Wakefit Innovations Limited (WAKEFIT) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Wakefit Innovations' Limited Q1 FY '27 Earnings Conference Call Hosted by 360 ONE Capital Markets Private Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Akhil Parekh. Thank you, and over to you, sir.

Yes. Thanks, Anushka. Good morning. On behalf of 360 ONE Capital, I welcome you all to Wakefit Innovations 1Q FY '27 Conference Call. We have with us the management team of Wakefit represented by Mr. Ankit Garg, Chairman, CEO and Executive Director; Mr. Chaitanya Ramalingegowda, Executive Director; and Ms. Parul Gupta, CFO. Without taking much time, I'll hand over the call to Ankit for his opening remarks, post which we'll open the floor for Q&A session. Over to you, Ankit.

Okay. Thank you so much for the introduction. Good morning, everybody. A warm welcome to all of you, and thank you for joining our Q1 FY '27 earnings call. On this call, we are joined by Chaitanya , Executive Director, Parul, CFO, Strategic Growth Adviser, our Investor Relations Adviser. The results and the presentations are uploaded on the stock exchange and company website. I hope everybody has had a chance to look at them. A quick glimpse of it. We entered FY '27 with encouraging momentum supported by healthy demand during the quarter. Revenue from operations for the Q1 FY '27 increased 16.6% year-on-year to INR 404.9 crores. EBITDA grew 25.2% year-on-year to INR 56 crores with an EBITDA margin of 13.9%. Profit after tax for the quarter increased 19.2% year-on-year to INR 23.3 crores. Coming to our category-wise performance. Our business continues to be anchored across 3 core categories: mattress, furniture and furnishings. Mattress contributing 65.9%, about 66% for Q1 FY '27 revenue with a healthy 27.3% year-on-year growth. Furniture contributed to about 28% of revenue during the quarter and furnishing contributed remaining 6.3% of revenue. Our mattress category continues to be a key growth driver for the company. Wakefit offers a wide range of mattresses to tap customers across almost every major segment of the organized market from memory foam and hybrid mattresses to orthopedic premium and smart sleep solutions. This comprehensive portfolio enables us to cater to evolving customer needs across different price segments while reinforcing our leadership in the organized market -- mattress market. We also see a significant opportunity in our furniture and furnishing category. These categories expand our addressable market while enabling us to offer customers a more comprehensive home solutions portfolio. This is a long-term opportunity where we are working on addressing in the coming years as our network matures further. Before, I conclude, I would like to sincerely thank our employees for this unwavering commitment, passion and dedication. Their relentless efforts focus on execution, continue to be the driving force behind Wakefit's growth and success. As we enter the next phase of our journey, I'm confident that together, we will continue to build a stronger businesses, create greater value for all stakeholders and deliver on our long-term vision. Now with this, I would hand over to Chaitanya, Executive Director, to explain more.

