Sheela Foam Limited (SFL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Sheela Foam's Q4 FY '23 Earnings Conference Call hosted by Investec Capital Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ritesh Shah, Head, Mid-Market Coverage and ESG Investec Capital Services. Thank you, and over to you, sir.

Thanks, Tanvi. We have with us entire Sheela Foam management. We have with us Mr. Rahul Gautam, Chairman and Managing Director; Mr. Rakesh Chahar, Full-time Director; Mr. Nilesh Mazumdar is newly appointed Chief [Audio Gap]. We also have with us, Mr. Amit Gupta who has recently joined and...

Sorry to interrupt you Mr. Shah, we are experiencing audio loss from your connection.

Am I audible now?

Yes. Sir, I would request you to please introduce the management again.

Sure. So we have with us the entire Sheela Foam management. We have with us Mr. Rahul Gautam, Chairman and Managing Director; Mr. Rakesh Chahar, Whole-Time Director; Mr. Nilesh Mazumdar, who joined recently as Chief Executive Officer for the India business. We also have Mr. Amit Gupta, who has recently joined the group as Chief Financial Officer; and we have Mr. Davinder Ahuja, Group Financial Controller. I'll request [indiscernible].

So operator, are you there? I think we're facing some connectivity problems with Ritesh.

Yes. So Mr. Rahul Gautam, I would request you to please proceed.

You can probably request him to use another device.

I will just reconnect the line from Mr. Ritesh Shah. Ladies and gentlemen, we have the line from Mr. Ritesh Shah reconnected.

Thanks, Tanvi. So I'll hand over the call to Mr. Rahul Gautam. Sir, I would request you for initial remarks, post which we'll have a Q&A session. Over to you, sir. Thank you.

Thank you, Ritesh. Thank you, Ritesh. And I must apologize to everyone for the little connectivity problems that we had. So I just want to thank you Investec for holding this call. And on behalf of Sheela Foam for our annual results for FY '22, '23. I welcome you all on, at least in Delhi, is an extremely hot afternoon and I must also say that we are in the middle of May. The earlier part of May was an extremely cool one, yet unusual. But like this inclement weather, the business conditions are also suffering almost long COVID and do not appear to be getting out of it. The macroeconomic average indicators that we see do not tell the entire story. As industry segments each have different performance experiences. For example, we supply to the auto industry, which is doing extremely well. However, as far as consumers are concerned, or the B2C business is concerned for mattresses, they are preferring to postpone their purchases and the footfalls in the stores are extremely low. So I think these unusually different conditions in different parts of the business for different segments of industries is the norm of the day. However, we expect all this to settle down very quickly. And when I was giving you examples of the automobile and the mattress industry, both are, by the way, discretionary products. However, I must also say that there is some kind of stability returning back, and we can experience it starting from the highly volatile raw materials that we use. You are all aware of it. There are 2 major ones, polyol and TDI. And they are now back to some kind of normal levels. And with fingers crossed, appear to be steady at least for the past many weeks. And as you can see from the annual results, the performance has been flat across geographies of India, Australia and Spain. Though the reasons for this flatness in each of these regions -- each of these countries, has been different. In Spain, it is the Ukrainian war, which is impacting. In Australia, there was a second bout of COVID in the earlier part of this year. And India, of course, we are all aware that the uncertainties that kind of prevail. But as the reasons are completely different, the company is also taking steps, which are different in each country. And we feel that sooner rather than later, the economy has to and should look up. For that time, we prepare and ensuring that we do not have any supply constraints then, new plants in India and Australia and a capacity increase of almost 60% in Spain are all in their final periods of closing. And by Q2 or the end of Q2, we should have each one of them ready to deliver as the market demands. Also happy to share that our long and much awaited project ends fine, which is the Mattress For Every Indian has now reached the refining stages and it's ready to be launched. Pilot works have begun, and distribution is soon going to be done. We expect that from Q3 onwards, it should start contributing to the business of the company. As you all know that this is aimed at the low-income consumers and consumers who are at a distance or far away from existing markets or towns. We had our Board meeting -- the final Board meeting yesterday, and the Board of the company continues to be of the view that plowing back the profits is in the best interest of the shareholders. I had already mentioned to you the organic investments that we have done in each geography and share that there are also inorganic opportunities. Those still in work in progress status but are getting nearer to finalization. Last time I had shared with you that Sheela Foam does take its responsibilities CSR and ESG areas seriously. Our first BRSR is ready and I'm happy to share that on a comparison basis, whether with similar industries elsewhere in the world or comparable industries in India, our status and our goals that we take are very good. I will now hand over the mic to Ritesh Bhai for moderating the questions. And me and my team would be happy to take them. Over to you, Ritesh.

