sheela foam ltd Management discussions

Economic overview

Global economy

Global economies faced significant headwinds in 2022 in the wake of mounting inflationary pressures and geopolitical conflict in Europe. The sustained rise in interest rates by Central Banks to combat inflation and the ongoing geopolitical crisis in Europe are exacting a heavy toll on the economy.

The sudden surge of COVID in China dented growth prospects in 2022. However, the recent reopening has set the stage for a faster-than-anticipated recovery. Another positive aspect is the fact that global inflation is likely to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024 [Source: IMF World Economic Outlook, January 2023].

Emerging market economies are projected to grow by 4.5% in 2023, compared to 1.1% for advanced economies [Source: IMF World Economic Outlook, April 2023]. The emerging markets and developing economies of the world are expected to be instrumental in accelerating global economic growth in the years ahead. In addition, certain industries, such as technology and e-commerce, have experienced significant growth during the pandemic and are expected to continue to do so in the coming years.

Outlook

Demographic trends and rising middle-class consumption are most likely to contribute to the rapid growth of the EMDEs. Many emerging market economies have young populations that are joining the workforce and contributing to economic growth. In addition, faster urbanisation is leading to a greater demand for housing, infrastructure and consumer goods.

There is potential for further innovation and technological advancement that could fuel the economys recovery. The pandemic has accelerated digital transformation across many industries, which could lead to enhanced productivity and efficiency in the upcoming years.

A stronger boost from pent-up demand in numerous economies or a faster fall in inflation is likely in the course of 2023. The governments and central banks of the world are expected to play a major role in accelerating economic growth through targeted, need-based measures. [Source: IMF Word Economic Outlook, January 2023]

Indian economy

Notwithstanding the global gloomy outlook, Indias economic activity has been robust on the back of a conducive domestic policy environment and the Governments sustained focus on structural reforms. Owing to its strong macroeconomic fundamentals, the Indian economy is in a sweet spot to grow at 7% in FY 2022-23 [Source: NSO, second advance estimates].

A combination of rising disposable income, coupled with the easy availability of credit and lowering interest rates in the wake of a stabilising inflation trajectory will bode well for the domestic economys growth in the years ahead.

https://www.indiabudget.gov.in/economicsurvey/doc/eschapter/ echap01.pdf

Outlook

There are several reasons to be bullish about Indias economy in FY 2023. With robust consumer demand and an improved balance sheet of the private sector, the domestic economys outlook appears cautiously optimistic. High-frequency data indicates that the manufacturing PMI in December 2022 rose to the highest levels in over two years, which augurs well for fresh investment activity in the sector. Despite the challenges, Indias economy has strong domestic drivers that can help it register strong growth 2023 onwards.¹

According to the IMF, India and China will contribute over 50% of global growth in FY 2023.

Industry overview

Health and wellness industry

Indias health and wellness market is expected to expand at a CAGR of 5.55% during 2023-2028. With an increased focus on fitness, wellness, nutrition, personal care, weight management, mindfulness and preventive medicine, the health and wellness industry in India is gaining traction. Apart from this, higher incidences of chronic lifestyle diseases, stress and other ailments, as well as advancements in the medical field, including predictive genetic testing, are escalating the demand for health and wellness products across the country. Other factors contributing to the markets positive outlook include a rising number of sports and fitness training centres, greater reliance on healing practices such as naturopathy and the rapid growth of health tourism.²

Indias mattress industry

There are many branded and unbranded players producing a wide range of mattresses through local distribution channels in Indias fragmented mattress market. The unorganised sector dominates the countrys mattress industry and has a major share of the Indian mattress market. Mattresses from this unorganised sector usually use cotton filler, as it is the cheapest of the many options that are now available.

An increasing number of residential units is propelling the demand for mattresses all over the country. Residential consumers accounted for the bulk of the share, while the remaining was shared by institutional customers, which include hotels, hospitals and educational institutions. Among the different sizes available, king-size mattresses are the most preferred and comfort is the most crucial factor that determines their dominance in the market.³

Residential consumers accounted for 80% of Indias mattress market, while 20% was constituted by institutional customers.⁴

Strategic growth drivers

• Work from home (WFH) culture

Following the pandemic, there have been several changes in the way people live and work. These have created the need to allocate a space inside houses for office work. This trend has played out across homes, irrespective of their sizes and has increased the requirement for mattresses.

• Increasing awareness

Greater consumer awareness of the significance of quality sleep and the crucial function that a decent mattress can play for achieving it is one of the main growth enablers for Indias mattress market.

