Sheela Foam Limited (SFL) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Q3 FY '23 Results Conference Call of Sheela Foam Limited hosted by Emkay Global Financial Services. We have with us today Mr. Rahul Gautam, Managing Director; Mr. Rakesh Chahar, Whole-Time Director; Mr. Tushaar Gautam, Whole-Time Director and Chief Executive Officer, India Business; and Mr. Davinder Ahuja, Group Finance Controller. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Ms. Bhavika Choudhary from Emkay Global Financial Services. Thank you. Over to you, ma'am.

Thank you. Good afternoon, everyone. We would like to welcome the management and thank them for this opportunity. I shall now hand over the call to the management for the opening remarks. Over to you, gentlemen.

Thank you, Bhavika. Am I audible?

Yes, sir.

Thank you, Bhavika once again. And thank you Emkay Global Financial Services for hosting this earnings call, and a very good afternoon to everyone joining us today. It is my pleasure to welcome you all to this conference call for Q3 and the 9 months ended of this year, this financial year FY '23. Let me just begin with -- by saying that both FY '22 and FY '23 were full of extreme turmoils. We know what happened last year. We closed down and then reopening up. In such conditions and such varying conditions actually, the corresponding quarter comparisons become very distorted. The 9 months to 9 months, this being a little bit longer period, is a steady reflection of the performance. I'm happy to share that your company has registered a growth albeit a small percentage only, and that's true primarily on account of retail inflation. I'm also satisfied to share with you that in spite of continuing fluctuations in raw materials, we have seen sustained expansion in gross margins. However, at the EBITDA level, the numbers show a top 10 percentile performance. And this is primarily on account of some expenses which can be counted as one-off, however, have to be adjusted to the expense side according to the index. There was an increased advertisement to restart post [indiscernible] or post-COVID period. There were some exploratory M&A expenses, which are again one-off. And however, as for any index, they have to be accounted for. And there was also some noncash mark-to-market ForEx losses, which are clearly one-off and also those when they are noncash. The account for all this, we would see that we are in reasonably about the previous period. The COVID period has also put a stop to all kinds of market surveys, researches, et cetera. As soon as it got over, the industry -- we started the process, and the findings were very encouraging. The shift from unorganized to organized continues, and this was after -- this research was after the last 2.5 years, and this is very encouraging. Second, the market share of your company, Sleepwell brand and the other brands, considerably increased and it further consolidates its leadership position. I'm also happy to share that the subsidiaries of the company in Australia and Spain are continuously increasing their market share as they grow. Both have different realities, however, they are performing well. Both have expansion plan and projects which will come onstream by the middle of this year, and this will further strengthen, add their capacities and strengthen their position as far as those markets are concerned. We also recognize that Sheela Foam is not only an economic organization but also a social organism, and sustainability is of utmost important. I'm also happy to share with you that we are on track to with our ESG, our sustainability programs and our BRSR report is under preparation for this year. With this, I hand over to Bhavika and we will be happy to answer the questions that make the day. Thank you.

[Operator Instructions] The first question is from the line of Nihal Mahesh Jham from Nuvama.

My first question was, sir, you alluded that there was a base impact because of COVID last year. But if you compare the mattress volume even to pre-COVID, there is a slight fall which has happened. So just wanted to understand, this is purely because of the current sentiment or there has been a shift in demand between quarters because of certain mattress -related [indiscernible] Any other aspects that you may want to highlight?

I must confess that the voice levels which are coming in are rather low, so let's just repeat the question. You're saying the mattress volumes are lower, and the question is that is it because of the market sentiments or is it because of the shift in the consumers. Is that correct?

Yes. Consumer sentiment over -- generally, there has been a shift in the volume that's also seen between Q3 and Q4, if there is any element of that element? Because I'm comparing your volumes to pre-COVID market from last year. You highlighted maybe there was a COVID-based impact. So just comparing it from that perspective.

So Nihal, and I'm not [indiscernible] the audio is not so clear. However, let me just say that first there is a little bit of a drop in the mattress volumes as far as we are concerned. However, when we compare it to the kind of service that, et cetera, that have been done, it appears that there is some changes in the market as far as the size of the market is concerned. But this is purely temporary, purely on account of inflation. If there is any aberration which [indiscernible] apparent preparation that is pending there, it's only temporary, and it will shift [indiscernible] because the trends are very clear in the research.

