Ladies and gentlemen, good day and welcome to the Q2 FY 2023 earnings conference call of Sheela Foam Limited, hosted by ICICI Securities. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes.
If you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Karan Bhuwania from ICICI Securities. Thank you, and over to you, sir.
Good evening, everyone. It's our pleasure-
Sorry to interrupt you, Mr. Karan. We are unable to hear you. Can you please speak a little louder?
Good evening, everyone. It's our pleasure at ICICI to host Sheela Foam's earnings conference call. From the management today we have Mr. Rahul Gautam, Managing Director, Mr. Rakesh Chahar , Full-time Director, Mr. Tushar Gautam, Full-time Director and CEO of India Business, Mr. Nikhil Datye, Group Chief Financial Officer, and Mr. Davinder Ahuja, Finance Controller. I'll now hand over the call to Mr. Rahul Gautam for his opening remarks. Thank you. Over to you, sir.
Thank you, Karan. Thank you. Thanks a lot. As usual, we will begin with our vision statement. Our vision: We will continue to be recognized as a leading organization in quality comfort products while practicing values of integrity, reliability, proactivity, and transparency, to do business with a smile for customer delight and a commitment to society.
Thank you.
Thank you very much. Thank you, Karan, once again for hosting this call on behalf of ICICI Securities, and a very good afternoon to everyone joining us today, and wish you all a very happy Guru Purnima.
It's my pleasure to welcome you all to the earnings conference call for the same quarter and first half of the financial year 2023. I just wanted to say something upfront as far as participation is concerned. So, Mr. Nikhil Datye is today unwell and is not able to attend the conference.
However, at the same time, I also want to add that you know, he was, he's originally from Mumbai, but he's you know, the process of transferring and changing and there were personal difficulties in getting admission for children, et cetera.
So he is unable to continue with Sheela Foam, and with effect from early part of December, we will then put a process on to get a replacement. Let me first take you through the quarterly and half-yearly financial highlights, and then discuss some of the operational and industry highlights.
For the quarter under review, on a consolidated basis, we reported a revenue of INR 772 crores, which was down by about 8% on a year-on-year basis, and about 1% on a quarter-to-quarter basis. EBITDA margins for the quarter were reported at 10.84%, which was an improvement versus previous quarter, but still down against the same period in the previous financial year.
Net profits stood at INR 54 crores, which is down by about 10% or so on a quarter-to-quarter basis. First, to talk about the raw material scenario, both our basic chemicals, which is polyol and TDI, have been experiencing a little bit of a downward trend. Polyol prices continued their consistent movement downwards, while TDI prices also cooled off and then have been fluctuating thereof.
This has definitely resulted in an improvement in gross margins across various geographies that we trade on. Uncertainty still looms large, though clear indications of the volatility settling down are on the horizon. The year-on-year decline in revenue are primarily due to softer demand in our India and European business, while Australia continued to perform well.
For India, we have registered a growth of 15% in the H1, and Australia, as I said, has been doing well. While Spain, you know, whatever has been happening in the European continent due to the Ukrainian war has been experiencing a downward consumption and therefore a downward production. In India, the revival in consumption patterns is slow due to the inflationary pressures seen across consumer durable companies.
The global economies do continue to face headwinds due to certain geopolitical situations and high inflation. The rising interest rates across the globe to fight inflationary pressures are weighing in on economic activities and consumption patterns. Similar to last quarter, the auto industry continued to do well for us in India, resulting in good volume and revenue growth in our technical foam products on a year-on-year basis and quarter-on-quarter basis.
Over this quarter, the mattress segment, furniture foam products, Feather Foam products witnessed some decline year-on-year. Decline in consolidated EBITDA margins are primarily due to the increase in sales and marketing expenses by 37% year-on-year and 24% quarter-on-quarter.
For the first half of the financial year 2023, consolidated revenues stood at INR 1,451 crores, reflecting a growth of 9%, with EBITDA margins at 9.94%, and a net profit of INR 96 crores. I must share with you that in our recently concluded board meeting, just a few hours back, the board has approved a 1:1 bonus on the existing shares.
So I think this should bring some cheer to the investor community. Also, the board discussed in detail the dividend policy, which is being fine-tuned, and we will be ready as and when the time comes.
In conclusion, despite the macro challenges, we believe that the inflationary environment is slowly cooling off, and with our revived efforts in sales and marketing and the extra initiative that we have done there, we believe that the financial revival is around the corner. We can now open the floor for the questions- and- answer session. Thank you very much. Over to you, Karan.
Thank you very much. We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two.
Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Ritesh Shah from Investec. Please go ahead.
