Sheela Foam Ltd Q4 FY2022 Concall Summary

Key Takeaways

• Demand hit by early summer, not share loss: Mattress volumes degrew in Q4 as an early summer shifted discretionary spending to fans and coolers; management stated with certainty there was no market share loss.
• Sales engine restarted after COVID hibernation: Sales and marketing spends, curtailed during Corona, were restored in Q4 with EBO renewals and salesforce placement already showing results.
• Technical foam was the bright spot: Strong growth driven by auto customers increasing their share, two large new customer additions, and non-auto segments like acoustic and shoe.
• International margins under raw material siege: Spain margins were volatile on monthly raw material pricing with only two days' notice; Europe saw a 16–20% premium in polyol and TDI vs Asia.
• What to watch next quarter: Whether the March/April run-rate uptick sustains into a demand recovery, how quickly Spain's customer sorting improves margins, and any concrete progress on the "very promising" inorganic opportunities.

Demand & Market Dynamics

• Category-level footfall decline: The problem was footfalls into the mattress category as a whole, not just Sleepwell showrooms; the market diminished and moved toward the lower end of average sales prices.
• Early summer diversion: Summer arrived mid-February through March, pulling discretionary spending toward fans, coolers and ACs while mattresses took a temporary backseat.
• Omicron impact: January saw reduced footfall in EBO showrooms due to the Omicron wave, compounding the seasonal demand shift.
• Starlite outpacing Sleepwell: The economy-focused Starlite brand grew faster than Sleepwell over the last year, driven by price points and availability; Sleepwell carries a much wider mattress range.
• Conversion process underway: The company has begun a major initiative to improve conversion within retail showrooms, with results expected by the next quarter call.

Rahul Gautam: "I can say with a lot of certainty that there was no market share loss at all. If there would have it they would actually be on the other side and the category per se... the market is diminished a little bit and it also moved on the lower end of the average sales prices."

International Business

• Spain margin volatility: Europe moved to monthly raw material pricing with only about two days' notice, while Australia operates on quarterly pricing settled a month in advance, making Spain far more volatile.
• Spain at full capacity: The Spanish unit is running at 100% capacity, so management has begun sorting out customers and shifting to preferential selling to improve numbers.
• Spain capacity expansion: A 30–35% capacity enhancement through improved curing space, storage and conveyors is expected by end of the calendar year, with the added output expected to be absorbed as soon as production begins.
• Australia expansion: A new unit in Adelaide will provide comfort to existing suppliers previously dependent on one unit and bring the company closer to Western Australia; once operational, the company plans "a little more aggression in the market."
• Raw material premium in Europe: Polyol and TDI prices showed an unprecedented 16–20% premium in Europe vs Asia, with freight costs also disproportionately high.
• India/Spain vs Mexico competitiveness: In any stable state, India or Spain supply is cost-effective compared to Mexican supply, assuming normalized raw material parity across geographies with only 1–3% monthly differences.

Tushaar Gautam: "if I look at any stable state for sure India or even Spain supply is cost effective compared to Mexican supply. Historic raw material stability, not stability parity across the world which is whatever are the normal 1%, 2% or 3% differences on the monthly basis that happen across geographies and whatever is normalized straight."

Technical Foam & New Initiatives

• Auto customer gains: Some auto customers who were partly buying increased their share completely; the company now has the complete share of those customers. Two large new customers were added to the portfolio, but management did not specify whether they are auto or non-auto.
• Non-auto diversification: Acoustic and shoe segments also performed well, broadening the technical foam base beyond automotive.
• Indian Railways ramp-up: Supply to coach factories has begun and the product is recognized by the railways' research organization as the best combination of comfort and safety; orders are coming in but the transition to 70% polyurethane foam level is taking longer than expected, typical of government organizations.
• Exports unit near Mumbai: The new exports-dedicated facility has started producing; management is targeting a conservative three-figure (₹100 Cr) run rate for the year, though supply chain and logistics issues that previously caused a bite warrant caution.
• E-commerce scale: The e-commerce business did about ₹80 Cr this year with upwards of 50% growth; strategy is to remain upfront cash and profitable even if marginally.
• Mattress for every Indian: Organization setup is underway with trials and piloting to begin in two to three months; direct distribution targeted to 500 amenable districts, extending to block enterprise level.

Rahul Gautam: "We are being a little conservative because we have been just bitten a little bit on export. It was a new business and there was something else which kind of happened on the supply chain side or on the logistics side therefore a little conservatively I said we would look at a three-figure mark, the capacity for to produce the product and the ability and the way that it is seeming it should be far more."

Capacity Expansion

• Jamalpur facility: Buildings are nearly ready but machines may be delayed a couple of months due to steel grade availability; the supplier in the UK indicated most steel was manufactured out of Ukraine. Expected before the year ends.
• India new facility: A double-pole capacity, completely new facility with unique greener technology that helps produce newer foam grades and brings some cost down; will start with a slight delay, not by end of calendar year but before the financial year end; will primarily serve the "mattress for every Indian" initiative.
• Spain expansion timeline: 30–35% capacity enhancement expected by end of this calendar year.
• Australia new unit: Adelaide facility to provide geographic diversification and enable more aggressive market approach.

Margins & Raw Material

• Raw material trajectory: TDI prices have come down 10% in the last 15 days, but management declined to predict a normalization timeline, citing repeated forecasting failures.
• Margin outlook: Margins will remain modest. They may expand further from here.
• Sales spend restoration: Sales and marketing expenses held back during Corona were restored in Q4; activities like renewing exclusive stores and placing and training salespeople have begun with some good results already visible.
• Channel margin structure: Most channels operate on an exclusive basis, so the extra margin provided to the channel does not drive the retailer to do better than they already do; the consumer is well attended to when they walk in.

Tushaar Gautam: "Resham whenever I have tried to guess I have been wrong so I would still say that because we have the advantage of some high-end site that would have happened for the year closed, it is coming down and it is in public domain."

Inorganic Opportunities & Capital Allocation

• Promising pipeline: Management described inorganic opportunities as "very promising and progressing," with a few described as "very favorable," but declined to provide details on competitive intensity, leverage ratios, or specific targets.
• Investment reserves: The company is making good returns on investments in bonds and debentures; reserves are built to provide for expansion capex and future opportunities.

Rahul Gautam: "On the inorganic part I would say there are some very promising ones on the radar, some progress too, but I will not go beyond that..."

Guidance & Commitments

Key Metrics