Understood. Sir, if I would ask that as the trends seen in the month of Jan improved, or currently sensing the uncertainty first. If you could give us some sense of that?

So we have -- I don't know how much can I say, but they have drastically improved. And then it's -- albeit the month of Jan is just over, where the situation has considerably improved.

Sir, my last question was on the gross margin side. You highlighted that there has been a significant reduction in both PDI, specifically in [indiscernible]. So what proportion of the old inventories that you end up using this quarter, and how much of an impact that had in terms of the limitation in the gross margin improvement?

So I think I mentioned that even in the first quarter that's gone by, the gross margin has definitely improved. However, when we come down to the EBITDA level, there is a bit of a drop, and this is on account of raw materials fluctuating, however moving slightly downwards. When we come on back as we move forward, the same trend is continuing. And I would say that even if we account for the opening stocks that we have, there would be a positive impact as far as Q4 is concerned.

Just to clarify, so the current gross margin in a way more or less reflect our current -- the current pricing in both raw materials?

That's right.

[Operator Instructions] The next question is from the line of Ritesh Shah, an individual investor.

This is Ritesh from Investec, not an individual investor. Sir, a couple of questions. Sir, first is, if you can descale, what is the strategy to recoup volumes? So basically, what is the end customer or the end channel that we are looking at basically to increase volumes? That's one. And what I'm referring to here is something beyond EBOs and MBOs that you are already doing. That's the first question. So second question is on update on the expansion plan, along with the time lines for Jabalpur, Spain and Australia. You did indicate in the middle of this year, but some specifics would help. Third question is on inorganic growth. Basically, what's the status? First, sir, on the growth engine, and it has 4 buckets, mattress for every Indian, the exports run rate, railways current run rate and online channel, the current run rate. And I have a first question, which is on new initiatives, so would we get sir if you could please help with this?

Ritesh. You've gone through the entire portfolio that we have, but let me first begin with your first question, and that is on the volumes part of it. I just want to say that Sleepwell, we have been operating through the EBOs and the footfalls, et cetera, have been challenging as far as the recent part and parcel is concerned. We are well entrenched on that. Footfalls, as I said, if I look at January, have begun to increase. That will automatically increase the volumes. There is an expansion plan for the EBOs, and that's almost about 400 to 500 extra outlets for the year, and that's also on track. I must also add that, of course, Sleepwell was not selling through the MBOs, which are also continued to be in large number. We address those markets via our other brand, which is Feather Foam and Starlite. Now that we have reached out to -- or spread out to all of them, our real good push as far as MBOs is going to happen. And we expect that the first initiative of expanding EBOs and putting through the MBOs, both will increase our volumes and that's our strategy for that. As far as Australia and Spain is concerned, so let me take Australia first. Australia has already been doing -- has been having almost a 10%, 20% increase, both in its volumes as well as its in document. And the reason for that, as we see, people spending more and more as far as home improvement, sights are concerned. Now we expected that COVID would finish and this will also slow down, but it has not because people are not learning so much, people have money in their pocket and people want to. Besides this, it's also the imports that Australia was having. And with the sentiments like Australian made, et cetera, those imports have been impacted. Especially imports from China, and there were also some imports from Europe. And we see that as a very good sign, and in spite of a secure market, this expansion will continue to grow or this sentiments will continue to grow. On our plant, which is being set up in the -- the second foaming plant which is being set up in Adelaide, that has already been installed and it will be commissioned by the first week of March. And we will start then getting it more aggressive as far as the market share is concerned. And we believe that there is a lot of imports and other things, which can be sort of being catered by us, and therefore, increase our presence. Spain, I have said this many times before, we are a very small part of that large market, only 1%. And therefore, that even though the European market slumped by almost 25%, 30% during the Ukraine war or continuing even after the Ukraine war. In our company, we see just a 10% drop, which has also from January onwards begun to pick up. In fact, the entire order books in January and February were completely full and filled up, and in February, continue to be filled up. We have expansion project there where the current capacity will be increased. And so today, what we are doing is about 12,000 to 13,000 tonnes per annum. This will go up to about 17,000 tonnes per annum. And again, because we are a small plant, we expect that all this will be consumed market. Returning back to India, you have also said about the inorganic part of it. So I think the explorations continue. Some encouraging, but eventually, these things happen when they have to happen. But I can only say that the results are encouraging. On the initiative, we're still upon pursuing right mattress for every Indian. Again, we have started to receive the machinery, which was -- which is delayed on account of the war, and before that, on account of COVID. We started receiving that. We expect somewhere end of this year, that project in Jabalpur to begin to get installed and then commissioned soon thereafter. Railways has been good progress. I think railways have also now clearly stated that the product that we supply them is the preferred product for making the coaches, and the quantum is increasing month after month. I don't know. You have asked many questions, Ritesh.