Hi, sir. Thanks for the opportunity. A couple of questions. Cash flows in the manufacturing and third, more to do with the revenue stream we're looking at. So coming from MA, on cash flow, prior to call, also, we had indicated that we could be looking at a few acquisitions, and the timeline which was cited was October end.
If you could provide some color over there, on what we could be looking at, any numbers, that would help. So that's the first question. The second question on about third-party manufacturing, I understand that we have started this at a couple of places in India. If you could please highlight the rationale behind this, what are the products?
So I think I understand Starlite is one of the products which will be in the third-party manufacturing. So more of rationale and some numbers over here, that's the second question. T he third question is into four parts. So one is exports. Has it really come off from the lockdown? So I think earlier the problem was freight rates. That seems to be cooling off. Any numbers over here will be useful.
Second is any feedback on the e-commerce side? Last quarter we indicated that we have launched e-tail. How is it actually faring in the marketplace? That's the second part of the third question. Fourth is Indian Railways. Any numbers over here, any updates and glimpses on timelines on railway expansion along with launch for just for the region? Thank you so much, sir.
Thank you, Ritesh. Thank you. That's a lot of questions. So let me first begin with the first question that you have asked regarding acquisitions. We go through this day in and day out, and what we are experiencing is that these things always take a little longer time than what you think they should when you actually go down into details. I would only say that a couple of them have progressed well. They are close to the final run. However, giving any more details on that will be a little out of place at this point in time.
Sure.
On the third party, on the third-party manufacturing, I presume that you are talking about outsourcing manufacturing of Starlite. Is that correct?
That's right.
Right. Okay, so we are doing that on a standard basis, and I think there are two units who do that for us. The products, however, are completed there, and they come to our place for the final quality inspection, and then we are going ahead with that.
However, let me just say that we continue to have some flexibility on that, in the sense that if the markets are down and or the volumetric productions are less, then we do that more in-house and less from outside. So there is flexibility on it. There was a question on the Indian Railways.
Sir, can I... So sorry to interrupt. Sir, can I just ask you for the rationale for this particular outsourcing or third-party manufacturing? Is it only lead time, or is that? We are looking to improve the ROCE working capital. How should one understand it, sir?
So, Tushar, I'll take that. I think the rationale is, for that is very simple. It's a very low value item. We are anyway sourcing bulk of the cores and fabric materials for that. Whenever we have capacity constraints in our facility, it makes sense to outsource it as a finished product and bring it into our warehouses and then distribute onwards.
Rather than putting up any fresh capital investment and things like that for a product like this. But like Rahul ji said, during the year with seasonality, its volume of outsourcing moves up and down, depending on how much free capacity we have ourselves.
Sure.
Okay. Before I let Rakesh state the railway question, I just want to update you on the Jabalpur project that is a matter for every Indian. Last time, even the time before that, I had shared with you that there was some delay in the supply of equipment from England on account of steel, et cetera, which was actually available only from a Ukrainian plant.
However, all that has been kind of sorted out, and the machine is on its production. We should begin to receiving parts of it by the end of this year a nd I'm sure that by in the first half of next year or the middle of next year is when the production will start.
The civil facilities and the infrastructures are all complete, and some of the ancillary equipment, et cetera, is already in place or getting in place. We are looking at possibilities where we can manufacture before the machine arrives. If we can manufacture some small quantities of the grade and the quality that we want, so that the project can probably start a bit earlier.
W hile being on that project, may add that the front-end work is also in full swing, which is the products, the markets, the ways of distribution, et cetera. Now just I request Rakesh to update us on the railways bit, please.
Yeah. So railways is progressing well. The material has got very well established now. So whatever kind of occupations, specifications, so the existing material, lobby, that all seems to kind of getting settled down a nd so we are now getting to a good run rate monthly, and it's progressing well.
Would it be possible for you to give some numbers or some detailing into what all regional divisions that you're already supplying to? What's the opportunity size?
So we are supplying to seat and berth manufacturers, who in turn supply to the coach factories. So the current run rate is close to. We started doing about 200 coaches or 250 coaches a month. It is growing month by month. In terms of revenue, it will be about INR 4-INR 5 crores a month, is the current run rate that we are doing.
Okay, thank you. Yes, sir. Sir, I have two more questions regarding one was on export and secondly was on e-commerce, few months retail.
Okay. Tushar, you want to take one on the export?
Yeah. So, just, the export side, as like we discussed last time, was primarily struggling on account of extremely high freight charges from India. Those have eased off in the last quarter, they have normalized.
The other thing that's normalized is, because of the slowdown in the U.S. market, a lot of our customers had stuck inventories, which they had already imported. All of that kind of eased off, and from first week of October also, we're starting to see our existing customers buy more and more, and those orders have started coming. So this quarter should be a good quarter for exports a nd that ramp up that we had planned for should actually start to accelerate now.