• Online sales and distribution

The growth of e-commerce has opened up new avenues for the countrys mattress industry. Manufacturers can leverage online sales and distribution channels to reach a wider audience and expand their customer base.

• Infrastructure development

The growth of the Indian mattress industry is also dependent on infrastructure development, including the availability of raw materials, skilled labour and transportation.

• Growth in the real estate and hospitality sectors

According to the Union Budget for 2022-23, 80 lakh houses will be built for the identified eligible beneficiaries of the PM Awas Yojana, in both rural and urban regions. A sum of H 48,000 crore has been allocated for this purpose.

The real estate sector in India is expected to reach USD 1 trillion in market size by 2030 and contribute 18 to 20 % to the countrys GDP.⁵ Retail, hospitality and commercial real estate are also growing significantly, providing much-needed infrastructure for Indias rising needs. Demand for mattresses is high because both residential and institutional sectors are growing in India with greater awareness regarding mattress types and brands.

Changing consumer preferences

• Higher income

Mattresses are no longer considered mere consumer durables. They are now regarded as an indicator of quality of life. With increasing income, there are high chances that consumers will shift towards the purchase of premium mattresses.

• Increasing health consciousness

As people are now more aware of the benefits of high-quality mattresses for enhanced comfort and sleep, this is augmenting the demand for premium products.

• Greater awareness about brands

Consumer now prefer innovative and branded mattresses owing to changing lifestyles and enhanced digital literacy.

Organised mattress industry

The organised sector is now growing with the rising demand for good-quality mattresses among Indian consumers. The organised mattress market is further classified into PU foam, Rubberised Coir, Spring Mattresses and other types.

The organised mattress industry is increasingly investing in research and development with the aim of creating new and innovative mattresses that cater to specific customer needs. Additionally, there is an growing trend towards customisation, with companies selling custom mattresses made to fit specific body shapes and preferences. Customers are willing to spend more for a comfortable and customised sleeping experience, which is why these products are gaining more popularity.

Distribution platforms

Organised players offer mattresses through two mediums: offline and online. The trade through online sales in the organised mattress industry is gaining pace because more consumers now opt for online shopping. This has led to the online market developing at a faster rate as compared to the offline market. Several new trends are expected to emerge in the mattress industry in the upcoming years, whereby the demand for customised and luxury mattresses is expected to increase⁶.

Indias Flexible PU Foam Industry

Polyurethane foam is a widely used polymer that is available in two forms, i.e., flexible foam and rigid foam. Rigid polyurethane foams are utilised for numerous insulation applications pertaining to construction and refrigeration. Flexible polyurethane foams are particularly used as a cushioning substance in various end-use industries such as furniture, packaging, transportation, bedding, automotive interiors and carpet underlay. The use of flexible polyurethane foam is becoming popular as it can be customised in almost any shape and variety. These flexible foams are also durable, light, comfortable and supportive.

Polyurethane foams exhibit clean incineration and high recyclability for reduced waste, pollutant filtration and greater sustainability. The penetration of polyurethane foams is anticipated to rise owing to properties such as superior insulation that make them ideal for walls and roofs in new homes.

Applications of polyurethane foams in electric vehicles (EVs) are more than the normal vehicle i.e. new applications. As governments invest to incentivise EV usage, increasing the production of EVs in the future would also drive demand for PU foams in the upcoming years.

Asia-Pacific is anticipated to be the fastest-growing market for polyurethane foam. Factors such as rising demand for polyurethane foams from various end-user industries and the enlarging footprint of the global players in polyurethane foams are likely to facilitate the polyurethane foam markets growth. Government support in the form of subsidies and tax incentives is expected to encourage the manufacturing sector in countries such as India and China, which is further expected to promote bio-based polyurethane to replace conventional polymers⁷.

Opportunities and threats

Opportunities

• Product differentiation

Differentiated products such as new materials, designs and features that provide superior comfort and support are likely to attract a huge customer base with differentiated needs.

• E-commerce

The growth of e-commerce platforms offers a wider reach, as there is a growing market of consumers who may prefer to shop online for multiple reasons.

• Export potential

Indian industry offers competitive prices and hence, can expand into global markets. Asia-Pacific is expected to be the fastest-growing market.

• Rural market

One of the most significant opportunities for the mattress industry is in rural India with its large and growing population. The majority of Indias population lives in rural areas signifying a huge potential for the industry. As incomes have risen, rural consumers have begun to demand more comfortable and hygienic high-quality mattresses. The industry in rural India is still in its early stages of development, however, there is a lot of potential for growth.