Sir, exports was the other one, and the online channel, and sir, if you can please help us. The run rate or something for exports, railways and omnichannel basically, the online channel?

So run rate on railways is about INR 8 crores to INR 10 crores per month at the moment. And exports, I would say that there has been up and down. A couple of reasons we have talked about in the previous meetings. One was that the infrastructure coming up to speed as far as the supply of orders was concerned. And the second part is that U.S., which is the largest recipient of these exports, has also been going through its own inflation and a bit of recession that's been there. Recently, there has been the biggest exhibition in the U.S. For mattresses, it was in Las Vegas. Our people were there, and there is -- I mean, at the moment I can say the sentiments are encouraging. They are committed to looking at or creating a source besides China. And in India, we would be the preferred supplier. However, there is not too much to talk about it, let's say, in the last quarter or in this quarter, but I think the India would finish at about [ INR 40 crores ] or so. Definitely, a little dissatisfying, it should have been more than [ INR 40 crores ] and in coming years, I think you should see a jump up to about [ INR 100 crores ]. Online, we are treading along or trudging along at a reasonable pace. I think the year should end at about what, Rakesh-ji? No, online.

Online should be [indiscernible].

So online should also cross INR 100 crores. However, as I said, we also changed our strategy a little bit when we were doing it with a different brand. And now we're doing it with Sleepwell, and we have found a way to reduce or almost remove any kind of friction between online and offline, and that is picking up. By this year, we should close at about INR 100 crores or over INR 100 crores, and the next year, we would be at least 50% to 60% more than that.

New initiatives foray into living room, I'm looking at sofa, the revenue. That was the last 1, and probably I'll jump back in the queue again with -- I have some secondary questions, sir.

Maybe I will take that question on sofas. I presume you would have asked many questions for many other pieces, but -- so that's all right. I would have referred. So the sofas, we are -- the manufacturing of sofas, I would be able to talk on this better the next time. Some initiatives on -- but as I said, that it will be better if I talk next time on it. However, on the refurbishment of sofas, which continues to be a big business, is fragmented business. It is a very unorganized business, and our initiative to put all that together is now taking shape. I mean, at the moment, I'll share that a pilot is on where the proposal is that we -- as we speak, we'll pick your sofa up and do it, refurbish it and return it back in 3 to 4 days' time.

The next question is from the line of [ Forum Gosar ], an individual investor.

I just have 1 question. We have seen an increase in revenue from the Technical Foam business. So I just want to understand from where the demand is coming from? Like, did we onboard any new plans, sir?

Can I just have your name once again, please?

[ Forum ].

Okay. So the Technical Foam, the primary expansion in order has come from the auto sector. And we all know that the auto sector has been, for the last couple of months, has been doing extremely well or continues to do well and we have almost about 60% to 70%, 75% share in that market. And the growth in the technical side, and we are expecting that growth will continue at that expansion.

We have the next question from the line of Siddarth, an individual investor.

So actually, I just wanted to ask you that last time you had mentioned that our new management's focus is to increase the productivity of the outlets. So I mean, have we been successful in increasing the footfall? And if not, then when can we expect that to start?

Yes, our efforts are beginning to show some results. And the first, the productivity has been increased on 2 actions. One is to increase the footfalls coming into the showrooms, and the second is to increase the conversion of whatever is kind of convenient. Second thing, first, conversion. We have taken the help of a company called Quest and got some sales advisers from them, which have been placed at almost about 30%, 35% of the stores, and they are training the people as well as helping to convert whoever is coming in. And that conversion, we can see that the percentage is increasing month-on-month basis. . As far as footfalls are concerned, the only way is promotions, advertisements, BTL, ATL activities. And you would have noticed that recently, we have begun advertising on the television and even at the local level, and we believe that the footfalls will increase. And of course, as I already mentioned to Ritesh earlier, we are expanding our -- the number of showrooms, which definitely will increase the total number of footfalls which we cater to.