Thank you, Ankit, for the introduction, and good morning, everyone. During the quarter, the operating environment remained dynamic with the volatility in key raw material prices that were driven by geopolitical developments in the Middle East, particularly across the main inputs such as polyol and TDI that are used in foam making. This disruption impacted unorganized -- apologies for the disconnection. I was just saying that the disruption impacted the unorganized sector much more adversely because of organized companies like ours have a raw material management and inventory buildup capacity and planning and relationships with our suppliers. Thus, we were able to protect supply to our end consumers on our D2C platforms. To protect margins, calibrated pricing actions were also taken as we had explained even in the last quarter. The full impact of increased raw material costs will reflect in overall H1 FY '27. On the operational front, we made strong progress on our physical retail footprint. We added nearly 27 new COCO stores, company-owned company-operated, taking our total network to 165 stores across 100 cities as of June 30. We remain on track to achieve our target of adding about 80 company-owned company-operated stores during FY '27. To put this into perspective, we added 42 COCO stores during the entire FY '26. MBOs, which also complement our COCO channel in identifying how fertile an offline market is, is an asset-light manner -- it's very asset-light and grew to about 2,250 outlets across 701 cities. As a result of our continuous expansion efforts, retail revenue during the quarter grew 20.5% Y-o-Y. Further, our own channels contributed 72.3% of total revenue with revenue from these channels growing 20.5% Y-o-Y. Our external channels contributed 27.7% of total revenue and delivered 7.6% Y-o-Y revenue growth. Interestingly, we are increasingly seeing seamless engagement across our online and offline channels. During Q1 FY '27, online channels contributed 52.7% of revenue, while offline channels contributed 47.3% of the revenue. This reflects the strength of the integrated omnichannel model where customers can research anywhere and buy anywhere. Customers these days discover products online before purchasing in-store or experience our products in store before completing their purchase digitally. We believe our physical and digital channels complement each other with every new store, enhancing brand visibility, building customer trust and driving demand across both channels in those geographies. This pattern resonates with our COCO expansion strategy, reinforcing our omnichannel flywheel. Wakefit is well positioned as a single brand multichannel brand to gain a significant pie of the overall home category. I would like to now hand over to Parul Gupta, our CFO, to give insights on financial performance.

Thank you, Chaitanya. Let me now take you all through our financial performance for the quarter 1 of financial year 2027. Revenue from operations for the quarter stood at INR 405 crores, registering a healthy 16.6% Y-o-Y growth. Gross profit for the quarter stood at INR 231 crores, up 19.4% Y-o-Y with gross margin improving to 57.1% in quarter 1 FY '27 from 55.8% in the corresponding quarter last year. Reported EBITDA, excluding other income, stood at INR 56 crores, reflecting a 25.2% Y-o-Y growth with the EBITDA margin improving to 13.9%. Operating EBITDA for the quarter stood at INR 37 crores, registering a 50% Y-o-Y increase with the operating EBITDA margin expanding to 9.1%. Our advertisement and marketing investments remained consistent with the previous quarter and in line with our earlier guidance at 7.6% of the revenue from operations. The ESOP expense for the quarter stood at INR 6 million. Profit before tax before exceptional items stood at INR 36.3 crores, registering a robust 85% Y-o-Y growth with the PBT margin improving to 9% from 5.7% in the corresponding quarter last year. Tax expense for the quarter includes a deferred tax charge of INR 7.3 crores, primarily on account of reversal of the timing differences arising from the depreciation and provision in the normal course of business along with the partial unwinding of the deferred tax asset recognized on the carryforward losses as the company continues to generate taxable profits. This compares with a deferred tax income of INR 98 crores in the preceding quarter, which had included a higher onetime recognition of the DTA on carryforward losses and timing differences. Excluding these deferred tax movements, PAT for the quarter stood at INR 30.7 crores, which is 7.6% of the operating revenue, which is up by 0.7% quarter-on-quarter and 1.9% Y-o-Y, reflecting the underlying operating performance of the business. Profit after tax stood at INR 23 crores, registering a 19.2% Y-o-Y increase. Looking ahead, we expect to incur a capital expenditure of around INR 100 crores to INR 120 crores in FY '27 with nearly 80% of our investment directed towards expanding our retail footprint, particularly the rollout of our Jumbo store and jumbo store format. The remaining 20% will be invested in the manufacturing automation and other regular business upgrades to further strengthen operational efficiency and support our long-term goals. With this, we open the floor for Q&A.

[Operator Instructions] We take the first question from Siddhartha Bera from Nomura.

Sir, first question is on the growth. So on the macro side, we have clearly seen a good acceleration in the growth momentum. If you can probably highlight what is the volume and value growth in the quarter? And second is, on the other hand, in furniture, we also have seen a bit of deceleration. So how should we think about furniture growth for the year? Should we -- should it be in the similar range? Or do you see scope of acceleration going ahead in the furniture side as well?