Tanvi, I would request you if you could please open up the Q&A queue.

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

The first question was on the mattress business. You did allude to the fact that there is an overall weakness. But just as an observation, if I look at the volumes, they are maybe trending even lower than what they were pre-COVID, whereas we've obviously seen an increase in, I would assume, on the sale of Starlite. So just wanted to understand that is it that the impact on the sleeper brand, which is no premium is much more intense? And if you could just give any comments around that?

Nihal, you'll just have to repeat the last part of your question, please?

Yes. I was saying that the observation was that the volumes were maybe even [Audio Gap] lower than what they were in FY '19 for the same quarter. And is it -- and I know that we've obviously scaled up Feather Foam as a brand. So is it that Sleepwell as a brand has seen a higher contraction versus pre-COVID?

I would say, yes. If you look at Sleepwell by itself, but you must also appreciate that both Feather Foam and Starlite are endorsed by white people. And it is just that we do [indiscernible] which is for catering to the different segments of distribution or different lines, because for Sleepwell, currently we have exclusive distribution. And therefore, it will be a good idea to see -- look at them as consolidated.

Sure. Point taken. The only observation there was that given the channels are very different that we have the EBOs with sales sleepers. So that separately would be as you so said seeing lower footfall and maybe the intensity there would be higher?

So you're quite right on that. The footfall numbers with we measures, all defined have been lower. Now there are a couple of reasons we believe that to be, and we are taking corrective steps. One is definitely an exclusive mattress store that needs some more stuff to attract day-to-day consumer. And the other belief is for the other understanding from the market is that there has been an -- the average selling price -- pressures on the selling price to come down, especially post COVID and during the COVID areas. So the journey that we were in, which is to keep pulling up the Sleepwell price and keep adding value and move ahead, but COVID has done this and we are reviewing the entire portfolio and we'll be taking our actions.

That is helpful. I had 2 other accounting-related questions. The first is on the reclassification that we have done, while I do see the note, maybe incremental details on that. I don't know if I missed, but what exactly have we reclassified both on revenue and expense to see this difference that has happened?

See, the first thing is, of course, the reclassification has no impact on the profitability or [indiscernible]. These are 2 expenses, which in our belief till now, were supposed to be as expenses, but our auditors felt that the interpretation of the index would be that if they are reduced from the top line itself. And therefore, that's the reclassification that has happened. So a few expenses -- selling expenses, which have been reduced from the top line and have also been then removed from the lower portion of the balance sheet.

Sure that is helpful. Just one final question. You were obviously mentioning about the fact that there are multiple M&A opportunities that you are evaluating, just wanted to get a sense, is there a cap in terms of the amount that you want to spend or the number of transactions that we are looking at. Just to put it another way, is there a possibility of maybe looking at maybe more than 1 target and you're looking at maybe 1 or 2 acquisitions just if I could get a sense of that.

Nihal, the only thing that I can say is that you do pursue these opportunities and you have sometimes very little handle on when they will be ready for it to happen. And even if you would -- you were to plan that they don't happen all at the same time, sometimes they do, because there are so many other reasons for it to happen. On the cap part of it, of course, we will keep that in mind that what is definitely digestible and affordable that we would do. But again, as I said, when you look at the opportunity of 10%, 15%, 20% beside of that side, honestly, you cannot control that.