Threats

• Transportation and warehousing

The fact that PU foam and mattresses are voluminous in nature makes warehousing and transportation difficult. Long-distance transportation is impractical due to the high expenses required.

• Raw material prices

The cost of raw materials, including foam, cotton and latex, can significantly impact manufacturers profitability. Volatility in raw material prices can lead to higher costs that are difficult to pass on to customers.

• Economic instability

Economic instability, such as inflation, recession, or changes in government policies, can adversely affect Indias mattress industry. This can lead to reduced consumer spending, lower demand and decreased profits.

• Counterfeit products

The proliferation of counterfeit products poses a key threat to the mattress industry in India. These products may be of inferior quality, which can damage the reputation of legitimate manufacturers and affect consumer trust.

COMPANY OVERVIEW

Established in 1971, Sheela Foam Ltd. has been at the forefront of the foam-based product industry in India for over 50 years. The Companys unwavering commitment to quality, innovation and sustainability has helped it establish itself as a leading brand in the industry. Sheela Foams diverse product portfolio caters to the needs of various industries, including home furnishings, automotive, healthcare and more. The Companys products, including technical-grade PU foam, are renowned for their superior quality and find diverse applications in various sectors.

The Companys operations are supported by a dynamic management team, a recognised brand, cutting-edge manufacturing facilities, a sizable distribution network and ground-breaking research and development capabilities. To offer its customers the utmost comfort and convenience, the Company creates items of unparalleled quality based on shifting customer preferences. The Companys core strength is its dedicated and highly competent talent pool , which enables it to manufacture distinctive, top-of-the-line goods using state-of-the-art technologies. As a responsible corporate citizen, Sheela Foam has implemented various initiatives to lower its carbon footprint and promote eco-friendly practices across its operations.

Product portfolio

Mattresses segment

Foam Mattress, Spring Range, Technology Range, Comfort Cell Range, Back Support Range, Flexi PUF Range, Showroom Range, Economy Range, SleepX Online Brand

Technical foam

Automotive Foams, Reticulated Foams, UltraViolet Stable Foams and Silentech Foams

Furniture foam

Sleepwell Resitec, Sleepwell Cool Gel and Primo

Comfort foam and home care products

Foam Sheets, Foam Blocks, Comfort Range accessories, Foam Cores, Furniture Cushions, Pillows, Bedsheets, Comforters/ Blankets, Mattress Protectors, Sofa-cum-Beds

Manufacturing prowess

The Company has 17 manufacturing facilities spread across India, Australia and Spain. It produces cutting-edge products that offer the ideal balance of support and comfort. The Company exhibits outstanding capabilities in high-quality production and technological advancements.

To better serve its customers, and to expand its global market share the Company established new facilities in strategic locations in Australia and India, which would help it to produce and distribute its products more efficiently, reducing lead times and transportation costs. The Companys wholly-owned subsidiary, International Comfort Technologies (ICTPL), will be responsible for overseeing the operations of these state-of-the-art facilities.

The Australian facility, strategically located in five places have 11,000 MT per year. The Indian facilities, located in Jabalpur and Nandigram, is under our wholly owned subsidiary, International Comfort Technologies Pvt Ltd.

This expansion is a testament to the Companys dedication to providing its customers with the best products at competitive prices. It is confident that these new facilities will be a major success and help it to further establish itself as a leader in the industry.

Creating futuristic brands

The Company has a flawless track record of creating individualised products that cater to changing customer needs. The Companys flagship brand, Sleepwell, has developed a strong reputation over the years. Feather Foam and Starlite are two other brands owned by the Company that offer inexpensive mattresses to consumers. The Companys market share in the organised mattress market has increased owing to these products.

Technological innovations at Sleepwell

Variable Pressure Foaming (VPF)

The Company is a pioneer of the worlds most environmentally friendly method of foam manufacture, variable pressure vertical foaming (VPVF). Variable Pressure Foaming (VPF) is a rapidly growing technology and is a proven way to improve the environmental performance, quality, and efficiency of foam production and contribute to overall sustainability. The Company will be commissioning a VPF machine in its Jabalpur facility which is a sign of the Companys commitment to sustainability and innovation. It will help Sheela Foam to improve its environmental performance and the quality of its products.

