Sheela Foam Limited (SFL) Earnings Call Transcript & Summary

ladies and gentlemen, good day, and welcome to the Q2 FY '25 Earnings Conference Call of Sheela Foam Limited hosted by Arihant Capital. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Ms. Anushka Chitnis from Arihant Capital. Thank you, and over to you, ma'am.

Thank you. Good evening, and festive greetings to all. On behalf of Arihant Capital, I would like to welcome everyone to the Q2 and H1 FY '25 Earnings Conference Call of Sheela Foam Limited. I would like to take this opportunity to welcome the management of Sheela Foam represented by Mr. Rahul Gautam, the Executive Chairman; Mr. Rakesh Chahar, the Whole Time Director; Mr. Nilesh Mazumdar, the CEO of the India business; and Mr. Amit Kumar Gupta, the Group CFO. Now without further ado, I will hand the conference call over to Mr. Rahul Gautam for the opening remarks. Over to you, sir.

Thank you, Anushka. Thank you very much and greetings to everyone who's joined in. Good afternoon, everyone, and thank you for joining us for the earnings conference for the second quarter and half year ended on 30th September 2024. Let me first take you through the major developments in the company, and then I would request Amit to take you through the financials. As you all know, we acquired Kurlon in October last year, and it's been barely 1 year since that happened. And since then, with a strong focus on integrating Kurlon with Sheela Foam, we have been progressing well. Though both the companies sold similar products, there was a lot of difference in the ways both the companies operated. I'm delighted to share that we have finally been able to figure out and implement the model where both the companies are working together and progressing. While successfully integrating the acquisition has been a challenge for any company -- would have been a challenge for any company across the globe. However, I'm happy to share -- and that we have demonstrated that both Sleepwell and Kurlon brand can be effectively and sustainably sold in the market. Mattress, as a share of our total revenue has now crossed 50%, which emphasizes our focus on B2C business and we intend to grow this much faster than the rest. This actually leads to one of the basic initiatives of the company, which is decommoditizing the product, which means that we are selling more and more of branded goods, more and more of mattresses and focusing more and more on the Indian business. I'm happy to report that we have witnessed a healthy volume growth across all the segments and more so on the mattress side. On a like-to-like basis, we achieved a 19%, 19. I repeat that, 19% volume growth year-on-year in the mattress segment which is the highest in the last 8 quarters. Sleepwell volumes, Sleepwell which is the flagship brand of the company, along with Kurlon, the Sleepwell volumes grew by 40% year-on-year, whereas Kurlon volumes grew by 26% on a year-to-year basis. Our technical foams and furniture foams segments have also been -- has also seen good volume growth year-on-year by 18% and 10%, respectively. The other synergy of the integration, which is on the savings side, happy to share with you that the savings of the annual run rate of about INR 100 crores per annum is already achieved, and we have other initiatives in place, which would further augment this annual run rate in Q3 and Q4. Our foaming production is gradually being shifted to the VPF side, which is, again, a technology that we depend for improving our cost and for ensuring that we give an environmentally friendly foam more and more. We've also shifted foaming from 4 of the Kurlon plants to Sheela Foam plants, which has resulted in around close to 10% savings due to better yield at Sheela Foam plant. We've also commenced foaming in the Kurlon plant at Gwalior, which results in further reductions in freight. Kurlon has adopted and is now in the same mode as that of April, and that is the distribution to the distributor model. So they had, Kurlon has closed down the regional distribution centers, and this has resulted in cost savings and the full impact of that will be felt in the quarter 3 of FY '25. As you are aware that there was an investment that the company had made in the furniture business and that was in Furlenco. I'm happy to share with you that Furlenco continues to grow with its subscriber base almost doubled in the last 1 year. Our IT a Staqo also saw revenue increases by 33% on a year-on-year basis with EBITDA margins further improving than what they were before. In October this year, we have exercised our option of increasing equity in Furlenco with an incremental investment of around INR 100 crores taking our stake to 45% in the company. Earlier, it was 35%. And we got this incremental 10% increase without any changes in the cost of it. This, we have been able to acquire at almost the same valuation as the other investment in spite of the company, in spite of Furlenco becoming more profitable and almost 1.5x the size when we acquired the initial stake in August last year. The company, Furlenco, is now generating cash at P&L level with incremental cash only needed to buy new assets and scale up the business further. Now I request Amit to take us through the financial highlights of the last quarter and the half year that we have disclosed. Over to you, Amit.