[Operator Instructions] The next question is from the line of Ritesh Shah from Investec.

I have a list of questions, sir. First, I'll start with the rationale for the new management structure. So that would be the first question for you. And after that, if Mr. Mazumdar could come in and give us thoughts on how he sees things over the next 3 years, 5 years? That's the first question, sir.

Let's go question by question before we forget about others. So look, they were -- let's say, if we cut back to pre-COVID times and we will just divide it like that. There was -- I was the in charge of 3 things: being the Chairman of the company, the management director and also looking after the Indian business. And then we made the first change where Tushaar took over the Indian business, and I continued to look after the Chairman and duties of the Managing Director. Now we are in the process of Nilesh, who has just joined on the 1st of February to take over the Indian business. Tushaar would move differently or move up and we would also get into the stage of splitting the -- now this is all on the cards. We haven't made any announcements, but this is just a thought process that we are saying. And it is also to provide design to the Indian or at least the directors or the top management to be able to spend time and energy over inorganic possibilities that we can play rightly. And of course, the last rationale for this thing is that we have all been running the Indian business for quite some time. And it definitely needed a different experience at least in the standard parts of business, which is the distribution, the supply chain and logistics and the brand, et cetera. And therefore, Mr. Nilesh Mazumdar who comes -- who has taken over the responsibility, comes with a rich background of Asian Paints and Pidilite where these things have probably been already done a couple of times over. So that was the rationale behind and now Nilesh, why don't you just tell about yourself a bit. And maybe whatever experience that you have in the last couple of months? And what do you think of this industry.

Sure. Thank you Rahulji. Thanks, Ritesh, for that question. As a matter of introduction, I have spent about more than a decade with Pidilite Industries, handling different portfolios there. I have handled the waterproofing, the Doctor Fixit business for the last couple of years. Before that, I have handled the Fevicol business, the consumer product business. Before Pidilite, I have largely spent my balance career across 2 organizations. One was Onida in the consumer electronics space and before that in Asian Paints. So about 3 decades of experience is what I have looking for strong Indian brands and Indian organizations. I joined on 1st of February. And I had a brief look at the kind of opportunity that both the category of mattresses and the brand Sleepwell. And I must say that it is extremely exciting. I think as far as the entire category is concerned, there are 2 large opportunities that I see. Number one is the trend that we are seeing across most of the industries, which is movement from the unorganized to the organized segment, so that is one big opportunity. And the second is block at the bottom of the pyramid, which is by upgradation of consumers who are using cotton mattresses, darri, chatai, et cetera, to using a good quality foam mattress. So these are, I think, the 2 big opportunities in India, as I see today. And this will be possible to be exploited if we have; a, the right sales and distribution channel so that we are able to reach the product as close to the consumer as possible. Number two, we have the right product offering at different price points for different segments in the market with the right to win. And third is being able to connect the brand Sleepwell with the consumer. And that's how we will be able to position the brand in the mind of consumer space. It's -- obviously, Sleepwell is a brand that is couple of decades old in the country and has a strong equity. In some parts of the country, we are fairly strong. So how do we build on that further and also gain share in some of the comparatively weaker markets as we move ahead. So broadly, that's the structure and format that I have in mind of how we will be taking ahead the India business.

That's useful. I have a few more questions. Tanvi, you can make an announcement if anybody has any questions as probably I have like list of few more questions.

[Operator Instructions] In the meanwhile Mr. Shah, you may continue.

Coming back to Rahulji. I think a couple of quarters back, you had indicated exports was clocking around INR 1.5 crores, which was quite low from a utilization standpoint. Is there any uptick over here? Are we looking at green shoots. We understand the challenges in the U.S., European market on the inventory destock or the overhang, which is there. So that was one. Second is basically Indian Railways, any incremental numbers that would be very useful. Third is based on our checks, we do find people from Quest at the EBOs and MBOs are trying to move around things. Are there any new initiatives to increase footfalls, conversions from an MBO, EBO count standpoint or incentivizing more of our own people from a variable component and things like getting Quest folks on the stores to increase conversion. So I asked like a few questions. First was export, second was Indian railways and third was related to footfalls and conversions.