Rakesh, can you just respond to the e-com question, please?
So, Regal is introduced on both the platforms, Amazon and Flipkart, in late September. The response in October was very encouraging, both on the marketplace and also on our website.
Now we are ramping that up, and we also will be running other campaigns, continuation of the three SKUs that we've introduced a nd this is actually an omni-channel, and these products can also be booked on the offline channel. I think it is settling down, but the initial response has been quite encouraging, and the price point is very competitive.
Sure. Thank you so much for the detailed answers. I'll join back with you. Appreciate it.
Thank you. The next question is from the line of Nihal Shah from Nuvama Wealth, please go ahead.
Yes, thank you so much, and good evening to the management. So a couple of questions from my side. First, you did highlight that the current environment remains a little impacted, specifically on the mattress side.
I'd just ask you that at least the activity from a lot of the other B2C brands in the mattress space has started getting very aggressive. Would you believe that there could be any impact from that specifically happening, and that also being an added to even the overall consumer sentiment?
Nihal, I'll just quickly repeat the question so that I've understood well. You are, that's the competition activity in the market, which is heightened at this time, and, the question is that, is it going to make any big impact as far as Sheela Foam is concerned? Is that correct?
Yes, and I was specifically referring to a lot of the direct-to-consumer mattresses brands that have come up over the last three years. I would assume at least before were doing. So is that a bigger reason than maybe the overall slowdown, which is, say, impacting the performance across the offline mattress industry, not to say specifically as well as Sleepwell or Sheela Foam?
That is, I don't think so. Oh, yeah.
So I think you're referring to the, e-com, brand,
Yes.
-which have been aggressive. So yes, it has an impact on offline in two ways. One is there is a consumer who is now looking at the price, at the offering, and he's also looking at the same kind of bargain in the offline, which is not easy to get because dealer also has to make his money.
So that is one disruption which does impact the offline. S econd is, I think, it's because it's still a small market and growing at a faster rate than offline, about 25%-30%. So but it is still in the realm of 1,200, about maybe 6%-7% of the total market.
So, I would say that, yes, it is a upcoming channel which is getting evolved, but the impact on offline is more a new channel having its own ways of servicing customers, offers, COD, 100 free nights. Those are the things which the retailers are not kind of equipped to handle.
But the brands are, I mean, more and more brands are kind of working with the retailers to bridge that gap. So, but I would not attribute it only to the e-com. I think it's more to do with the environment and consumer sentiment.
I think if I add, if I may add to this, that all this heightened activity that is there, to my mind, is only expanding the mattress market, and expanding the organized mattress market, which derives its source from the unorganized sector, which is an extremely large sector. Therefore, my take on this is that this, all this activity, is helpful.
T he other, little comment that I would want to say, because we are also present, strongly in the e-commerce market, that e-commerce business, as it stands today, is not a very profitable business yet. I mean, eventually, people will have to figure out, ways to exist there, that is by, margins or reducing discounts, et cetera. But otherwise, it's not a sustainable, business.
So just these two points, one, all those activities going, whatever rupees are going into advertisements and talking points, et cetera, and the noise it's creating, good for the business, not good for, not so good for the companies who are doing this.
Understood. J ust to follow up on that would be that from our side, we have SleepX as a brand which is purely online, and we have limited SKUs of Sleepwell, which we have recently got on Amazon and Flipkart. That is the way we are approaching this channel. That would be a right understanding?
That is correct. A lso ensuring that there is some sanity in this in this wild thing which is going on, you know, where the brand is has an opportunity to grow, where you still make some money out of it et cetera, and give your larger market of offline enough foundation and enough strong feet to stay strong.
This is helpful. One last question would be that given the recent correction in raw material that we've seen, how do we plan to use this benefit? Do we plan to reduce our prices? I know you highlighted about a slight increase in marketing, but would there be pricing action on the products, if raw material stays low?
Sorry, I didn't hear that clearly, b ut you are talking about reduction of prices, are you?
Yes. Given that we've seen a correction in the raw material prices, and assuming that sustains, would we reduce the prices of the products?
Generally, we don't do that. In fact, when the prices are to be increased, we also do not exactly commensurate with the increase of raw material that has happened b ecause the market's being structured in a way cannot take these wild fluctuations as the raw material people do.
Therefore, we have increased prudently. We generally do not reduce the prices. If an offering needs to be tweaked up, we will do that. If some of the thing, additional thing needs to be given with a mattress, we will do that. But price reduction is not the possibility.
Understood. Thank you so much, I wish you all the best.
Thank you. The next question is from the line of Sohini Andani from SBI Mutual Fund. Please go ahead.