Thank you, Sir. Good afternoon, everyone. Now let me just take you through the financial performance of the company for the quarter ended and half year ended 30th September 2025. For the second quarter, on a stand-alone basis, we reported a total revenue of INR 602 crores, which is a growth of around 42% on a Y-o-Y basis. EBITDA for the quarter stood at INR 70 crores, which grew by 54% on a Y-o-Y basis. EBITDA margins were reported at 12% for the quarter. Net profit was INR 43 crores, which was up by about 12% Y-o-Y. For the first half of the financial year, the stand-alone revenues were at INR 1,106 crores, which grew by around 26% Y-o-Y. EBITDA for the period excluded INR 118 crores, which grew by 11% Y-o-Y. EBITDA margins were reported at 11%. Net profit was INR 75 crores, which declined by around 7% year-on-year. The decline was primarily on account of incremental interest cost on the debt that we took for Kurlon acquisition. On a consolidated basis, for the second quarter, we reported revenues of INR 813 crores, which increased by around 32% Y-o-Y. EBITDA for the quarter stood at INR 69 crores, which was up by 5% Y-o-Y. EBITDA margins were reported at 9% for the quarter. Net profit stood at INR 9 crores, which is a decrease of around 79% Y-o-Y. For the first half, we reported a consolidated revenue of INR 1,622 crores which increased by around 29% Y-o-Y. EBITDA for the period stood at INR 129 crores, which declined by 10% Y-o-Y. EBITDA margins were reported at 8%. Net profit stood at INR 56 crores, which is a decrease of around 36% Y-o-Y. So just 2 pointers on this. We acquired Kurlon last year because of which there were certain debt, which the company took to pay off the purchase consideration, which has interest component, which comes as an incremental cost. And secondly, the depreciation of Kurlon is also added. So though we see improvement in operational performance but by the interest and the depreciation reduces the profit after tax that goes to the bottom line for which we believe that over a period of next 2 to 3 years, we would be able to garner revenues and profitability enough to absorb the same. With that, we can now open the floor to the question-and-answer session.

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

A couple of questions. Sir, first is, can you provide some color on the ramp-up of both Tarang as well as Aaram? Where do we see these numbers going? I think you had indicated INR 250 crores, INR 300 crores in 2 to 3 years. If you could help us with some broader numbers on contribution for both volume as well as value for Q2 and first half, that would be really helpful.

Ritesh, you want to finish your questions? Or you want them to be answered one by one.

I will finish up all the questions, sir.

Okay. Okay.

Sir, second question is on distribution network. We have been trying to understand the company better visiting multiple states. So sir, a simple question over here is, in how many states do we directly supply to the dealers from the factory that is we are actually getting rid of the distributor? And is this something for both Sheela Foam as well as Kurlon and is it something new by design. If so, I think there will be incremental delta on cost margins, which will definitely benefit us. So how are we looking at that particular variable. Third, number is Furlenco, basically, broadly, if you could indicate how are we looking to acquire the residual stakes and the sort of synergies that the existing business is deriving out of Furlenco. That was the third one. And the fourth one is more operating numbers. If you can spell out the revenue breakup for Kurlon and Sheela Foam for the quarter that would be great? And in the prior quarter, we had given marketing expenses numbers on the slides, which was at, I think, 5.7%, 5.8%. What would those numbers be for this particular quarter?

Thank you, Ritesh. So Nilesh, would you be able to respond to the Tarang and Aaram situation as to where we are based on our projections that in 3 years we will go to about INR 250 crores, INR 300 crores? And how are we distributing that?

