as -- even in quarter 1 '22, there were lockdowns, there were bad periods like April, May, where everybody was running around for medicines and hospital beds and oxygen, et cetera. However, the markets were open. So we were operating. Sales were happening far better than the previous year. However, much lower than quarter 4. In India, we were only about 60% of that phase -- that happened. So historically, one, we feel good about it. However, actually, it was -- the sales should have been far more, completely attributable to corona. However, that will be distorting the results and distorting the prism through which we see that. As far as our raw materials are concerned, they continue to [ trouble us ], these wide fluctuations. There almost changes to the extent of 15% to 20%, and [ Slide 1 ] particular month, it was almost 25% change, and all happening in less than a month's time. Of course, it is primarily on account of availability and depends, of course, on the global shipping that is making these things available. But the global shipping as we all know, is in a complete different area. We experienced that on the input side and the raw material side, and we also experienced that on our export side. And again, as we go back to the root cause of all that, it started with the corona part. Would probably -- [ second would be ] with the corona vanishing. But to my mind, it will take -- even if when corona vanishes, will take at least 5-6 months or maybe -- right up to 12 months to really become stable again. The world is so well connected today, corrected and unstable, that a small disturbance anywhere else in the world just assumes the exponential impact on the other parts of the world. And if there was 1 word to describe our prayers on a daily basis, we yearn for stability. Though fully appreciate that it cannot be like the days before. However, we're also sure that it cannot be what is happening now. It has to go. So while we wait for this so-called stable or stability to kind of come in, we [ aren't ] preparing strong countermeasures for that. And in the next month or 2 months, we should be seeing those impacts of those contents. Reflecting on our subsidiaries, Australia has been stable. And they did not have much of a lockdown. They operated well even in the last full year. However, now they are impacted. So today morning when I had a call, the corona cases going up to about 400 per day, and they have paranoid about that. There are -- when you say you have to close down a unit or you have to include so many tracking of the people that they are quarantining. So all that is beginning to happen in Australia where we thought that it was completely isolated and they have done well to keep themselves away from anything else. Spain, on the other hand, has been working very well. They have been growing and growing even this year, and they have learned to live with corona. So their cases are far more, however, they know how to take care of it and they are quite brave, that I'll say about it. They have, in fact, started vaccinating the -- even the children are [ are on itself ], which is the first. Our third subsidiary, which is the IT initiative, Staqo in India, based out of India, is progressing well, both in the Indian market as well as in the outside market. And mostly in the Indian market, mostly they have been government-based orders, and outside have been on a few exceptional products that we see here. Just to also update you on the environment and social front that we deal with throughout the operations as well as to our foundation, Sleepwell Foundation. So we have contributed with an oxygen plant at 2 places. We are ensuring vaccinations for all our people. And in fact, holding vaccination camps for our people as well as for the [ interland ] or for the people living around this area. And I'm also happy to share with you that the new plastic recycling policy or the plastic usage policy that the government has announced a couple of days back, we are already compliant with that and, in fact, ahead on that. So as we search for this stability and if we don't get it, we will create that and pray that the third wave which is being talked about so much to never come. I would just say thank you once again, and open to questions. Thank you.

[Operator Instructions] First question is from the line of K. SivaKumar from Unifi Capital.

Sir, can you dig deeper on the raw material position currently? And what are you doing to tackle the same? Because we have never seen this kind of a margin in the past. And would you be open to taking price hikes to combat this pressure on the margin?

So thank you, SivaKumar. The raw materials are fluctuating. Look, what we -- and they are fluctuating based on availability issue. What we have definitely been able to do is to ensure that we don't run out of them and availability has -- we maintain that. However, on the pricing front, we have to take those fluctuations. Going forward, what do we see there? What do we think it's going to be like that? I think it's going to fluctuate around for the next couple of months for sure. The availability we will ensure. Impact on the margins, you are right that they are there. And one thing that we must appreciate is that the cost of the fluctuations and be out of sync with these steps that we take and the impact that we see in the market. For a particular period, the margins may look satisfactory, for another period they may look terrible and another period they may look poor. So there is this part that is happening. There is a lag behind that. However, as I mentioned earlier, we are taking countermeasures to get out of this [ talk that is first ] of all saying that this is a temporary phenomena and it is kind of going away and all that. I think we're reasonably convinced that is not going to go away. And even if it is going to die down, it will be over a period of time. And therefore, these countermeasures are being taken, which is -- I can only talk in very broad terms at this point of time. One, of course, is on the storage part. So I'm sure that we don't need to compromise on prices because of availability, and we don't need to pay more. The second one is, of course, on the selling side part of it. I'm going to leave it at that. But I just want to assure you that we are taking the countermeasures and they will be in place.