Hello. Yeah.
Yes.
Yeah, good afternoon. I just wanted little more understanding on, you know, the increase in sales and marketing expenses that we've seen both year-on-year and quarter-on-quarter. A lso the fact that, you know, our mattresses sales have actually declined during this period.
So if you could just, and, if you, if you could just explain, you know, on what areas have we spent this and, you know, the, the economy a bit in terms of actual mattress sales being lower. So it could be good if you could explain this in some detail.
Yeah. All right. Thank you, thank you. I think Tushar will do that, which is, I think, primarily your question: increase in the sales and marketing expense, while the number of mattresses has declined. Where, I think both are following a different curve. Tushar, can you just explain that? Right.
The way that we are looking at that is from a baseline, let's say, of H1 last year or quarter, even quarter two last year, which was very, very unusual. There was Q1 was virtually a base quarter and a lot of the, especially the marketing side, and even some, you know, trade promotions and channels and all of that wasn't there. We've over a period of 12 months, it's suddenly come back to what the normalized level used to be two or three years ago.
What is really extra from the sales side, so what is really extra is marketing expense, and that's something that we are, we are focusing on making the brand more visible, also investing in some of these newer channels where we are just starting to expand the Sleepwell brand, like the e-com site has come now.
So there are a couple of other developments like this that are ongoing, of special channels, special businesses in which we intend to expand the Sleepwell brand. So there are some marketing investments that are related to that, which have, which have gone up or which have been front-loaded at the moment.
Sure. Sure. Okay. Thank you.
Thank you. The next question is from the line of Resham Jain from DSP Investment Managers. Please go ahead.
Yeah. Hi, good afternoon, sir. So I have a few questions. So the first one is, on the, in the past, when we didn't have Starlite and Foam, or rather the high-value products where, the mix was higher, I think the largest contribution used to come from, the marriage-related buying patterns.
Obviously, last two years, those events got postponed and stuff like that. But what we are hearing now is that, the upcoming marriage season seems to be quite strong, and that is, another way, you used to market in the past. So any comments around this, specifically on the marriage-led, demand of your products?
So, I would say yes, wedding season continues to be a strong time for us to market or to sell. And this time, what are the dates, Rakesh, that the weddings have started? Okay. So right through up to 19th of December, I think. Is it? 19th of December. Yes, it is.
So this is a strong season, and you know, you can always feel the feel in the air that mattresses are being sold more. But definitely, this is a strong time, and we should have. I think the phenomenon more in north, which is related to marriage. It has a very little impact on the other zones. But north for sure, I mean, the impact is large.
Yeah, because I think the other zones, they marry whenever they want. Yes. So for sure, the point which you're making, Resham, is strong. This is a good time, and you would see good sales at this time.
Okay. This should improve the mix as well, right? The price points.
Yes.
Okay, got it. So the second part is, I think on the digital spend, because, as you mentioned, e-commerce is where the competition is. And, I could see that in terms of Google searches and all also, earlier, whenever we used to type Sleepwell, the competing brand used to come at the top. I think that has changed little bit, but not fully....
So how much spend has to happen on this side to be relevant b ecause, with the aggression on the e-commerce side, the relevant spend also has to happen, which is unlike a traditional company, where economics are quite different? Some of the competing brands are okay not earning money. So how will you approach this whole competition in this regard?
Generally, I think I'll take that question. You're absolutely correct, and like you're saying, you're starting to see some green shoots there, which is primarily on account of, I would say, a month and a half of extra spend and extra work on the digital platform. Not just Amazon, Flipkart, but on Google, Google Search, Facebook, YouTube, all of that stuff.
More and more, as we move along, we will focus primarily on television and digital. That's where the breakup of the brand spend will be. A lot of the traditional spends are slowly ramping down, and those resources are getting transitioned into digital. So that's one side of the efficiency.
On the other side, just to give you an example, in September and October, we would have resourced the digital spend at least 7x-8 x of what we normally do in a month, and I don't see that slowing down. As we move along, you'll see more and more of that.
Okay. Understood. Can I ask one more? Just to understand, on the e-commerce side, the SleepX and Sleepwell now both will be present online. So from differentiation standpoint and marketing, because marketing, there is a limited budget in terms of how you want to position your brand and spend. So how will you now do, because earlier you used to do for more from SleepX perspective, but now you have to do for Sleepwell as well. So how should one think about this?
I think just think about it in a way that we started SleepX a couple of years ago when all of this, all of these other brands were coming in. Looking at the model, looking at the conflict between online, offline, we thought it's better to do it with a separate brand.
Of course, it's grown, it's competing with the other e-com players, and it continues to compete. The long-term play, the sustainable play is for Sleepwell to be present in that channel and take a larger share of it, which we started about a couple of months ago. Like Rakesh says, good first indication.