Sure, Ritesh, greetings of the season to you and to everyone else. As far as Tarang and Aaram is concerned, in terms of volume contribution to the total mattress, it is approximately about 7.5% [so thanks ] to the total mattress volume. Of course, this is at a lower average selling price than what we sell in the main course. So this will be approximately at about 3.5% to 4% of the total overall mattress value. We are right now averaging in high single-digit numbers in terms of the revenue per month that we are doing. Hopefully, by next year, next financial year, we would be looking at touching a number of about INR 100 crores, and I'm talking of FY '26. Currently, we have ramped up in the entire country, excepting Kerala, Northeast, Jammu and Kashmir, and Punjab. So barring these 4 states, we are present in rest of the country. And one more thing that I would want to add is that, from this quarter onwards we are also looking at extension of Tarang and Aaram into the urban markets in a calibrated manner because we see an opportunity there also as the economy end of the market as there are a large number of cotton mattress and EPE mattresses are there. But we will need to do it in a very calibrated manner, so that it does not cannibalize our mainline Sleepwell and Kurlon sales. Coming -- so does that answer all your questions on Tarang and Aaram, Ritesh?

Yes, sir. Yes, sir. That's helpful. Yes.

Nilesh, I would request you to -- if you can go along with this for the second one, too, that is the distribution network that he has said. So he just wanted to know that in how many states would there be direct and the commonality of the distributors and the distribution of both Sleepwell and Kurlon. So just...

So the only states right now, Ritesh, where we are direct is in Karnataka, in most of the other states, we have kept the distributors with us, and they handle both Sleepwell and Kurlon. With the exception of 2 or 3 states in South and East because there, it was more an emotional angle about the Kurlon dealers wanting to continue dealing with the company. So we didn't want to disturb the market operating practices as of now. What we need to understand is that our distributors have a fairly strong hold and equity and reputation in the market. So therefore, we look at them as an extended arm who help us in also scaling up Kurlon in the markets where Kurlon had a large opportunity, for example, in the northern parts of the country or in the eastern parts of the country. So in these markets, our distributors have been there with us, and they have a fairly strong hold in the market. And we would want to continue dealing with them and because we see them adding a lot of value to the business and being able to help us scale up the Kurlon business in these markets.

Thanks, Nilesh.

Sir, can I just?

Yes. Sure.

Sir, can I just seek a clarification over here?

Yes, please.

Sir, you -- sir, you indicated for the only state where we don't have a distributor for Sheela Foam is Karnataka. And for Kurlon, you indicated except for 2 or 3 states and South and East, right? Is that reading right?

Yes, that's right. So up North and up West, we are going through the same distributors of Sleepwell.

Okay. And sir, is this something for historical reasons or is it by design that we intend to go by this model because, obviously, we can say a few percentage of margins, if we are able to take care of turnaround time, customization, et cetera, et cetera.

So what happens, Ritesh, first of all, when we have given Kurlon to our distributors, given that there has been increase in the turnover, there has been some marginal amount of rationalization that we have done with the distributor with their buying. However, you see, if I have to do away with the distributor, then I will need to set up a far larger regional distributor centers set up all over again. So therefore, while there will be some savings here, but there will be an additional expense that you would look to bear on setting up the [RDC] which as Rahul just now mentioned that we had closed. But more important than that, we see the distributor ability to add a lot of value to the Kurlon business in these markets because they know the market well, they are very familiar. They have been dealing in these markets for the last 10, 15, 20 years. So there is a tremendous amount of knowledge, information about the mattress category and the dealers that they bring on to the table and that adds a lot of value to us. So therefore, we would want to continue to deal with through them in these markets, and we see a benefit in the long run.

Very helpful, sir.

