Sheela Foam Ltd Q1 FY2023 Concall Summary

Key Takeaways

• Sharp standalone rebound, soft base: Standalone revenue grew ~58% YoY and consolidated ~32%, but the base quarter was severely depressed by COVID, so the headline growth overstates underlying momentum.
• B2B is carrying the quarter: Railways, auto and new product launches are doing the heavy lifting while B2C footfalls remain subdued, a split management expects to persist until a demand trigger arrives.
• Export takeoff keeps getting deferred: Ocean freight has normalised but a US slowdown has replaced it as the blocker; management describes exports as "ready to take off, but it has not taken."
• Europe is shrinking, share is not: The Spanish market has contracted ~30–35% on war-linked energy and consumer caution, but Sheela Foam's decline was roughly half that, and small share leaves room to grow even in a down market.
• What to watch next quarter: Whether the home-sales pickup converts into B2C demand after the 3–4 month lag, whether railways orders sustain their Q1 promise, and whether Jamalpur machinery ships by year-end.

Demand & Channel Dynamics

• B2B vs B2C split: B2B is seeing better traction from railways, new launches and auto-industry customers who are doing very well; B2C revival needs a small trigger such as a good monsoon or season, and management has not attempted to forecast the next 3–4 quarters.
• Store footfalls subdued: Q1 environment was soft, reflected in reduced store footfalls; overall market has not really grown, with some share having shifted to online and unorganised during lockdown.
• Mattress volumes still below pre-COVID: Volumes are slightly lower than FY2019; the challenge is more on the ASP side, with the lower end tracking faster during marriage season and the higher end at other times.
• Realisation lift is mix, not price: Average realisations improved because of a mix shift toward the higher-ASP Sleepwell brand, not because of price hikes.
• Real estate tailwind forming: Home sales pickup was observed in the last month or so; management notes a 3–4 month lag between a home sale and a consumer sale for Sheela Foam, implying any benefit would show from late Q2 onward.
• Distribution expansion on track: ~500 outlets added in Q1, reaching ~5,500 total outlets, focused on exclusive dealers and showrooms; expansion plan is meeting most targets.
• Feather Foam cushioning push: A new MBO network is being created under a "cushioning partner" program, with intent to eventually convert MBOs to the EBO network; volumes expected to start coming in from end of Q2.

Rahul Gautam: "I know that in the shorter-term that there is a lot of laziness and lot of uncertainty which is existing and therefore some of our answers would also have been in similar manner with very little sharpness and very little... specifics because that is how the picture is at the moment."

E-Commerce & Channel Strategy

• Sleepwell launched on Marketplace: Introduced with a new portfolio and new outlook to play a bigger role; previously the brand was absent from third-party platforms.
• Channel conflict judged manageable: The online Sleepwell portfolio is limited; for the same range, similar or identical offerings will exist offline. Management's experience is that when the offer is similar, consumers tend to buy from brick-and-mortar stores, so they expect very little friction.
• Online working capital improved: Shifted from fulfillment by online partners (30–60 days inventory, ~60-day repayment) to direct distribution from own warehouses; now 6–7 dedicated online warehouses across India; online working capital is now slightly better than offline.
• Offline working capital tightened: Moved away from higher channel inventory to an F-24 model (service within 24 hours from nearest stock point); distributors run on cash-and-carry or 15-day credit.
• Margins: offline edges ahead: General trade margins are a little higher than online; online is more competitive with basic/economic products. On an apple-to-apple segment basis margins are at par, but offline services premium/luxury segments so overall offline margins are better.

Rakesh Chahar: "Our experience told that if the offer is similar and the offline offer is similar to the online one people tend to buy material from the brick-and-mortar store, and therefore, we are pretty comfortable with that there would be very little friction that would be there."

