Sheela Foam Ltd Q1 FY2025 Concall Summary

Key Takeaways

• Integration disruption masked underlying strength: Revenue was temporarily hit by front-end consolidation (RDCs cut from ~55 to ~16, distributors retrained), but management says the combined platform is stronger and ready for the upcoming season.
• Gross margin story is better than it looks: Standalone gross margin was dragged down by low-margin intercompany sales; at the India business level, gross margin actually rose ~0.5% QoQ despite an adverse channel mix shift.
• Synergy savings are on track: INR100 crores of the INR250 crores annual synergy target is already at run-rate, with another INR100-150 crores expected over the next 6-9 months.
• Furlenco turned profitable: The furniture rental subsidiary swung from a ~INR10 crores monthly PBT loss pre-acquisition to PBT positive, crossing a INR200 crores+ annualized revenue run-rate last month.
• What to watch next quarter: Whether the 85-90% complete integration translates into the promised ~15% YoY growth, the pace of gross margin enhancement, and standalone Kurlon numbers that management committed to share.

Integration: The Deliberate Disruption

• Front-end overhaul caused temporary pain: RDCs were consolidated from ~55 to ~16, distributors were given the additional task of distributing Kurlon products, and stocks had to be transferred, people trained, and systems changed, all of which disrupted sales in the quarter.
• ERP switch completed in under a week: A process that normally takes 6-12 months was done in less than a week by training people in advance and switching over at the financial year start on April 1.
• Two factories closed peacefully: All people were taken care of, and the closures were executed without friction.
• Merger filed with NCLT: The filing is with effect from October 2023, the date of acquisition; when the NCLT order comes out, it will be a seamless conversion at the corporate level.
• Distribution structure now unified: Previously, Sleepwell largely did exclusive outlets while Kurlon was mostly through multi-brand outlets; post-acquisition, both brands get the opportunity to go through both channels.
• Incentive discipline tightened: Incentives have not been majorly disrupted but made a little more disciplined; management distinguishes its approach from competitors who "drive sales by throwing money at the channel," focusing instead on creating consumer demand.

Rahul Gautam: "We could have waited to run the two entities separately as different businesses... but we chose otherwise. If we had continued by keeping them separate, the fluid situations would have also continued for a very long time."

Revenue & Margin Mechanics

• Revenue shortfall quantified: Top line was lower by ~INR70 crores versus Q4; at the prevailing gross margin rate, EBITDA margin would have been in the 12%-plus range if revenue had been maintained.
• Standalone gross margin optically depressed: Intercompany sales of INR40-45 crores at arm's length with only 5-6% profit margin on COGS dragged down the average standalone gross margin, obscuring the fact that India business gross margin increased by ~0.5% from Q4.
• India margin resilience: Gross margin should have gone down 0.4% due to mix shift toward online and lower-margin segments, but actually increased 0.1%, implying underlying margin strength.
• International margin compressed on raw materials: Australia and Spain margins fell because they supply foam to brand owners and mattress manufacturers, making them more sensitive to raw material price movements; raw material prices have now stabilized.
• Kurlon revenue run-rate: Approximately INR170-175 crores for the quarter, with management targeting an INR1,000 crores annual run-rate that "will soon be realized."
• Market share held: Management does not believe they are losing market share; Sleepwell grew in both volume and value terms, and Kurlon went up 5-6% last quarter.

Rahul Gautam: "Fundamentally, the business, and I'm talking the combined business has actually become stronger. That means as a platform, it has become stronger from the two platforms that were existing. Now it's not getting reflected on the top line."

Synergies & Cost Savings

• INR250 crores annual synergy potential identified: INR100 crores run-rate already achieved, with an additional INR100-150 crores of savings efficiency expected over the next 6-9 months.
• Gross margin enhancement expected: Management anticipates gross margin improvement over the next 6-9 months leading to levels much higher than current, driven by synergies and operating leverage.
• Finance and Accounts integrated: The F&A function has been combined as part of the integration process.
• HR practices under review: Still to be completed, with no specific timeline beyond "will be done soon."

Channel & Distribution Expansion

• Small Town India is a new channel being created: Already at about 5,000 outlets, with a target of 7,500-8,000 outlets by the end of the financial year.
• Urban channel expanding ~10%: Active channel in urban markets growing from 7,000 outlets, split approximately 3,000 exclusive and 4,000 multi-brand.
• Volume growth strategy: New product introductions every quarter to fill portfolio gaps, communication for brand saliency, and channel expansion are the three levers.
• Consumer shift from cotton to foam: Management acknowledged the trend in villages but said it "will unfold in due course of time" without providing a specific plan or timeline.

International Business & Capacity

• Australia capacity expanded: Commissioned and increased from 10,000 to 15,000 tons per annum.
• Spain capacity expanded: Commissioned and increased from 12,000 to 18,000 tons per annum.
• Better numbers expected: Raw material prices have stabilized and costs are being reduced, so international business should see improvement in coming quarters.

Furlenco Turnaround

• From deep losses to profitability: Prior to acquisition, Furlenco was PBT negative at ~INR10 crores per month; post-acquisition in February, it turned PBT positive at a ~INR14.5-15 crores per month top line.
• Revenue run-rate accelerating: Last month crossed INR17 crores top line, implying a INR200 crores+ annualized run-rate, with PBT positive and gradually improving profitability.
• Option for additional 9% stake: The company has an option to acquire another 9% in Furlenco with an investment of ~INR100 crores, available till 29th August; the matter is being debated at the Board level.

Guidance & Commitments

Rahul Gautam: "We fully recognize the role that dividends play, and let's hope soon it will come through."

Key Metrics