Yes. If I would just add to that, I mean, as a balance, we would see that they are adding more value than the cost part of it. And plus, as Nilesh said, we can, of course, do that ourselves, theoretically, yes. But it takes time to build the entire infrastructure to do that. Was it kind of existing in Kurlon? Probably, yes. But it wasn't deficient enough. So I think for us, at the moment, it's sales is the most important part, and we push at it -- I don't know whether that is going to cost 1% more or 1% less. But as time goes by, we will take a call on that. More important part is to focus on the sales part. Nilesh, while you are there, Ritesh also had a question on the marketing cost, which were [5.2%]. So would you just fill in.

Yes. So the marketing expenses for quarter 2, Ritesh was approximately 5.2%. You wanted the marketing expenses, right? So quarter 1 was 5.7% and quarter 2 was 5.2%.

And sir, the last -- similar question was on Furlenco...

Furlenco. So I'm just coming -- yes, just coming to that part. So I think your question was that how is Furlenco progressing? And then what is the -- what are the synergies which are there? And the second part to it was that, what is the plan as far as acquiring the balance part of it. Is that correct? I mean, my understanding the question correct?

Yes, sir.

So on the acquisition part of it, let me just say that we are at 45% are the largest shareholder, fully control the board and fully control. All the other shareholders are much smaller. And there are certain rights which have accrued to us as we kind of go along. So as far as controlling or managing the company is concerned, there is no issue on it. As we progress, we will view this -- review this, come with perfect sometimes in March '25 and then before up to December and also need to see that how -- and what's the direction of this company? I mean, eventually, do we do an IPO in FY '27? Or do we wait for some more time. So I think based on that, we would be looking at the -- as far as acquiring more part of the company is concerned. On the synergies by itself, it is working very well, and we've seen that over the last 6, 7, 8 months that at P&L level that it's generating cash. The growth at the moment appears to be only restrained or constricted by the assets which are there. We are improving the utility or utilization of these assets. But we are already at about 88%, 90%. And therefore, there's only small improvement that we can see there. But by and large, we would need or the company will need money as it goes along to get more and more assets. But we took -- I mean, our acquisition into the company is not going to -- is not going to be determined by the need of the company for the money. That is already kind of planned out that the growth ending at FY '28 of about INR 500 crores as top line, it should be absolutely on track.

We'll take the next question from the line of Aniket Kulkarni from BMSPL Capital.

So my question is regarding the other income. So on a trailing 12-month basis, it is around INR 130 crores? This is quite high as we compare it to a trailing 12 months net profit of about INR 150 crores. So my question is, how are we getting to this INR 130 crores of other income. So if you can explain how much cash is deployed in interest-bearing instruments and what rate is it fetching you? And how sustainable is this level of other income of INR 130 crores for the next 2, 3 years?

Thanks Aniket. Amit, would you respond to this?

So currently, if you see our balance sheet, there are around -- till now around INR 550 crores worth of money was invested in these instruments. Of course, we invested INR 100 crores in Furlenco, that is now INR 450 crores. You see a higher accrual of other income, primarily because interest rates have been going down and so the debt instruments have been accruing more returns than they are -- they usually do it. In addition to this, we have some other sources of other income also, which is certain carrying on certain instrument, certain scale of scrap and other things, which also accrue to other income. Yes, if you say going forward, the trajectory of other income, it will not be as robust as you see it now, but we are pretty comfortable that it will be in a very comfortable range.

Sir, can you give some ballpark figures of -- we have a return -- how it will be [indiscernible] or something?

Yes. Yes. Let's say 12-odd percent plus return on investments.

The next question is from the line of Vatsal Shah from [Whitestone] Capital.

Am I audible.

Yes, Vatsal.

Yes. So I have 3 questions. So firstly, what will be the margin differentiation between the B2B part of the business compared to the mattresses part. The second question is what kind of return profile are we looking at 2 to 3 years down the line as the equity base has gone up quite high after the Kurlon acquisition. And the third will be any kind of consolidated growth and EBITDA margin guidance for the year? Yes, that is it.

So Amit, would you please take the first one, which is the margin between B2B and the B2C business.

