Sheela Foam Ltd Q4 FY2026 Concall Summary

Key Takeaways

• Record FY26, margin expansion underway: The company posted its highest ever annual foam production, top line, and EBITDA, with core EBITDA margin reaching 11.5% in Q4 and 10.8% for the full year.
• Kurlon integration is now a contributor, not a project: Return on capital employed (ex-intangibles) improved to ~18% from ~17% pre-acquisition, and the combined platform is driving mattress growth across both Sleepwell and Kurlon brands.
• Raw material volatility is the new normal: TDI and polyol prices now swing INR40-50 at a time, multiple times a month; the company is learning to pass through costs within its 10-15 day inventory cycle and does not expect material margin pressure in Q1/Q2.
• First-ever dividend signals confidence: The board recommended a 20% dividend, a milestone enabled by enhanced profitability post-Kurlon integration and significantly reduced debt levels.
• What to watch next quarter: Whether the pending INR40 crores in synergy savings from new imported machines materializes after a 1.5-quarter delay, the trajectory of raw material prices as the war premium fades, and the Furlenco IPO timing decision due in 3-4 months.

Margin & Profitability

• Margin walk: Core EBITDA margin improvement to 11.5% in Q4 was driven by incremental sales volume (30%+ contribution margin business), better gross margins (up 50-100 bps YoY), and disciplined control over operating and fixed costs.
• Raw material pass-through mechanics: The company can pass on cost increases across all channels, with the process taking 10-15 days to match the inventory holding period. B2C and industrial segments move fastest; B2B moves more slowly.
• Price hikes taken: In mattresses, decent price hikes were taken; B2B a little lesser; industrial segment can pass on immediately. Polyol and TDI increased 25-35% on average, and prices increased to offset those increases and to some extent maintain margins.
• Gross margin trajectory: Gross margins improved 50-100 bps YoY in Q4. Management does not expect material EBITDA margin pressure in Q1/Q2 from higher raw material prices.
• International margin turnaround: Australia EBITDA margin improved ~400 bps via strategic yield improvement programs, customer price renegotiations, and supply chain restructuring. Spain EBITDA margin increased from 8.4% to 10.4% on better pricing realization.
• Australia margin ceiling: Intent is to retain profitability between 10% to 12%, not push to 16-18%, as those levels are not sustainable in that market. Spain margins are stable between 30% to 32% with only minor improvements possible.

Gautam: "This is a significant milestone for the company as the profitability of the business has enhanced after successful integration of Kurlon and with significant reduction of debt levels, the group has strengthened its cash generation profile, enabling it to share profits with shareholders."

Raw Material Environment

• Unprecedented volatility: TDI and polyol prices now move INR40-50 at a time, multiple times in a month, versus the historical pattern of INR2-10 per kilo movement over a year. The company is learning to handle this new regime.
• Polyol price spike: Polyol was INR120 in January, started rising in February, spiked to INR220 at end-February due to war, and is currently oscillating between INR180 and INR200. Part of the price increase has already been passed on.
• TDI supply disruption: GNFC, the biggest domestic supplier, shut down temporarily due to technical reasons and natural gas energy issues. Traders importing the balance 40% raised rates. Sheela Foam had introduced a new supplier partner (mix of Korea, Japan, China) a few months back as a hedge, which helped avoid stock-outs, though at a slightly higher cost at times.
• Directional outlook: Raw materials are looking southwards now but remain very volatile, a function of both availability and pricing. Management expects polyols around INR120+ and TDI around INR240 based on the last 5-year average; both are currently above that.
• Margin expansion opportunity: The company sees an opportunity for margin expansion from March and going forward, as price increases flow through while raw material costs potentially ease.

Gautam: "What used to be some INR2, INR3, INR4, INR5, INR10 a kilo in a year that you would see something moving up or down or up and down. Now you suddenly have INR40 and INR50 at a time happening multiple times in a month."

India Volume Growth & Market Position

• Growth drivers: India volume growth was driven by a sharp organizational focus after Kurlon integration, a shift to a "profitable growth" model, long-term planning, channel expansion into white spaces, and integration of both brands under channel partners with clear accountability.
• Market share dynamics: No recent industry study is available, but management senses the organized sector play is improving after a period where the unorganized sector was growing faster.
• Technical foam & comfort foam Q4 spike: Two factors drove the spike: structural changes in distribution and market approach that were already showing results, and a war-related shift where smaller players struggled with supply chains and their orders moved to Sheela Foam. On an annual basis, these businesses grew 15%.
• Customer retention: Customers who moved to Sheela Foam during the scarcity in March/April have started buying, and the company plans to retain them. The plan for next year is similar 15% growth on an annual basis.
• Channel stocking denial: Management pushed back on the suggestion that the Q4 spike reflected channel stocking ahead of price hikes, stating foam is too bulky to stock beyond volume and the demand was genuine.

Gupta: "Nothing else. I don't think raw material has changed. I don't think market has changed, customer has changed or anyone has changed. But yes, our way of looking at the business and putting targets in front of ourselves has changed."

Category & Channel Performance

• Mattress growth: Growth was well distributed across Sleepwell and Kurlon, supported by deeper distribution, sustained brand investments, sharper channel execution, and benefits of the integrated platform.
• E-commerce growth: Driven by a focused digital strategy, targeted consumer marketing, a sharper online portfolio, better alignment between product pricing and fulfillment capabilities, and changes in platform strategy for Kurlon that yielded results.
• U2O growth: Value growth of 111% exceeded volume growth of 65% because a higher-priced model was introduced and price increases were taken in both models. Margins lie between offline mattress (higher) and e-commerce (lower).
• Furlenco performance: Achieved growth while maintaining stringent cost discipline and fiscal prudence. Integrated stores (Furlenco + Sheela Foam) have seen encouraging customer response; the plan is to cross 100 stores during the current year, up from 40-plus now.
• Pillow segment: Will be treated as a separate category and built upon; the market is approximately INR100 crores.

Capital Allocation & Balance Sheet

• First dividend: The board recommended a 20% dividend for FY26, subject to shareholder approval, the first dividend since listing or forever.
• Debt capacity: India debt of INR300-odd crores can be repaid in 1.5 years from cash flow, but cash may be used for further growth instead. Debt to EBITDA is less than 1.
• Capex FY27: INR125-150 crores planned, including maintenance, new stores, debottlenecking, and all plants across India, Australia, and Spain.
• Depreciation policy change: The company realigned from the written-down method to reflect the useful life of assets, noting foaming machines last 40-50 years and buildings 40-50 years. The previous method depreciated 70-75% in the first 3-4 years, which did not reflect actual amortization. Consolidated depreciation for FY27 is expected at INR140-145 crores based on current assets.
• Synergy savings pending: INR40 crores in savings from new imported machines using malleable fiber as a comfort layer are pending. Installation was delayed by 1.5 quarters and is now expected by mid or end of this quarter, with scaling in subsequent quarters.
• Furlenco IPO: A decision on timing will be taken in the next 3 to 4 months, with the IPO itself "maybe 1 year from now or maybe a little bit later than that."
• International business sale: Management remains open to selling but is not actively pursuing; waiting for the right party at the right time.

Gautam: "We will take our decision somewhere in the next 3 to 4 months' time."

Guidance & Commitments

Key Metrics