Sure. Thanks, Siddhartha. Of all the growth that has come over, about 2/3 can be attributed to volume growth and about 1/3 can be attributed to the price increases that we took because of the Middle East and West Asia crisis. So that means even for mattress, there has been a healthy volume growth driven by store expansion in more and more geographies, SSSG as well as improved uptake in the online marketplaces as well as on our D2C platform. So mattress has come back on track. It has always been our mainstay that enables us to build the flywheel. On the furniture side, last quarter, we did mention that there were 2 reasons for slowdown in furniture. Reason number one was specific machine breakdown and workforce shortage due to elections, et cetera, and then a buildup of promised delivery date, which reduced the conversion rate. The second reason was the fact that we have not added more furniture-first stores to our store network. If you remember, this was a conscious call to improve the unit economics of the furniture category as well as the whole company to take a pause to focus only on the existing store SSG and focus on furniture growth through jumbo stores that are coming up in the next year. So the furniture category team is fully focused on completing catalog, visual merchandise and design for those stores, which will give a massive step jump for the overall furniture category. These are the 2 reasons. So we should get back to mid-teens to late teens furniture category growth over the next 2 quarters steadily, but it will not probably go to 30% that was there last year because of these 2 conscious reasons. But it will see a step jump of more than 25%, 30% when we open up the jumbo stores.

Got it, sir. And in terms of commodity cost inflation, are we seeing any further cost escalation in the second quarter? Or most of it has come in the numbers? And if there is more inflation, do you need more price hikes to offset that? How should one think about the cost and price hikes?

Initially, when the crisis started, the price increases were because everybody increased the prices, all the suppliers increased the prices as well as the logistics itself became very expensive. However, today, the conflicting its head up [indiscernible] on and off once in a few weeks, given both of these reasons. But given our long relationships with these suppliers and Ankit's background in this industry, we have been able to handle it in a way that we always have some form of supply, so the disruption does not come to the business, but we have to wait and watch every few weeks.

We take the next question from the line of Navin from iThought PMS.

I hope I am audible?

Yes, you're audible.

Yes. Yes. Just wanted to understand one thing regarding mattresses. So my first point would be, yes, we've taken price hikes this quarter, but the 1/3 that you have mentioned that was driven by price mix, was there any benefit for us by people upgrading and buying higher ASP products? In conjunction to this question, I just want to understand how do you see market traction for higher ASP mattresses online? I'm talking about INR 23,000, INR 25,000 mattresses online. Like is there uptick for it?

Sure. So the price increases has not driven premiumization. Our premium products come with a different value proposition of longer warranty period, higher density of the material, et cetera. So that was always present. And historically also, we have seen that, that category is less sensitive to price increases. So it has neither crazily increased the premium uptake nor has it impacted negatively. That has continued to chug along on premium....

I think there's a small misunderstanding. So essentially, our headline ASP has seen a benefit of basically price mix change. So we have taken price hikes. I just wanted to understand if the headline ASP number was also driven by overall mix of customers moving towards the premium side. So that's what I meant.

Yes. Short answer is the premiumization percentage is very similar to what it was always there. A small maybe about 20% to 30% increase has happened in the premium category share of sales in mattress.

Got it.

Yes, second part of your question, for the INR 2,000-plus category mattresses, offline is our main stay. Customers usually research very deeply online. They come with query-specific questions, but transactions mostly happen at our company-owned company-operated stores.

Got it. And would you be able to briefly quantify this maybe this much percent of your premium mattress sales happens offline versus online? Any broad numbers?

Yes. I think if you look at the offline channel mattress sales, nearly half of it will be -- close to half of it will be premium. When you look at it at a company level, that would reduce to about 15% to 20%.

I see. Got it. Yes. My next question is going to be on the lower end of the mattress segment. So I've been hearing a lot about this product called mattress toppers and how that's becoming a better way to enhance the experience with a lower-cost mattress versus like naturally cheaper mattress. So do you see some more traction for this product category or more competition from this product category for the lower ASP mattresses, maybe the INR 2,000, INR 3,000 mattresses?