Joyce Foam Products

Joyce Foam, Australia, a wholly-owned subsidiary of the Sheela Group, has over 40% market share in Australia. It is Australias one of the largest manufacturers of flexible open-cell polyurethane foams and serves a variety of markets, including bedding, furniture, medical, and specialised industrial applications. Joyce Foam has cemented its position as a leading manufacturer of flexible polyurethane foam in the region. The company prides itself on its state-of-the-art production centres, located in key cities such as Adelaide, Canberra, Melbourne, Perth, and Sydney, which are equipped with the latest technology and machinery for producing high-quality foam and mattress products.

Other initiatives

The Company has expanded its retail network to reach more customers and improve its brand presence. It has increased the number of its Multi Bran Outlets MBOs and has expanded its dealer network which has allowed it to reach a wide range of customers and sell its products in a variety of locations. It has a network of over 115 exclusive distributors, approximately 5,700 exclusive dealers, and approximately 7,600 multi-brand outlets.

Online sales

The Company has witnessed an increase in its online sales in FY23, with a striking 24% growth. Also, online sales now account for a considerable 8% of the companys total sales volume.

Marketing Initiatives

BTL Marketing

Sheela Foam has been consistently expanding its below-the-line (BTL) marketing efforts for its legacy brands such as Sleepwell and Feather Foam. This includes activities such as in-store promotions, product demonstrations and direct mail campaigns that help the Company reach out to customers personally.

E-commerce marketing

The Company has been revamping its e-commerce marketing efforts by using content marketing to cater to the urban population. For instance, Sleep X, the e-commerce brand from Sheela Foam, has launched a wide collection of durable, high- quality mattresses for enhanced back support and comfort, considering the changing buying habits and lifestyles of the youth.

Product launches

Sheela Foam regularly introduces new products that cater to evolving customer needs and preferences. For instance, the Company recently launched a range of premium mattresses under its flagship brand, Sleepwell, that offer superior comfort and support.

Digital marketing

The Company has a strong online presence through its website, social media pages and e-commerce platforms. It leverages these channels to engage with customers through targeted advertising campaigns, influencer partnerships and interactive content.

Promotional activities

Sheela Foam engages in various promotional activities such as advertising campaigns on TV and print media, sponsorships of sports events, including IPL cricket matches and marathons, along with participation in trade shows to raise brand awareness and drive sales.

Financial overview

In FY23, the Companys net revenue from operations on a standalone basis was H 2,019.82 crore as compared to H 2,008.21 crore in FY22. Profit after tax for the current year was H 194.86 crore in contrast to H 197.31 crore in FY22. Net revenue from operations in Australia was AUD 79.56 million as compared to AUD 77.56 million in the previous year. The net profit after tax was AUD 0.94 million as compared to AUD 2.66 million in FY22.

The net revenue from operations in Spain was Euro 47.21 million as compared to Euro 51.18 million in FY22. The net profit after tax was Euro 2.89 million as compared to Euro 2.19 million in FY22. On a consolidated basis, net revenue from operations stood at H 2,873.32 crore as compared to H 2,865.58 crore in the previous year. Consolidated net profit after tax decreased to H 203.06 crore from H 218.73 crore registered in FY22.

Key Financial Ratios Standalone Operation according to the SEBI Listing Obligations and Disclosure Requirements (Amendment) Regulations, 2018

	2022-23	2021-22
Debtors Turnover (in times)	13.46	13.43
Inventory Turnover (in times)	6.70	6.32
Interest Coverage Ratio (in	37.30	38.32
times)
Current Ratio (in times)	3.11	1.54
Debt Equity Ratio (in times)	0.01	0.02
Operating Profit Margin (%)	8.17	7.22
Net Profit Margin (%)	10.00	10.00
Return on Net Worth (RONW) (%)	18.45	21.07

Growth strategy and outlook

Improving branding and product development initiatives

The Companys budget mattresses, Starlite and Feather Foam, offer sufficient growth potential for development in the rural retail sector. It concentrates on increasing investments in brand-building initiatives to improve distribution and retail networks, brand recognition and customer recall. To sell more products, it also plans to introduce products at competitive prices.

Boosting e-commerce penetration

The Company has been using an e-commerce platform to sell mattresses and related goods. It lists its products on well-known e-commerce platforms in addition to using its own website to promote sales and display its product line-up. With wider e-commerce penetration, it aims to bolster both its top-line and bottom-line performance.

Catering to changing customer needs

The Company is dedicated to creating personalised products that cater to different customer needs. Its broad range of products, technological expertise and strong manufacturing skills enable it to produce high-quality, higher-margin items, including more refined grades of technical PU foam.