It's a product and a model which we worked very hard to develop, an omni-channel experience, where I can compete on an Amazon, Flipkart, website, and compete with all of these other new digital e-com brands. But at the same time, a consumer can also access the same product, the same offer, at the same time, at any of my retail outlets.
From our perspective, we think the Sleepwell brand getting access to this new channel, which is roughly about 6%-7% of the overall market, is a sustainable way to progress a nd therefore, the resource allocation of marketing will be more and more to those people.
Okay, sir.
I f I just add to that, that number one, Sleepwell is the brand, is our flagship brand. That's a sustainable one, and that's what we would be working on. This was a new territory, a new unknown territory.
Therefore, all the exploration, all the initial experience, et cetera, was done using SleepX and not to sort of fool around with the Sleepwell brand. Now that we are learning the trade, we are learning the processes it would be more and more of Sleepwell, for sure.
Okay. Thank you, sir. All the best.
Thank you. Participant who wishes to ask a question may press star then one. The next question is from the line of Vidisha Sheth from Key Capital. Please go ahead.
Yeah, hi. Thank you for an opportunity. Sorry, I'm just looking at your company for the first time, so my question may be a little novice. Just wanted to understand your geographical growth opportunity. So I have kind of historical data, but how do you see the things moving in the two to three-year time horizon? How do you see the opportunity, size, and scale?
One is that question, and secondly, are you looking at any complementary businesses apart from what is, what we sell as of now, as an opportunity to give a kind of a details product to the customer who walks into our store or buy our products?
Okay, thank you. I'm just repeating the first question so that, again, we've understood it properly. You are saying that how is the geographical growth going to be in the next two to three years? O f India we are talking about, is that correct?
That's right, sir. One is India, and how do we see the global opportunity also? If you can share some form of opportunity in that. Yeah.
So, our philosophy or our thinking on, on this is clear, that when we look outside of India, we look at an opportunity which is on the operation side, manufacturing side, where all the experience of sourcing of raw materials, formulating the products, and manufacturing them on the best possible, equipment with the best possible technology, that is what we excel in, and that is what we will look at outside.
So whether the current ones also, which is Australia and Spain, we limit ourselves to manufacturing the best possible foam and the best variety, and giving it to the customers. When it comes to going beyond that, that is the consumer, the distribution and the consumer and the customer, that is where we look at India, and that is how we are, we are structured and integrated here b ecause we understand the culture, we understand the ethos, we understand the consumer.
Outside, we don't do that, and therefore we don't. So just to simply put it, consumer business, India, just manufacturing of foam and excellence in foaming and foaming processes outside India as well as outside India.
Coming back to the question of geographic improvement, undoubtedly, we are strong in the northern part, the western part. We're getting stronger on the southern part. We are a little weak on the eastern part, as the eastern markets are also relatively small compared to the other ones. It's completely the way that the country is, you know.
If you look at it, it's an inverted triangle, and then you have the rivers flowing, and that's where the people live, and that's how what we call the northern part of it. So though we are strong, but where we are strong, the opportunity is also larger, and because the opportunity comes from the unorganized part of it.
The other places we may not be that strong, but we have the processes in place to get stronger, to get to the position that the brand has similar kind of dominance as we have in the northern and western part of it. T herefore, growth to me, my mind, will come all over the country, different places for different reasons.
The second question that you had on the complementary business, we do things like pillows, we do bedsheets, we do comforters, we do bed sets, and anything which goes on top of the bed. We are doing it, and this is going into the stores, and at times some last as extra attraction for the consumer when he or she comes into the store.
However, beyond that, the only other category which is somewhat related, both in terms of consumption of foam as well as in terms of the way that the markets are structured, that you generally have furniture and mattresses, or bedroom beds and mattresses, and they are generally kind of similar together. So it's very fragmented, it's very...
The varieties and the SKUs and all that are phenomenal. However, we have a play in this, and we have some programs. At this point, I'll only say that we have some programs, and I may not be in a position to discuss them any further.
Yeah. Thank you so much. Just one, a broad last question from my side. In terms of, while answering my previous question, you kind of mentioned about, technical capability and also manufacturing excellence.
Could you also give us some sense on... You know, because historically, if we see a decade back or so, people were not very choosy or assertive about the form in which they sleep, or they sit, or they use in their furniture, but now this awareness has kind of improved.
So how do you see this change of, consumer mindset, which has evolved, can help you, and you also want to take advantage of that with your, with your maybe R&D capability or technical capability, and give a better product at a better price point? Any thought on the product side will be very helpful. That's it from my side, sir, and wish you all the best.