So mattress toppers have been around in the developed markets for long, but they've never got on massive traction. Even in India, this product has been around for the last 8 to 9 years, and Wakefit it is a 11-year-old company. So the main problems are twofold. Problem number one is a mattress topper comes with elastic on the 4 sides that can be stuck on to the mattress. So that means when you toss and turn or when you move or when you sit on it, it moves along with you. So it's not a comfortable experience. While it is a cheap way to provide some kind of softer comfort, the problem also is that opening price point mattresses these days are available for INR 5,000-odd single size. So the difference isn't too much. And hence, there has not been a massive uptake of toppers in India. Some people have even tried premium toppers where they are putting up latex or memory foam premium toppers, but that also was a nonstarter because those who want that premium feel will go for a direct latex or memory foam, full mattress.

Got it. Got it. So one more question would be on like just the customer cohorts, this small question. So do you see more people like online versus offline coming to purchase like a single item, be it furniture or mattress? Or are there more people who are coming who just freshly moved or like we want a basket of items. So which kind of purchaser is the majority for us?

Our average units per transaction, which is per cart is somewhere over 2 products per cart. That essentially means irrespective of what intent they came in with, the advantage of Wakefit having multi-category play and not just a single mattress focused business is the fact that we are able to cross-sell as well as upsell. So people who might come for a mattress end up invariably buying bed sheets, pillows, et cetera. People who come for sofas invariably end up buying a coffee table or a side table. So that is the advantage of a flywheel. And hence, nearly 36% of our revenue comes from repeat customers as well as the cross-category cross-sell is very, very high.

Just a quick follow-up.

Sorry to interrupt. Mr. Navin, I would request you to join back the queue as there are several participants waiting for their turn. We take the next question from the line of Harish Advani from Axis Capital.

Congrats on a great set of numbers. My first question was on the mattresses side. So while you did mention that this quarter, the growth construct was 2/3 volume and 1/3 price, how was the same kind of breakup last quarter?

It will be very nominal, Harish, because the first price hike happened only in the last week of March. So it won't comprise more than 5% of the overall revenue for the last quarter.

Perfect. Perfect. So that volume trajectory is remaining strong. That was what I was trying to get at. And how is this kind of trending into the July and August month as we move now into Q2?

In July, we have -- we, in fact, started the quarter by taking a small price cut. But with a very, very nominal price cut as the prices normalize for raw materials. But then we have remained at the similar price range as of now. So mostly the growth till now at least has been volume driven. If something changes in the last month or so of this quarter, we will have to update you next time.

Perfect, sir. Perfect. And similarly on that train of thought, so how is the competitive intensity on the mattresses side? So are we seeing traditional brands increasing their digital spends? Or are we seeing some of the organized furniture players expanding more towards the online side? Or are there any competitors who are significantly more aggressive than they were last year?

No, there is nobody that is more significantly aggressive than last year. But the intensity comes and goes in the mattress category in waves. So every time somebody raises capital or every time somebody has a new brand, we see a short burst of increased ad spends, increased store openings, et cetera, until it stabilizes, then they realize that it's not a sustainable strategy. So we've seen 3 or 4 such waves in the last 11 years. As of now, it has remained stable. There's been no new entrants that have come in, but whoever was competitive, investing in store opening, investing in marketplace growth or advertising in the last 6, 7 months, the same companies are doing it even now. So we are -- that is the reason we ramped up our A&P spends from 5-odd percent to 7.5%, and we are holding steady on that, but ensuring that every rupee is spent on a very focused ROI-driven marketing channels.

Okay. And my final question is on the external channels. So after last 2 quarters of anywhere between 15% to 20% decline, we've managed to see a high single-digit kind of a growth out there. So can you tell us what initiatives you have taken to turn this around?