All right, sir. Sir, but the treated polyol, there was a one-off thing that was what the general perception was that polyol has never been a problem in the past. Has treated polyol cooled off a bit in [ TDI ]?

So you're right, Siva. During my entire tenure in this industry, I have never ever seen polyol, first of all, fluctuate like this? And second, to be actually way above TDI. General principle over the long periods of, let's say, if we look at the last 30 years, or 50 years, general principles have been that TDI is twice the price of polyol. But this is the first time that polyol has even crossed TDI. It's primarily linked to, let's say -- and one of the chemicals that is used to manufacture polyol, which is propylene oxide is a very hazardous material. And it's -- transporting of that is -- global transporting of that has come under strong -- because of the shipping problem that is there. And this propylene oxide is a gas at normal temperature pressure, has to be pressurized into pressure vessels and then transported. And that has come under that. That's the reason for that. The capacity, if you look at a 30,000-foot view, the capacity is perfect. There is enough capacity for the total consumption in the world. And it is just the availability which is creating this. And polyol is primarily on that account. So we see this continuing. Of course, this is the -- it cannot because -- I mean, the very cost of it and -- is far, far lower than TDI there.

[Operator Instructions] The next question is from the line of Vandna Soni from SBICAP Securities.

You mentioned the plastic policy announced by the government recently. Just wanted to understand what exactly is this policy? What have we done to be compliant? And are we ahead of peers on this? Do we have any advantage over peers on plastic policy due to this plastic policy?

Number one, as far as the plastic policy is concerned, it is primarily based on the thickness of plastics, which can be used for packaging purposes, that there is a minimum level and that minimum level will keep changing over the years to go right up to, I think, it is 70 microns that we go to. That's one. The second one is that wherever there are one-usage plastic items, like cups or phones and stuff like that, they will be banned over the period. We don't need to worry about that part. On the packaging part, we are way ahead [ as leaders]. So currently, I think the law is 20 microns. We are way ahead of that. And -- or is it 50 microns? But we are way ahead of that. The second part on the policy where I say that we have been ahead is that all our packaging materials are in the category of recyclable products. Most mattresses are packed in PBC, which is -- which may possibly give some little more luster to it, et cetera. But it's not as easily recyclable. While our packaging materials are all easily recyclable. So that's why I say that we are -- and we are different from the other parts of the industry on that part. That's why I see that we are ahead of the plastic policy.

My second question is on paying margin. It's down significantly. So what are the reasons behind the same margin going down on Y-on-Y basis or quarterly basis?

So look, as I said, it's the sales part of it, which is the major culprit. And as I was mentioning that on a Y-on-Y basis, the sales appear have grown a lot, but that's a mirage. This is where -- nowhere compared to [ the activity of ] quarter 4 of last year. So primarily, it's on that. However, there are a few other things that have happened this time. The raw material prices have been going up or the impact of that has been going up. And to even achieve these kind of things, we had to do far more sales expenses to ensure that we get a healthy top line.

So earlier you mentioned we are exporting from Spain also. So have we started exporting from Spain? I understand this quarter exposure was impacted, but just wanted to understand what is the content of exports from Spain and India in this quarter?

Tushaar, would you take that question, please?

Yes, sure. So I think from both geographies from India and Spain, we are looking at export as an overall potential. We have just classified what products make more sense to export from Spain and what makes more sense to export from India. Still in a scale-up mode. The gestation period for these customers and orders is usually pretty long, with sampling and testing and then future supply orders. But a significant ramp-up in terms of visibility of orders is expected starting this month, August, and then ramping up all the way until December. But I don't want to mention any exact numbers. We can talk about that offline. But it will be a fairly significant number by December. But the next step jump is happening now as we speak.