Thank you. Thanks a lot.
Thank you. The next question is from the line of Resha Mehta from GreenEdge Wealth Services. Please go ahead.
Yeah, thank you. Again, fairly new to the company. So the first question again is on the e-commerce channel. So if you could just comment on, you know, how big is this channel for mattresses in India? A lso, what would be our market share a nd would Feather Foam and Starlite be also available on the e-com channel? That's the first question.
Okay. Tushar, would you answer that? That is the, how big is the e-com channel? What's our share on it?
The overall mattress market could be approximately INR 15,000-INR 16,000 crore for the consumer. E-com this year, projected is approximately anywhere between INR 1,000-INR 1,200 crore, and we should finish the year at about 10% market share. On your second question, Feather Foam, Starlite will not be available now.
Okay. What maybe is the positioning of, you know, or rather, what is the differentiated positioning of Starlite and Feather Foam brands b ecause I see both are through MBOs and are in the pricing of INR 5,000-INR 20,00? Am I somewhat not wrong?
The Starlite is lower. Starlite is a lower range brand, and that's only anywhere from INR 4,000- INR 8,000-INR 9,000. Feather Foam is the little more premium, larger offering brand, from INR 5,000-INR 20,000, that's it. Well, now a little higher as well.
Out of the total mattress India revenue, how much would be coming from Starlite and Feather Foam?
About 10%.
Okay. On the export front, if you know, you could just give a general sense on that, you know, after China plus one, you know, which are the major countries, countries that are exporting to U.S. and EU? Would our exports be branded or white-labeled, and just the margins and working capital here?
Yeah. So export generally from the, from the China plus one peak, what really happened in the export of mattresses to the U.S., is step one, there were anti-dumping duties and resistance to buy from China. Primarily, the Chinese mattress exporters shifted shops to Vietnam, Indonesia, and places like that, even some in Eastern Europe and things like that.
Those have all got covered under the anti-dumping regime of the U.S a nd therefore, India is still in a good position to export. That was primarily our play there. In the interim, two things that are negative have happened. One was the escalation in transport costs.
The container rates from India, which were normally $3,000-$4,000, went up to $18,000-$20,000 in the last 12-18 months, and they've now come back to normal. The other thing that happened was demand in the U.S. really dropping, and a lot of inventory stuck in the system and all of that, all that kind of gone.
That's why we are starting to see good traction from customers for supply of white label mattresses into the U.S. So it's starting to happen for the last 30-35 days. The only other thing I probably had... Did I answer all your questions?
Yeah. So margins and working capital here, and also, what we sell is essentially white-labeled mattresses, right?
That's correct.
Okay, a nd the margins and working capital here, and also, India is not seeing any anti-dumping duties?
Well, not yet. Not yet, and that should not. So that's why we kind of hedged that U.S. supply by also supplying product out of our Spanish entity, with the assumption that the European Union countries coming under anti-dumping from the U.S. will be a very, very tough ask. Even if India gets covered, we have the capability to service customers from here.
Got it. W orking capital and margins here?
Working capital is generally very conservative on, and payment terms are at best, 20 days or so from the start, at best.
Okay. Okay. L astly, on the rural distribution plan, if you can elaborate on this. A lso, I think it was mentioned that we may enter the furniture segment. So, any progress there?
I'll pass the furniture question maybe for three months down the line. Like Rahulji said, we're not in a position to respond to that at the moment. On the rural side of things, Rahulji has already commented on the capital expenditure in Jabalpur as it sits intent and the status of that.
What we are doing currently is to really do the product development, the distribution development, the brand development in a small piloted territory, so that all of that is good to go by the time the facility is up and running, which is probably anywhere from 9-10 months away. That's generally the outlook on that.
Right. I f I can squeeze in one more, what would be our revenues from metro Tier one, Tier two, Tier three rural currently, like let's say, on an annualized basis for 2022 basis?
So I'd say metro Tier 1 is about 70%, and Tier 2, Tier 3 would be about 30%. R ural would be virtually 0%. I mean, it's if I look at my retail outlets and their sales, that's what I'm telling you right now. There would be consumer behavior of rural consumers coming to the closest big town and buying some Sleepwell products from an existing retail outlet. That's standard consumer behavior for all big purchases in rural, and that would be happening even now.
Right. All right. Thank you, and all the best.
Okay.
Thank you. There is one gentleman in order to ensure that the management is able to address questions from all participants. Please limit your questions to two per participant. Next question is from the line of Pankaj Agrawal from Muthoot Mutual Fund. Please go ahead.
Yeah.
Sir, we can't hear you. Mr. Agrawal. We cannot hear you, sir.
Okay.
You are sounding very low, sir.
Can you hear me now?