The next question is from the line of Ritesh Shah, an individual investor.

Sir, just wanted to understand the market sizing. So when we are looking at the INR 15,000 crores, INR 20,000 crores of total market, I appreciate what you're doing on the EBOs and MBOs. But how about the market basically, say, for the likes of Pepperfry, IKEA, HomeLane, I think that's also incrementally a trend. So how do we approach basically tapping this particular market, or are we already there? And if you're already there, how does the economics work? So that's the first question.

So do you want to complete your -- the questions, or should I?

I'll just like your answer here, sir.

Okay. So Ritesh, as I am understanding the question, you're saying that the likes of IKEA and Pepperfry which are primarily furniture or furnishing outlets, that they do cater to mattresses and how are we making our presence felt in that segment. So let me just say that we have already begun looking at what we call as furniture-first stores, and these are stores which are not necessarily exclusive to our mattress stores. However, do [ furniture-first ] and consequently sell mattresses along with the beds this year. And that expansion has already begun. We are present in -- how many markets would we be present at the moment?

More than [indiscernible]

So about 2,000, we have already got our presence. But as I said, those are not exclusive. And therefore, that is done under the Feather Foam brand, which is endorsed by Sleepwell, and that's been regionally well accepted. So I'm -- just to sum up, our response to the IKEAs and the Pepperfries and all that is to go and be present in the furniture-first stores.

Sir, my question was basically, if you look at the mobile population of tier 1, tier 2, I think probably the population which goes to individual stores, it might be reducing. I'm just -- in a hypothetical scenario, and there will be more and more people who might be going to HomeLane, Pepperfry, IKEA than they would just go to buy a curtain or something else, and they are buying a mattress. So from a sample sizing standpoint, if you have to look at the marketplace, so is furniture-first the solution that we were looking at, or are we looking at something beyond that to tap the larger marketplace?

So I agree with you that there are some stores which are complete furnishing stores. I agree with you that there is a mobile population which may be very short on time and would not go from a store to store and would want to have a one-stop place and do that. But however, those people, we would be attracting them maybe more with Sleepwell at home or through the e-commerce platform that we are operating on. And I would say that -- I mean, for us really to get into a full-fledged furnishing store at the moment is not [ under that ].

Sure, sir. And sir, my second question was specifically on the EPE foam or mattress for every Indian, what we have indicated. I just wanted to say, is it for the first time that it's happening something of this sort in India, or has it been tried by any of our peers in the past?

No, no. I don't know, you're connecting the EPT with that mattress for every Indian. So EPE is a completely different product for -- which is different from polyurethane foams. Do we do some EPE stuff? Yes, we do. Is it cheaper? It is. However, the availability part of it is still a challenge. It's been extremely light material to be transported all over the place. Our mattress for every Indian foray is primarily to look at people who are not using any kind of mattresses, modern mattresses at the moment. They may be using cotton mattresses and maybe using dharis, chetais, et cetera, and there are 2 challenges to it. One is to make the product affordable for them. The second thing is to make it available to them to where they are, whether in a therapy block or a structure of villages that they are. So our project, which is coming up in Jabalpur, the new technology that we talk about, will help us in both these aspects of affordability and as well as accessibility or making it available to those people. Has it been done before? To the best of my knowledge, no. And generally, it's just -- the way that it happens that when you have a new product and new mattress coming up, it goes to the big towns. Then it starts entering down to Tier 2, Tier 3, Tier 4, Tier 5 kind of levels. Here, we are just trying to go the other way around it, which is start from the bottom most area and try to work upwards, and hopefully, fills the gap here.

Right. Sir, possible -- so you indicated it's new foam, right, for mattress for every Indian, that's what we're looking at?

Yes. It could possibly have 1 or 2 other materials, for example. But primarily, it is polyurethane foam with the new technology that we would be making.

Okay and sir, any timelines over here? I presume it's going to be Jabalpur expansion.

So, Ritesh, I said that right in the beginning, this project got delayed on account of COVID and it got delayed out of the Ukraine war because the steel, et cetera, needed to come from there. Our supplier of this technology is based in U.K. but we have begun receiving parts of the machine. We expected to start getting installed anytime by the end of this year.