Sheela Foam Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Flat quarter, geography-specific drags: Revenue was flat across India, Australia, and Spain, with India hurt by weak consumer footfalls while the auto segment stayed strong.
• Gross margin inflection arrived: Gross margins jumped to 39% (vs 34% YoY) on stable raw material prices, and management expects this to continue and improve further.
• New India CEO installed to free up top bandwidth: Nilesh Mazumdar joined as India CEO, a structural move designed to let senior leadership focus on inorganic opportunities that are "getting nearer to finalization."
• Volume problem, not a conversion problem: The Quest initiative confirmed healthy 30–50% conversion rates; the real challenge is extremely low store footfalls and a post-COVID purchase cycle hangover.
• What to watch next quarter: Whether the new Sleepwell ad campaign and 800–1,000 outlet expansion reverse the footfall decline, and if the "Mattress for Every Indian" pilot shows traction ahead of a Q3 launch.

Demand & Volume: The Footfall Problem

• India consumer weak: Consumers are postponing mattress purchases, with footfalls in exclusive brand outlets (EBOs) extremely low. The Sleepwell brand has seen higher contraction versus pre-COVID levels.
• Pent-up demand hangover: The industry is working through a cycle where COVID-era pent-up demand pulled purchases forward, depressing current footfalls, especially at exclusive stores.
• Conversion is not the issue: The Quest initiative showed conversion rates are already healthy at 30% to 50%. The binding constraint is getting customers into stores, not closing sales once they arrive.
• Auto segment a bright spot: The company's supplies to the auto industry are doing extremely well, providing a partial offset to consumer weakness.
• Australia and Spain flat for different reasons: Australia faced a second COVID wave earlier in the year; Spain was impacted by the Ukraine war.
• Online sales structurally limited: Mattress as a category requires touch and feel; internationally, online sales hover around 12% to 15% post-COVID, so e-commerce cannot fully substitute for missing store traffic.

Rahul Gautam: "The macroeconomic average indicators that we see do not tell the entire story. As industry segments each have different performance experiences."

Gross Margin Recovery & Raw Material Stability

• Sharp YoY expansion: Gross margins improved to 39% in Q4 FY23 from 34% in Q4 FY22, driven by stability in raw material prices.
• Trajectory expected to hold: Management stated the Q4 print is an indication of a durable trend, with gross margins expected to continue improving and exceed 12% going forward (context suggests this refers to EBITDA margin or a different base; the directional signal is upward).
• Variable pay reinstated: Performance-linked incentives for the salesforce, employees, retailers, and channel partners have been brought back, signaling confidence in the cost structure even as volumes remain soft.
• Reclassification a non-event: Certain selling expenses were reclassified, reducing the top line with an equal reduction in expenses; auditors required it based on an accounting index interpretation, and there was zero impact on profitability.

Rahul Gautam: "if Q4 is not any indication, is the indication for the stability of raw material prices sort of contributing to the gross margin, this is going to continue."

Brand & Channel: The Sleepwell Reset

• New advertising agency engaged: SightBase has been brought on, and a new Sleepwell campaign will launch around end-Q2 or beginning-Q3.
• Aggressive channel expansion: The company plans to add 800 to 1,000 outlets for Sleepwell over the next three months, a roughly 20% expansion in active channel, targeting under-represented markets.
• Advertising spend commitment: Advertising expenses will be maintained at 5% to 6% of net sales, with higher absolute spends in Q2 and Q3 due to seasonality.
• Portfolio under review: The entire Sleepwell portfolio is being reviewed, with actions to follow. The COVID period disrupted the journey of pulling up Sleepwell's price point and adding value.
• Market share intact: Industry market research conducted every half-year shows both Sleepwell and Starlite's share has increased, confirming no loss of market share despite the volume softness.

New Initiatives: Bottom-of-Pyramid & Railways

• Mattress for Every Indian: The long-awaited project is now at refining stages, with pilot works begun and distribution soon to follow. It is expected to start contributing from Q3 onwards, targeting low-income consumers and those far from existing markets.
• Bottom-of-pyramid pilot underway: A pilot program to upgrade consumers from cotton mattresses, darri, and chatai to foam mattresses has just started, with results expected by end of Q2.
• Indian Railways traction: Q4 traction was good and in line with expectations. A new product is being developed to increase market share, with a target of reaching INR 300–350 crores in about three years, up from the current ~INR 60 crores.
• Exports recovering slowly: Markets are still slow but recovering, with early signs of reinventory orders. The long-term program involves working with retail brands to develop products for them.

Nilesh Mazumdar: "Number one is the trend that we are seeing across most of the industries, which is movement from the unorganized to the organized segment, so that is one big opportunity. And the second is block at the bottom of the pyramid, which is by upgradation of consumers who are using cotton mattresses, darri, chatai, etcetera, to using a good quality foam mattress."

Capacity, Inorganic Pipeline & Management Changes

• Three-plant capacity expansion nearing completion: New plants in India and Australia, plus a 60% capacity increase in Spain, are in final stages. Each should be ready to deliver as market demands by Q2 or end-Q2.
• Inorganic opportunities progressing: Work remains in progress but is "getting nearer to finalization." Management offered no cap on deal size or number of transactions, noting they have little control over timing and will keep deals within what is digestible and affordable.
• New India CEO installed: Nilesh Mazumdar joined February 1 as CEO of India business, bringing over a decade at Pidilite (Doctor Fixit, Fevicol) and prior experience at Onida and Asian Paints. The structure is designed to free top management for inorganic opportunities.
• New CFO joined: Amit Gupta has joined as the group's CFO.
• First BRSR ready: The company's first Business Responsibility and Sustainability Report is complete; management says its status and goals compare very well with similar industries in India or globally.
• Focus on core: Given volume pressure, the company is strategically focusing on core categories (mattress, furniture cushioning, technical foam) rather than extending to living room categories. Only small pilots may be done for understanding.

Rahul Gautam: "The only thing that I can say is that you do pursue these opportunities and you have sometimes very little handle on when they will be ready for it to happen."

Guidance & Commitments

Key Metrics