Sheela Foam Ltd Q2 FY2025 Concall Summary

Key Takeaways

• Integration unlocked, volumes surged: The Sleepwell-Kurlon operating model is now working, driving 19% like-to-like mattress volume growth, the highest in eight quarters.
• B2C shift is deliberate and margin-accretive: Mattress share crossed 50% of revenue, carrying a 5–8% margin premium over B2B, as the company actively decommoditizes its mix.
• Cost savings are real and ramping: INR100 crores annual run-rate already achieved from plant consolidation and yield improvements, with more to come in H2.
• Furlenco turned the corner: The rental business is now PBT-positive and cash-generative after reaching a INR210 crores run-rate, with the stake increased to 45%.
• What to watch next quarter: Full impact of Kurlon's distribution model change, the trajectory of other income, and whether the Tarang/Aaram urban extension gains traction.

Integration & Cost Realization

• Operating model solved: Management stated the model where both Sleepwell and Kurlon work together has been figured out and implemented, ending a period of uncertainty.
• Plant consolidation delivering: Shifting foaming from four Kurlon plants to Sheela Foam plants yielded close to 10% savings from better yield, and commencing foaming at Kurlon's Gwalior plant is further reducing freight.
• VPS shift underway: Foaming production is gradually being moved to the VPS technology side, a structural cost and quality lever.
• Savings runway intact: The INR100 crores annual run-rate achieved is expected to be augmented by further initiatives in Q3 and Q4.
• Distribution overhaul in motion: Kurlon adopted a distributor-to-distributor model and closed regional distribution centres, a change whose full impact will only be felt in Q3 FY25.

Rahul Gautam: "I'm delighted to share that we have finally been able to figure out and implement the model where both the companies are working together and progressing."

Volume & Brand Performance

• Mattress volumes exceptional: Sleepwell volumes grew 40% YoY, Kurlon grew 26% YoY, driving the consolidated 19% like-to-like mattress volume growth.
• Technical and furniture foams healthy: Technical foams grew 18% YoY and furniture foam grew 10% YoY, showing broad-based demand.
• Decommoditization in action: The mattress share of revenue crossing 50% reflects a deliberate push to sell more branded goods and reduce reliance on lower-margin B2B foam.
• Flanking brands pruned: Previously discontinued flanking brands like SleepX that operated at zero or negative margin, cleaning up the portfolio for profitable growth.
• Pricing strategy anchored to penetration: The biggest opportunity is converting non-users via Tarang/Aaram and shifting unorganized-sector consumers to the Kurlon and Sleepwell branded play, with pricing viewed from a double-mattress sizing lens.

Rahul Gautam: "This actually leads to one of the basic initiatives of the company, which is decommoditizing the product, which means that we are selling more and more of branded goods, more and more of mattresses, and focusing more and more on the Indian business."

Furlenco & New Businesses

• Turnaround complete: Furlenco reached breakeven at a INR190 crores run-rate and is now PBT-positive and cash-generative at a INR210 crores September run-rate, with depreciation of INR2.5–3 crores per month.
• Stake increased to 45%: An incremental INR100 crores investment in October 2024 raised the stake from 35% without any change in cost, signalling conviction in the trajectory.
• H2 run-rate target: Management expects Furlenco to reach a INR250–260 crores run-rate in the second half.
• Asset utilization high: Growth is currently constrained by assets, with utilization at 88–90%, implying further capital deployment will be needed to sustain the ramp.
• Staqo growing profitably: Revenue increased 33% YoY with EBITDA margins further improving, adding a second growth vector.
• Cross-selling pilot underway: Furlenco furniture is being piloted in 8 Sleepwell stores, with plans to expand to EBOs and other stores after learnings are absorbed.

Amit Gupta: "The breakeven point of this business or this company I can say is around INR190 crores. Currently, if you see the results that we have published, we have already reached a turnaround rate of around INR210 crores. And that's why we say that it is PBT positive and because it has a depreciation of around INR2.5 crores to INR3 crores per month, this company is generating that much equivalent plus PBT as cash."

Margins & Profitability

• Gross margin improved post-acquisition: Sheela Foam's standalone gross margin moved from 40% pre-acquisition to 44% post-acquisition, while Kurlon was at 41–42%, reflecting integration benefits.
• B2C margin premium structural: Mattress commands a 5–8% margin higher than B2B businesses, so the mix shift toward branded mattresses is inherently margin-accretive.
• Standalone profit decline explained: The H1 net profit decline is primarily on account of incremental interest costs on debt taken for the Kurlon acquisition, not operational weakness.
• Consolidated profit drag: The consolidated profit decline stems from the debt interest component and depreciation of Kurlon added to the books.
• Other income elevated but normalizing: Higher other income this quarter came from declining interest rates accruing more returns on debt instruments and carries on certain instruments; management flagged it will not be as robust going forward but will remain in a comfortable range with a 12%+ return expectation.

Distribution & Go-to-Market

• Distributor model preferred: In most states, distributors handle both Sleepwell and Kurlon, with Karnataka as the only direct state; management sees distributors adding more value than cost versus setting up regional distribution centres.
• Tarang & Aaram expanding: The economy-range initiative is now present across most of India except Kerala, Northeast, J&K, and Punjab, and is extending into urban markets in a calibrated manner from this quarter.
• Inventory normalized: Inventory came down from an exceptional 17-day level to about 45 days, with the normal target being less than 30 days; RDC closures also contributed to the reduction.
• Foam distribution unchanged: The company is not reducing the selling of foam to the local market, which goes into various applications like mattress and sofa making by smaller players.

Nilesh Mazumdar: "But more important than that, we see the distributor's ability to add a lot of value to the Kurlon business in these markets because they know the market well, they are very familiar, they have been dealing in these markets for the last 10, 15, 20 years."

Guidance & Commitments

Key Metrics