International Markets

• Australia resilient: The Australian entity is doing reasonably well despite being a mature market that has already gone through opening up and pent-up demand; attributed to a deglobalisation-like phenomenon where Australia needs to depend on domestic resources and materials. Raw materials there are very steady.
• Spain under pressure: The Spanish entity sits inside a European economy full of uncertainties; the real picture will emerge later. Raw material prices are moving downwards, suppliers are complaining that increased energy costs mean they cannot make money while demand is absent, and a couple of plants may close down.
• Europe: shrinking market, growing share: The European market had 8–10 good years; the war increased energy costs, fuel costs and consumer caution. The market shrunk ~30–35% but Sheela Foam's decline was about half that; small market share leaves room to grow even in a shrinking market. Plans from October 2019 that were put aside during COVID are being revisited.
• Exports from India stuck: Export potential is still huge but hurdles persist. Ocean freight spiked to \$17,000 for a \$30,000 consignment, making imports unviable for buyers; freights have since come down, but now a US slowdown is subduing demand, so it will take more time for orders to come in. The company participated in a large Las Vegas trade show, meeting existing importing buyers and some new customers.

Rahul Gautam: "freight cost has come down, but the recession in US is now playing out. I mean something on the other is kind of happening, but it just appears that it is ready to take off, but it has not taken."

Raw Materials & Margin Outlook

• India: no clear direction: Raw material prices continue to fluctuate; TDI is fluctuating more, Polyol is on a needless downward trend; no clear direction for the coming months.
• Spain: downward pressure with pain: Raw material prices are moving downwards; suppliers are squeezed between high energy costs and weak demand, with a couple of plants potentially closing.
• Australia: steady: Raw materials are very steady.
• EBITDA margin expectation: Management stated it "should be double digits" but explicitly refrained from giving specific guidance for the next nine months of FY23.
• Marketing spend to step up: Current marketing spend is ~2.5–3% of revenue; intent is to increase it, with total selling plus marketing expected to hover between 13–14%.
• Brand ambassador ruled out for now: Management believes Sleepwell's salience and recognition are at a good enough level that a brand ambassador would not serve the purpose; may reconsider when going deeper into the market.

Rahul Gautam: "our belief is that when you are introducing a brand or introducing either to a new market or the brand is new then the brand ambassador plays an important role, however in the current scenario, the salience of Sleepwell or the recognition of that is reasonably on a good level and therefore having a brand ambassador will not serve the purpose."

Capacity Expansion & New Initiatives

• Jamalpur (M5 project) delayed: Progressing but delayed because special steels come from Ukraine; the machine supplier is delayed by a couple of months. The machine is expected to be shipped out by end of this year, with product supply to market expected to start somewhere in the middle of 2023. Seed marketing and market research are already underway.
• Australia capacity: A little bit delayed but otherwise on track; expected to be in production in January/February.
• Spain expansion: On track; will be viewed more critically going forward, may resume somewhere in September/October.
• Railways exceeding expectations: Product has been well accepted; some clarifications and due diligence within railways on existing material recommended the product. Q1 saw some part of it and did much better than expected; upcoming quarters look very promising.
• Market research refresh: No formal market research was conducted during COVID; a new study has been instituted and the report is expected in ~4 months, which will be the first post-COVID market sizing.

Inorganic Strategy & Long-Term View

• Three-pronged M&A approach: (1) No need for acquisitions in existing segments/geographies where already present; (2) Open to opportunities in geographies where weak, segment remaining the same; (3) Would refrain from completely new segments, but open to newer ways of reaching consumers or new distribution channels. Manufacturing foam can be anywhere globally; open globally but current global problems noted.
• EPS impact unknowable today: Management stated it is too difficult at this moment to comment on whether any acquisition would be EPS accretive; in the long run all ratios will get better, but depending on how the opportunity materialises and at what point in time, the initial-period EPS impact is impossible to call.
• Three-year growth view: Management looks at three-year growth rates of 10–15% for India, home improvement and Sheela Foam.

Rakesh Chahar: "I honestly, I look at a three-year growth rates of 10% to 15%, which would..."

Guidance & Commitments

Key Metrics