So in B2B, we have different types of businesses. We have furniture foam, which is partly branded and partly, you can consider as a B2B business. We have Comfort foam, which is bare foam that we sell. We have certain specialized foams called the technical foams, which we supply to end user industry like lingerie, soundproofing, automotive and places like that. There are different margin profiles between these different type of businesses. But broadly, we can say that mattress commands anything ranging between 5% to 8% margin higher than the B2B sort of businesses.

Okay. And the second one also, Amit, you will have to say, he's asked for the return profile in about 3 years time.

Yes, sir. I'll do...

As the equity base has gone up. Yes.

Yes. So before answering this question, I would just delve a little bit on how this equity capital has gone up. So you know that we were at around INR 1,800-odd crores of the equity capital before Kurlon acquisition. Yes, we did the QIP for Kurlon acquisition, which accrued it by further INR 1,200 crores. Now when you acquire a consumer brand on the first day, it is difficult to get the return on equity right at the base. So we have put for ourselves a 3-year time horizon in which we intend to get back the earlier return on capital employed of 18% plus that we had been having earlier. So if we look at other return profiles in terms of growth and profitability that you mentioned, we have already guided the market earlier that from 2025 onwards, we would be looking at a consolidated India business growth of around 14% to 15%. And in a 3-year period, we would be reaching an EBITDA margin of somewhere around 14% to 5%. Primarily on the back of increased volume or the growth that is coming in and also on the back of the savings initiatives, part of which has already been realized and which will be coming through in the remaining 2 quarters of the year. That should put us in a 3-year time horizon by '27 at a place comparable to give a return on equity of more than 18%.

Okay. And just a small clarification. The 14% to 15% growth in EBITDA you said, that was on consolidated level or India business.

India business.

India business. And consolidated any number?

Consolidated, so I expect overseas business, see Australia is a saturated market. If you know, we are the leaders in that market with 40% market share. So there, we expect the growth to be a little bit muted say, between 5% to 7%, whereas in Spain, we are a very small player in the overall European market. We have recently debottlenecked our capacity, which has enabled us to do a turnover of around EUR 80 million, which is an increase of EUR 30 million from our earlier capacity. So there, we expect the growth to be double-digit growth in the next 3 to 5 years. So broadly, you can assume somewhere between 7% to 10% growth for the International business.

Totally consolidated, he is asking for, Amit. So would you look at...

So this is somewhere between 13% to 14% or sorry -- 12% to 14%, sir.

The next question is from the line of [ Naman Maheshwari ] from [indiscernible].

Congratulations on a steady set of numbers. Sir my question is twofold. One is on the mattress pricing. It has remained quite flattish quarter-on-quarter, and we haven't seen any uptick on that. So the first part is that how are we seeing the price trends now? And what will be the drivers of this price point increasing, right? The second question is on the lines of inventory. We have seen some inventory level going down. So can we have some insights on what would be a stable level of inventory in the channel and how it would progress during the rest of the half of the year?

So Amit, can you first take the inventory question?

Sure, sir. So normally, our inventory there is depending on seasonality. So for the festive season, it is higher, whereas for other periods, it is lower. We have a turnaround time of 24 to 72 hours for delivery of products. Still, we need to maintain inventory somewhere between, say, 20 to 30 days on an average. However, we are putting in place payable solutions by which we intend to take out the working capital from the [indiscernible].

And I think the impact of closures of the RDC would have also reduced the inventory. I think that is what [ Naman ] is referring to.

Yes. Right, because it has come down from the 70-odd day level to about 45-odd day level. So what is the reason for this decline?

[indiscernible] high would be an exception, maybe because of certain reason, it was there, but normal inventory would be somewhere within less than 30 days for us that we are targeting now.

Finished goods.

Okay. Okay. Finished goods.

Okay. And the first question. Nilesh, are you still there on the line?

Yes, yes. I'm there.

So the question is that mattresses are growing. That's all happening. But on the value part of it, it's not growing. So [ Naman ] wants to know that how -- what kind of strengths do we have for increasing prices so that as the volume grows big, value also continues to grow.