Thanks Ritesh [indiscernible] part of the business. Anyway as far as the exports and railways, Rakesh, would you be able to take care of those 2 areas, exports and railways?

Yes, I will. As far as exports are concerned, so they are still hovering around INR 1.5 crores per month. The markets are still slow but recovering. So we are getting orders of reinventory, which is very low. So that process has started, which is a good sign. We have also changed a bit of strategy of also working with retail brands to develop products for them. So that is the real long-term program, but the process has started. On the railways side, the traction in quarter 4 has been good. It was on line with what we had anticipated. And going forward also, besides the product that we have, supplying that, we are also in the process of developing a new product, which will also increase our share in the market. So that process is also on. So on both sides, I think railways is definitely more promising and export is really coming along.

Okay. So would you like to put some numbers on Indian Railways, how much are we have -- how much have we clocked or how much we aspire to reach, say, in a year or 2 years, 3 years?

So it is -- we have done more than around INR 60 crores in the year online. So that now in the coming year, the target is more but at the same time, there are also more players who are coming and bidding for the tenders. So that's -- we are, as far as potential is concerned, potential definitely is much higher. So we are also -- besides catering to the current requirement, we are also developing a product, which will give us a competitive edge by which we can increase our market share substantially, so which is a growth, which is under process, and that will give us a good competitive edge.

So Ritesh I can try and put some numbers and Rakesh, I'm sure you will agree that at the moment, the estimate of the market is about INR 800 crores annually for the seats and cushions, in about 3 years' time, we should be looking at about INR 300 crores to INR 350 crores number. And at the moment, we're doing annually about INR 60 crores. So -- and the way to growth is contracts. Ritesh to the second part of your question, which was on Quest and the footfalls and the conversions, et cetera. Nilesh, I would like with the bit of pressure look that you have had, you can.

So it is, frankly, bit fair the 2 drivers of business for us is footfalls and second is conversion. Now the Quest initiative was really to try and see if we can get a higher uptick on conversion. Now conversion, what we are realizing is already we have a pretty healthy percentage for us. Our conversion rate is anywhere between 30% and 50%. So the challenge today for us as a brand is really footfall and how do we, therefore, get footfall for the brand in the marketplace. So, a, is in the footfall, which is happening in the marketplace, how do I participate in that mode and that can happen through having an intelligent channel expansion in markets -- micro markets where I'm not currently represented adequately. And therefore, that's a drive, which we can forward from quarter 4 onwards. And hopefully, we will start seeing some results of that as we move into quarter 2. Going down the Pops data also to towns which are smaller in size and seeing how we increase our representation there. That will be the other program that we will have. We've also engaged with a new advertising agency called [indiscernible]. And as you see sometime in quarter 2 -- end of quarter 2 or beginning of quarter 3, we will have a new campaign around Sleepwell in order to connect with the consumer. So these are some of the initiatives that we -- besides, of course, what Rahulji in the beginning mentioned about our program for upgrading the bottom of the pyramid that pilot is as we speak just about starting. But by the end of quarter 2, we would have seen some results of that initiative, which is to upgrade the cotton mattress users. So that's the other part that we are looking at. So it's basically between footfall and conversion. Footfall, how to get more footfall is really the business challenge, which we have to solve for.

Sure. And sir, would it be possible for you to comment whether do we have a variable component for the workforce and the incentive schemes, I think we had taken a backseat, I think, during COVID. But has all of it got imposed again, how are we looking at it?

Yes, very much, we have now a variable pay, which is a substantial portion of our workforce, our salesforce total salary and CTC. So that's been brought back now.

And sir incentives for the channel?

Sorry, I missed that question.

Sir, incentives for the channel for distributors, retailers.