Now firstly, these relationships with the external marketplaces go through their own cycles, which marketplace is focusing on profitability, which marketplace is focusing on growth in that year as per their company's business plan. So that goes through ups and downs. And hence, from the beginning, we have always focused on own channel increase. But having said that, the last quarter specifically was very good because all of the major platforms were focused on growth. All of the major platforms worked very well with their online partners such as us. And we also enjoy a long relationships where we form a large part of their category. And hence, that gave us -- and there was also a small sale event, all of which added together gave us good results. Even in July, there was a sale event in the online marketplaces, which should reflect positively in this quarter's results.

We take the next question from the line of Rakshit Desai from IIFL Capital.

Congratulations on a good set of numbers. My question was on inventory. So currently, how many months of low-cost inventory do we still have on hand? And when should we expect the full impact of higher input costs to flow through the P&L?

We do have about 3 to 4 weeks of raw material that is parked with us based on different types of raw materials. However, some minimal part of impact has already been seen absorbed in the Q1 that we have said. Some more part of it will come in Q2. And that is the reason in our commentary also, we have said that H1 should see the full impact come and go. If something worse doesn't happen in the Middle East, things should again start to improve in the OND quarter.

We take the next question from the line of Ritesh Shah from Investec.

Congratulations for a good set of numbers. A few questions. First is on -- you did indicate that we have taken a modest price cut starting in July. So if we have to just reflect on the quarter gone by, specifically on the gross margins, we have done amazingly well, both sequentially on a -- also on a year-on-year basis. So just trying to understand what has been the thought process? Like was it for us to hold on to the prices even in a case wherein we are looking at raw mat deflation. I think you also attributed this quarter, 2/3 the construct will be, say, more on volume growth. So just trying to understand your thoughts on price versus volume and incremental gross margin profile.

Sure. We always try to balance 2 opposing forces, Ritesh. One is as the market leader online and market leader in one of the opening price point and mass prestige categories, we always focus on growing the overall market because that is where the real growth of the category lies, not in taking away share from other companies because they're also not of a massive scale. So always that focus of growing market and owning that market share is primary. Second one is we don't want to treat mattress as a cash cow that just continues to feed other categories. It has to -- every other category has to earn its own gross margin, earn its own advertising dollars. So these 2 competing forces are always there at any point in time. So -- when the prices went up, we, along with the rest of the industry had forced to take it up because the margin was going to be severely impacted. When the prices stabilized briefly, we made some nominal cuts to come back to that. But again, there is no standardized long-term visibility on the raw materials because of the shortages also that I started the call with. So it's a weekly, monthly observation and reaction game while ensuring that we are just neither fleecing customers unduly nor are we just growing at all costs. So that is the focus.

Sure. Just a related question. In the opening remarks, you indicated full impact will be visible in first half. This was with respect to disruption and raw mat inflation. Why first half? Is it because of the extent of inventory that we hold is higher or something else?

Because when the war started, we did have a stockpile of raw material at a lower cost point, which we had acquired earlier when the prices were low. As the consumption of that continued to take up all of the existing stock, the new stock kept coming in and the blended rate kept going up. So that is the reason we said some of the impact would have been seen in Q1. Some of the impact would be seen now in Q2. Hence, H1 total should completely take care of all the impact of the raw material price increase is the way we were looking at it.

So if I could just reconcile this. So would the average cost of inventory that we hold right now be below or higher than the spot prices?

It will be below the spot prices because we acquire based on relationships and existing POs, yes.

Okay. That helps. I have just a few bookkeeping questions. I think A&P, you indicated it was 7.8 percentage of sales for the quarter. For the full year, should we take this number at 7% to 8%?

Yes, please. Because the festive season also will come up now. So in that range, it should be there.

And rental outgo, I think last time you had indicated INR 80 crores for FY '26. That number for FY '27 would be how much broadly?