Can you also give the numbers for the last quarter? And whatever, small or big, but exports have started from Spain and have started to be posted .

Yes. Well, they started from both. They started from both geographies, and I think the last quarter [ end ]. Yes, if I'm not incorrect, I'll just pull that number out. But last quarter, overall would be around INR 15 crores to INR 17 crores.

[Operator Instructions] The next question is from the line of Binoy Jariwala from Sunidhi Securities & Finance.

Rahul, I just wanted to understand the portfolio of products that you offer on the mattress side. And what is the price range, from where does it start? I mean how much -- so on the premium side, what range do we cover?

Rakesh, do you want to answer that?

Yes, I can do that. So the portfolio starts from as low as -- I'm talking about a double-sized mattress, which is 6 feet by 6 feet. It could start from as low as, say, INR 5,000, and it will go up to INR 1 lakh plus.

And I believe this INR 1 lakh plus would be made to order mattress, is that right?

So mostly, yes, because they will follow more direct-to-dealer kind of model because they are not typically stocked at the distributor end or the dealer end. So though they are at display at our showrooms. There at the presentation it brings to the consumer and once it's settled, then it is shipped to the consumer.

And the INR 5,000 markers that is starting range, am I correct that this would be the Starlite range or this is for the Sleepwell range that you're talking of?

So Starlite range is where we distribute Starlite in Feather Foam in the MDUs. And as it reduces in [ foam bed ] all these products are Sleepwell. So I was talking about Sleepwell products. We will have -- the showrooms are catering to both low, mid, upper mid, high kind of customers. So these products are available in Sleepwell also.

Right. And Starlite range would start from and go up to?

So Starlite range would start from maybe about INR 4,000 and would go up to about INR 8,000, INR 9,000. So we also have a Feather Foam range there, which is an all-foam mattress. So both Starlite and Sheela Foam [ Infinity ], they would start somewhere from INR 4,000 and will go up to about INR 20,000 lakhs. And these products are primarily for the India channel.

Understood. Understood. And this, you said INR 4,000 to INR 20,000. Is the range for a double-sized mattress, right?

Correct.

Okay. Now on -- a bit more on this. Do you see -- are there any portfolio gaps in terms of pricing that you see within our portfolio? Although does our portfolio straddle across the pricing parameter, let's say, from INR 5, INR 10, INR 15, INR 20, INR 30, INR 50 and INR 1 lakh plus. So are there any portfolio gaps do you see? Or do you think we have a fairly wide portfolio?

So by and large, I mean, at a lower price point, the gap between 2 products is smaller. And as you go up from INR 20,000 that the gaps are larger. And there they are sold more on technology and more on the key appearance, thickness of the mattress, comfort levels. So as such, I don't see a gap right now, but can we also keep reshaping or upgrading the products based on their proposition, newer technology, newer configurations, new optics. So as such, there are no gaps. But it is a continual process where we keep replacing the products at different price points.

Understood. Understood. As a pricing policy on the mattress side of the business, is it that we have a policy that every year, we typically, irrespective of price fluctuation and notwithstanding the current raw material pricing scenario, that every year, we typically kick in a particular percentage of price increases? Do we have any policy of that? Or it's more RM-oriented?

So on the...

Yes, I'll take your question. So on a -- we are saying not of times when there is these wide fluctuations happening, we're not talking of those times. We are talking of standard and [ price inflected pre-2019 ]. That time, we had 2 times in a year, then we would review the prices, 1st of April and 1st of October. And whatever was impacts of inflation, those would be [ brought in ] and that's how it works. Right now it is, of course, [ predicted at ] any time.

And all this is a -- typical price revision would be in what range?

A typical price -- a typical means this is not typical times, and I keep repeating that. I mean, generally...

Under steady state conditions.

3% to 5% every time it is deduced.

Okay. Okay. And how does this pricing work on the B2B side of the business where you're dealing with automotive customers? I understand in the past you've alluded that it's a cost-plus model. But what is the time lag there before we can pass on the RM fluctuation?