Yes, much better. Please go ahead.
Yeah. So, my first question is that, though we have seen improvement in gross margins, on a consolidated basis, that has not flowed down to the EBITDA and the PAT. F inally, what you explained is the marketing overheads, which you have done.
As you move into the second half, any comfort you can give us on the margin expansion, from a overall profitability and PAT margins? That's one question. The second is that, the observation is that Spain has seen a very sharp gross margin expansion.
Any one-off there b ecause in a rising, you know, in a bad environment where revenues have gone down, we have seen a very sharp expansion on margins in Spain? T hat has led to overall company gross margin also kind of improving. The last one is that cash flows have been weak in terms of generation. Can you help us understand how do you intend to improve the cash flow as you move into the future?
Thank you, Pankaj. Thanks, thanks a lot. Tushar, will you take the first one on the H2? I mean, to give some comfort without giving all the details. I think on two fronts. One, I would just say the quarter two results that have been released right now are also distorted from a July, August, September perspective.
September being extremely good on the margin front. The average, of course, is what has been released. So what that means is that the September PNL or the margin issue of September is going to continue, or we've seen it continue in October, November, coupled with better mix and higher sales on account of quarter three season, marriage season, sleeper products selling more than or having more of a ratio in overall sales.
So, just reiterating that point, September was better than August. August was better than July in terms of margins, and we see that continuing. O f course, the extra sales and the better product mix for quarter three. So that should be maintainable and comfortable. So second question?
The question was on Spain.
Again, personally, I think something very strange is going on. Yes, the market is depressed. Raw material is short. The prices of raw—yes, the prices of raw materials are still a bit higher than India or significantly higher. But because there is shortage of raw materials, we are able to maintain our margins.
We are able to pick our customers, we are able to hold on to prices and maintain our margins in Europe. I'd say Europe is going through something which is very unusual, and we'll have stability probably after this winter. That's what everyone in Europe is waiting to see how the winter progresses, how is the European Union able to sustain itself with the energy issues and things like that.
However, I'd say for us, what we have said is, yes, there is a drop on existing customers and existing market, but because we are only 1% of an overall extremely large market, there are still opportunities for us to grow. We were constrained a little bit by availability of raw materials.
So supply chains we have changed over to Asia now a nd now that we have enough raw material, we have started to go out after growth. I don't think there should be any limitations to growing that business, irrespective of what's really happening in the overall market. That is on Spain. On the cash front, cash flows, I think primarily, Pankaj, it's because of lower sales and... Yes, or, Davinder, why don't you answer that?
Yeah, yeah. So, we find there are certain expenses we have, one of which is resulting into lower cash from operations, b ut besides that, we are also working capital requirement in the market where we have extended certain credits which is resulting into lower cash operating cash flow. So I think it's just lower sales and an extended credit, which is, which is brought about it. But that credit is temporary. It's temporary and very secure.
Just last one, you know, Spain has seen a normal increase in gross margins from 20%-23% to 31%. Do you see the situation where in the second half, India does much better, we control our gross margin losses?
Australia continues to be steady, but Spain again see the setback on gross margins, and then the overall consumer margin is impacted. Is that a possibility, or you think Spain can sustain the margins at the situation?
So I think the 20-odd% that you are talking about, that was the unsteady point a nd that was the bottom point that was there, you know, that Spain and raw materials were violently fluctuating around.
But I think slowly kind of steadying down, slowly kind of—even if the Ukraine war continues, the people are finding ways, whether it's getting the raw materials from the Asian region or importing elsewhere, doesn't... And, you know, manufactured out of here, et cetera.
So I think the 20-odd%, 22% was the low one. It may, it will go up. I think it should be steady between 35 and 40. A s far as India is concerned, we are also experiencing the raw material kind of reduction, which is there. So I see that the margins are going to be much higher than where we are in the coming times.
Okay. Thank you. Thank you, and wish you all the best.
Thank you, Pankaj. Thanks, thanks a lot.
Thank you. The next question is from the line of Resham Jain from DSP Investment Managers. Please go ahead.
Thank you for, again, giving the opportunity. Sir, just on the export side, as you mentioned, things are looking up now. So, how much time do you think it will take to ramp up the export facility which we have set up? W hat could be the optimal throughput from this plant?
The facility is up and running completely. Just to keep it when the export side was a bit slow, just to keep it going, we put some of our Indian products through there. I mean, it's ready to respond to any demand that comes from, from the export side. So there are no issues on ramping up the facility at all.
No, my question was to ramp up the whole facility to, let's say, 80%-100%, how much time will it take? Will it do you think it will take three months, six months, one year? Once it reaches that level, how much throughput can come from this plant initially?
Are you—you're talking about the demand side then, right?