It will be similar only. There's not much change, Ritesh, in terms of our whole sheet.

The smaller store are around INR 80 crores.

Yes. Yes. Around INR 80 crores.

Okay. And ESOP expenses?

ESOP expenses may see a little lesser number than our earlier guidance. However, we are still figuring out because there are some delays. So if you look at the quarter expense has only been INR 6 million. Earlier, we gave the guidance of around INR 12 crores. It may range anywhere between INR 10 crores to INR 12 crores is what we anticipate.

Some of the senior people who are joining -- some of the senior people who are joining might join in the second half. So it will course correct. It won't be as low as this first quarter, but it might not be up to the INR 12 crore number that we had initially guided to. It might be lower.

Perfect. And just last 2 business questions. How many SKUs or standard SKUs do we have on mattresses?

SKU might not be the right way to look at it because it will...

I'll rephrase it. I'll just rephrase -- sorry, sorry, I'll just rephrase the question. So basically, if you look at, say, single bed, double bed, king and queen, these are like 4 larger categories. So if we have to bucket it amongst, say, something like this 4 or equivalent, how many categories would we have?

So it's actually not king, queen. India is a slightly weird country where queen size in South India is different from queen size in North India. But if you roughly take the top selling sizes, maybe about 15 to 20 sizes would contribute to 50%, 60% of the overall mattress sales. That would be the Pareto largely, Ritesh.

This helps. And lastly, any revenue mix for mattress...

Sorry to interrupt, Mr. Ritesh. We take the next question from the line of Akhil Parekh.

Congratulations on a good set of numbers. Chaitanya, my first question is on the price cuts and the increase, which we do based on the raw material price volatility. Don't you think this probably may dilute the brand perception because if our pricing is going to be purely a function of raw material volatility, the brand perception may go down. Any thoughts on that?

As a nonstandardized high ticket size item, unlike mobile phones or televisions, et cetera, which have a very standardized set of features and standardized set of MRPs, which are very consistent. Ours is we enjoy the advantage of saying we are nonstandardized and we are high ticket size. So given that traditionally, the D2C part of the business has always had MRPs remaining fixed, but the selling price, which means what selling price it is running on a particular day, historically, for the last 7 years, we have seen things go up and down up to 3%, 4% every month. So it can go down, it can go up based on various different parameters from raw material to commission changes on the marketplaces to advertising and promotion costs increasing to a target P&L that we want to operate on. So multiple parameters are there. So the MRP largely remains constant in our industry. Selling price keeps going up and down, a tad bit and consumers don't usually have any positive or negative perception about this particular matter. It's just how the industry operates.

Yes. This is helpful. And sir, can you quantify how much of the -- how much has been the inflation on polyol and TDI side for first quarter?

So it has gone -- so earlier, one of the other gentlemen asked us about spot price and the price at which we acquired. That was a very pertinent question because on the spot price side, some raw materials went up 140%, 160%, -- some raw materials went up 70% to 80%. However, given our relationships with the suppliers, we've been able to procure at a bulk, procure at a lower than spot price always. So although it went up 70%, 80%, 160%, we actually saw a net inflation only by about 30% to 40% at various points in time when we acquired it. And that is the reason when we passed on the price to end consumer, it was increases of about 5% each approximately.

Got it. And second question on the furniture. Any time lines you would like to give with regards to our jumbo stores? And of the 165 stores, what percentage stores are furniture-first stores?

On the jumbo stores, the first store, the excavation is nearly complete. The construction is well underway, where civil work is currently ongoing. The second store, we have 2 options and the negotiation, government approvals are both going on. We will be freezing one of them at the earliest. In terms of going live, we target the next year, June, July for the first store and August, September for the second store, both in Bangalore. But in terms of furniture category growth itself, we should definitely see that in the July, August, September also, the furniture should grow at a faster rate than what it has grown last time. And in the festive season also, it will usually grow faster. So it will come back to mid-teens is our estimate.