So B2B has a very wide range of products and by range of segment. So there is the shoe industry and there's the auto industry, and there is the lingerie industry and there is the sound adopter industry, et cetera. Each industry has its own ways of handling step changes. And even within one industry, there are 2 different methods. The simplest, of course, is where we have a rise and fall clause that says if raw material rises, the cost [ add-on ]. If it falls, we pass it on and there is a formula for that. And most of the automobile industry, they would be doing that. Then there are areas which is as the shoe industry. It may depend a little bit on the on the competition, it may depend on some changes that may have had there, et cetera. And the rise and fall is not -- because the industry itself is not so structured and so formal that you can have such kind of clauses. So it depends on the B2B changes, it depends on the segment. But generally, the rise and fall catches up, there are lags which are short or sometimes the lags are higher.

Thank you. Mr. Jariwala, may we request that you return to the question queue for follow-up questions. The next question is from the line of Ritesh Shah from Investec.

A couple of questions. First is, can you elaborate more on the export opportunity which is there for the company, both from sales out of India as well as other overseas factories?

Yes. Tushaar, you want to take that question? Okay. I don't know, [indiscernible]. Anyway, the export opportunity has completely surfaced after the China-USA pact that has come about. There has -- and there were these antidumping levy of duties on stuff coming in from there. The Chinese did some other ways of reaching out, which was to different countries like Cambodia, like Laos and Malaysia, Indonesia, et cetera, even going right up to Europe and going up to even purchasing or buying manufacturing industries in the U.S. However, I think they are -- the American government is now getting smarter on that and slowly trying to block all those areas to, of course, duties and [ duty subject ]. The opportunity that has arisen for India in this process, I think the Indian industry has been caught a little -- caught napping, I would say. The opportunity is big. The time frame for achieving it is small. And during that period, and we have to ensure that the raw material prices are -- remain okay. And above all, shipping out of containers. Those are the big challenges which are there. But just [ going strict ], the question that you asked how big is the opportunity, I can only say that currently what the business is, it can be doubled. If we are -- as it may be the leaning, the turning of the cost curve as a company, for the country and the ensuing logistics and, et cetera, et cetera, that [ we chair ], we could easily double our top line.

That's useful, sir. Sir, just a follow-up here. What would the leaning sort of cost curve of the company, like how is the company positioned on cost curve? And secondly, what implication would it have on the working capital?

So let me answer the second question. On the working capital, there is not going to be any impact at all, at least not for us as a company. We do have reasonable results, number one. Number two, the availability of finances is there. And above all, the export people or our customers outside that we have dealt with, the money comes in along with the order or within 30 days. So there is no issue on the working capital part. What was your first question? Could you just repeat that please?

What is the positioning of the company when it comes to the cost curve? So one is the duties, which are there in the currently held Indian companies. But when it comes to purely cost positioning, are we at par? Or are there other regions like Vietnam this can actually compete for this export opportunity?

So, as we said, we are marginally more expensive than Vietnam, just taking an example from Southeast Asia. We are marginally more expensive. But I mean I just don't tire myself in talking about the oscillations or the fluctuations in the raw materials which are happening at this point of time, that this comparison becomes very difficult to do because the fluctuations are different at different places. However, assuming things are steady, we are only very marginally higher than Vietnam or Southeast Asia. The antidumping duties, if we put them coming from a Chinese supplier, we would be better. And in any case, the American customers are looking for developing large alternatives. So they are also ready to pay a little more.

That's very useful, sir. Sir, just my second question is, I wanted to understand, are you happy with the growth rates that the company has been doing over the last 2 to 3 years? What I'm trying to gain is your reflection upon when you look at 3 segments, so low, mid and premium. The growth rates that each of the segment has given you, are you happy with that? And if you can just put it in convention how the competitive intensity is for the 3 buckets, it will be very useful, sir.

Ritesh, happy with the growth rate -- always unhappy. Dissatisfied, always unhappy. There is undoubtedly in the last 2 years, when the corona impact has come in, there is a great pressure on the prices, the average selling prices will be going down. And therefore, the effort of our team is always to keep pulling them up. However, the impact does take place. So whether it is the [ power light ] instead of [ foam door ] or it is the lower end of premium part, they tend to sell quicker and easier. We would be happier if the average selling price was at least 10% to 15% higher than what it once was, what it is now. And our efforts are always in that direction.