Yeah, yeah, on the export, because that plant is dedicated for exports, so I was just keeping from the plant perspective, because those kind of products can be manufactured only from that particular plant.
Approximately from the customer order side, approximately 5-6 months to ramp that up to full capacity. At that point in time, it should be doing close to five containers a day.
Okay. Okay, in terms of revenue side, because containers doesn't... We will not be able to understand what is the revenue potential.
One container is 400 boxes into a hundred. Roughly, about, about between 1-1.5 stores a day.
Okay, perfect, sir. Great. Thank you. Thank you, sir.
Thank you. The next question is from the line of Ritesh Shah from Investec. Please go ahead.
Yeah, hi, sir. Thanks for the opportunity again. So I just wanted your views on the distribution side. Most of the online-only players in the marketplace, they are also now looking at Omni-channel and looking to aggressively add stores. I think based on a recent institute we did in, we did find out that we have been appointing new MBOs as well.
A lso, basically, putting some accountability in the system, I think we didn't have any targets for EBOs and MBOs over the last two to three years, probably because of COVID. So, sir, just wanted to have your stance on distribution. Also, if you could give numbers on how many Shoppes, Galleries, and World we have right now?
So, Rakesh, will you take that question? That's the total number of World, Gallery, and Shoppes. T he question is that because of the COVID times, et cetera, there was no incentives for those people. So are you thinking anything in that direction?
As per the showroom format, which we call them World and Gallery , they are 1,500+ . The Shoppes are 2,200, and rest would be the exclusive dealers. They also, the network has been also growing.
Like, just to give you a sense, as in H1, we added about 100 showrooms in the first half. As far as the sales targets are concerned, how we are approaching EBO is a little different. We are focusing on improving the productivity inside the store, which is the conversion, the ASP and the attach ratio.
So we have a program which is, wherein we have, dedicated people to, help retailer to get on to these metrics and start with a baseline and then start improving on the conversion, on the ASP. T hat's where we believe the sale is going to come from, the same store. So that, that's the EBO part of it. I hope I have answered your question.
Yes. O n the MBO side, I think we were not very aggressive on adding MBOs. This is something which is going to be clearing a lot of six months. Also, I think on the incentive on how we are actually incentivizing the guy to actually also come to Sleepwell into the shop to make the sale happen, actually.
So we've started a new network. We are calling it a Fit-in partner , and we've started this program in this year from, let's say, the end May, beginning June time. So we have—we created about 1,500 people who have some products of people and a complete range of products.
So here the belief is to, instead of approaching thousands of MBOs, to focus on this set of, let's say, we have the plan to go up to 2,000 dealers in this year and focus on them and push them towards exclusivity. So that's what our plan is with this network.
MBO, since we also deal comfort foam and Starlite, that is, that's for MBO, where, I mean, there is a team which is working on that, both on comfort foam and Starlite, MBO. But there also we are going not by the number, but to deal with maybe 1,000 MBOs and get better extraction out of them b ecause our learning in past has been that, though we were able to appoint many MBOs, because they all wanted some connection with people and uniform, the extraction was very poor.
We were spending far more energy and time in visiting those dealers and not getting enough business. So there's a change in that outlook that we've done a nd we are approaching more for extraction now, as per the MBO businesses.
Right. This is very useful. Just one follow-up. What is the time period that you're looking at? Do you have any metrics when you're looking at revenues for EBO or MBO?
What we are looking at is we need to expand our EBO network. Currently, it stands at 5,000, plus this new network that we're developing, another 2,000, 7,000. So we want to expand it to about 10,000 in the next two years, which would be having a retail footprint of 20%+.
Sure. This is helpful, sir. Thank you so much.
Thank you. Thank you.
Thank you. Ladies and gentlemen, this was the last question for the day. I would now like to hand the conference over to the management for closing comments.
Thank you. Thanks a lot, and thank you everyone for participating, and actually making some positive suggestions for us to take home. As usual, it was a great learning exercise for all of us. I hope we've been able to answer your questions satisfactorily. If you do have any further questions or would like to know more about the company or its working, please reach out to our investment relationship managers at Valorem Advisors .
I want to conclude today with this note, that whatever recent key reports that I have been reading from all authorities, whether it's the World Bank or IMF or Morgan Stanley, et cetera, I think the whole world believes that India is the country of the decade, or is going to be the country of the decade, with at least a 57% growth.
S oon, recently, of course, we've become the fifth largest, but soon we would become the third largest. This is a good feeling to have and a good hope to have. So thank you very much once again, especially that today was a holiday and that all of you turned up and we could have this meaningful interaction. With those words, I just say good night and sleep well.
Thank you. On behalf of ICICI Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your line.