Sheela Foam Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Sub-10% EBITDA, but one-offs explain it: EBITDA margin dipped below 10% as post-COVID advertising restarts, M&A exploration costs, and non-cash forex losses hit the P&L, while gross margin actually improved on softer raw materials.
• Volume dip called temporary: Mattress volumes slipped versus pre-COVID, which management attributes entirely to retail inflation and expects to reverse, citing post-COVID market research that shows Sleepwell's share consolidating.
• Europe is a share-gain story, not a demand story: The EU market slumped 25%, but Sheela Foam's Spanish unit dropped only 10% and its order book is full, because it holds just 1% of that market and is gaining share.
• Jabalpur is the medium-term growth anchor: Machinery has begun arriving after war and COVID delays; installation starts end of CY23, full production from FY24, with a wild-guess revenue potential of ₹350–400 crores 2–3 years out.
• What to watch next quarter: Whether the January footfall and conversion uptick sustains into Q4, the pace of gross margin expansion as raw material trends stay favourable, and any concrete inorganic announcement.

Quarter in Review: What Drove the Sub-10% EBITDA

• Gross margin improved as raw material prices (TDI, polyol) moved slightly downwards; management expects a further positive impact in Q4 even after accounting for opening stocks.
• One-off expenses were the margin story: increased advertisement spend to restart post-COVID momentum, exploratory M&A expenses, and non-cash mark-to-market forex losses (notional, non-cash) combined to push EBITDA below 10%.
• Marketing spend is not entirely one-time: spending was zero during COVID, and restarting required spending more than necessary to regain momentum; it will settle at normal levels but not go to zero.
• Export plant losses reflect very low utilization (10–15%), though capex investment is low because the premises are rented and there is no foaming process, only mattress manufacturing and compressing/boxing.
• Management declined to quantify the one-off non-cash M2M forex losses and exploratory M&A expenses when asked, offering only a qualitative description of the hedging item.

Rahul Gautam: "But this is purely temporary, purely on account of inflation. And if there is any aberration, or apparent aberration that is seeming there, it's only temporary and it will shift and go back. Because the trends are very clear in the research."

Demand & Volume: The Recovery Bet

• Mattress volumes saw a slight drop compared to pre-COVID; management attributes this purely to temporary retail inflation and expects it to shift back, with post-COVID market research showing Sleepwell's market share considerably increased.
• January trends improved: footfalls in EBOs, which had been challenging in the recent past, began to increase in January, and the situation has considerably improved.
• Conversion rate is climbing month-on-month, helped by Quest sales advisors placed at 30–35% of stores who train staff and help convert walk-ins.
• Exports face headwinds: ups and downs stem from infrastructure coming up to speed on order supply, plus the US (largest recipient) going through its own inflation and a bit of recession.
• Online competition is rationalizing: online businesses have been losing money, and a change in investor sentiment (cost of money, cannot continue to burn cash) is forcing them to go offline; online is becoming just another channel.

Rahul Gautam: "There would be online and offline, but the online will be about anything between 15% to 20%. If it's any upwards of 15%, I think that will be a great achievement."

International: Australia Gains, Spain Resilient, Europe a Share Play

• Australia delivered 10–12% volume and top-line growth because people are spending more on home improvement (travel not fully resumed, money in pockets), and imports (especially from China and Europe) have been impacted by "Australian made" sentiment.
• A second foaming plant in Adelaide has been installed and will be commissioned by the first week of March; management expects to get more aggressive on market share thereafter, believing a lot of imports can be catered to.
• Spain dropped only 10% versus a 25–30% European market slump because the company is a very small part (1%) of that large market; order books in January and February were completely filled up.
• Expanded Spanish capacity (to ~17,000 tons per annum) is expected to be fully consumed because the plant does not cater to even 10% of the requirement of its local area, a hub for sofas, mattresses, shoes and furniture production.

Rahul Gautam: "Demand in Europe has definitely slumped. The market... has slumped by 25%. We fortunately, being just 1% of that market and having our own strengths, so even if the market size has shrunk, our share is already going up and has the potential of increasing. I mean, we are far, far away from making any kind of an impact on..."

Growth Initiatives: Distribution, Product & Adjacencies

• EBO expansion of 400 to 500 extra outlets per year is on track, which will automatically increase volumes as footfalls increase.
• MBO push via FeatherForm and Starlite brands is going to happen; combined with EBO expansion, both will increase volumes.
• Furniture-First stores have already begun, with about 2,000 stores under the Feather Foam brand (endorsed by Sleepwell); these are non-exclusive mattress stores.
• Sofa refurbishment pilot is on: Sleepwell will pick up, refurbish, and return a sofa in three to four days.
• Railways have clearly stated that the company's product is the preferred product for making coaches; quantum is increasing month after month.
• Technical Foam revenue increase is driven primarily by the auto sector, which has been doing extremely well; the company holds ~70–75% share in that market.
• Mattress for Every Indian is a polyurethane foam product with new technology from Jabalpur, aimed at people not using modern mattresses (using cotton mattresses, dharis, chattais); two challenges are making it affordable and making it available in remote blocks and clusters of villages.

Competitive Landscape & Regional Dynamics

• Market research (first in 2.5 years, post-COVID) shows the shift from unorganized to organized continues, and Sleepwell's market share considerably increased, further consolidating leadership.
• Regional split: historically, most organized mattress manufacturers were based in the South (coir/rubberized coir dominance 20–30 years ago); now North and West are increasing organized presence, but the South remains largest. South and East are more coir-oriented; North and West more foam-oriented. A change from coir to foam is happening.
• Sheela Foam's real strong areas are North and West: share in the South is increasing but not leading; East is a small market where the company would be number two.
• Growth by price segment: Feather Foam and Starlite (around ₹10,000 price range) have larger potential for growth; efforts to increase ASP will continue but it is a slow process, adversely impacted during COVID.
• Spring mattresses continue to grow with no regional differential.

Rahul Gautam: "Our real strong areas are North and West. Our share in the South is increasing, but we are definitely not leading that position there. There are others who lead that."

Inorganic Growth: Explorations Continue, Details Scarce

• Explorations continue and some are encouraging, but "these things happen when they have to happen."
• India strategy: looking for consumer-facing businesses that align with what Sheela Foam does; effort will be that any deal is EBITDA accretive, if not right away then on a stable basis as soon as stability happens.
• Outside India strategy: looking for businesses that manufacture foam (procurement, formulations, technologies to manufacture and sell foam to others); will hesitate or by and large not touch any business that involves understanding consumers outside India.
• Management declined to provide any numbers on leverage or whether a deal could be EPS dilutive, stating "at this point of time, I may be constrained into speak anything more about it."

Rahul Gautam: "We do not understand the markets, the consumer outside India, and we will hesitate or by and large, we will not touch any business which does that."

Guidance & Commitments

Key Metrics