Strengthening distribution and exports

The Company continues to market its low-cost items in rural areas while working to strengthen its domestic retail footprint. The Company will be able to expand its reach and meet the demand for affordable products owing to increased infrastructure development and growing distribution channels in newer geographies. Additionally, it focuses on enhancing its export business through the development of new products and technologies, the increase of capacity in overseas subsidiaries and so on.

Suburban penetration

The Company is committed to providing its customers with a convenient and enjoyable shopping experience. It has a number of strategies in place to penetrate the suburban market like expanding its retail network by opening new brand outlets, partnering with local retailers in suburban areas, promoting its products online through a variety of channels including website and social media, and offering financing options like instalments. Sheela Foam is well-positioned to penetrate the suburban market.

Risks and mitigation measures

Risks	Mitigation
Macroeconomic Risk The Companys operations may be impacted by recent COVID variants and associated restrictions, a slowdown in economic growth, along with end-user industries including the housing, hospitality and automobile sectors.	• Favourable government reforms and rising infrastructure development spending are all anticipated to revive the economys growth. To shield the economy against the pandemics negative impact and improve consumer confidence, the Government and key financial institutions have implemented several reform measures.
	• Rapid urbanisation, rising income levels and consumer demand for high-end, luxury goods and services are major factors driving the demand in the organised mattress market.
	• The Companys subsidiaries in Spain and Australia enable it to foray into foreign markets and reduce its dependence on the Indian economy.
Competition Risk	• By creating comfortable and high-quality mattresses and home comfort products, the Company has become a well-known and dependable name in the industry. Its flagship brand, Sleepwell enjoys high levels of consumer satisfaction and dependability.
Due to appealing expansion potential, the sector is facing rivalry from a growing number of organised mattress market competitors. Loss of market share could result from an inability to provide high-quality, personalised products to satisfy changing client needs.	• Increased spending on R&D and innovative technologies enables the Company to create high-end, cutting-edge products.
	• Additionally, the Companys activities are supported by cutting-edge production machinery and inventive shop floor practices that offer a significant operational advantage.
	• The Companys mission is to provide premium mattresses developed using innovative initiatives such as Comfort Cell and Neem Fresche. Furthermore, the Company is able to drive sales of its products because of its extensive distribution network.
	• With its wide variety of affordable mattresses, the Company focuses on serving specific niche markets. It supports the Company in retaining its position as the unorganised sectors market leader.
	• The Company extensively focuses on pioneering state of the art technologies like VPF which results in improved product quality and reduced costs.

Risks	Mitigation
Inventory Risk High inventory build-up due to unsuccessful marketing and selling of products may pose a challenge to the Companys operations.	• The Company assures balanced and orderly sales through its extensive distribution network, which includes more than 115 exclusive distributors, 13,300 retail dealers, 7,500 multi-brand and 5,700 exclusive brand outlets.
	• The Company relies on its strong brand recognition and continuously makes prudent branding and advertising expenditures to strengthen its presence across a range of media.
	• With the aid of an efficient IT infrastructure and inventory management, the Company guarantees effective product delivery. The system guarantees real- time inventory control and prompt delivery of the goods.
Raw Material Risk	• Key raw ingredients (Polyol and TDI) are purchased in bulk by the Company at cost-effective prices.
The smooth and continuous supply of raw materials is essential to the Companys operations and any interruptions could have a negative influence on the creation of high- quality products. Imported raw materials, currency and exchange rate variations could potentially have an effect on profit margins.	• It achieves a balance between importing raw materials and buying them locally.
	• The Company is able to obtain raw materials at the best prices because of its solid and established relationships.
	• By ensuring raw materials availability to meet market demand, it lowers the chance of an unexpected raw material shortfall.
Counterfeiting Risk	• Continued investments towards introduction of Unique Serial Number/marks/label/hologram/hot stamp, and so on, in mattresses enables the Company to check genuine products
Another important challenge is the inability of the Company to resolve product counterfeiting and quality issues, which may result in loss of customer trust and sales, thereby damaging the Companys brand name .	• The Company periodically checks the market to track and avoid sales of fraudulent and counterfeit products.
E-commerce Risk	• The Company offers its SleepX product on its own website as well as prominent e-commerce platforms such as Amazon, Flipkart and others
Globally and in India, consumer preferences have fundamentally changed as a result of the pandemic, favouring quick adoption of technology, online shopping, enhanced comfort and convenience at home, etc. Its business and market share may suffer if the Company is unable to use digitisation and technology to keep up with the changing trends.	. • The Company is focused on integrating retail and online sales to offer clients a seamless purchasing experience across all channels.

Internal controls

The Companys internal control framework centres on strong governance, a vigilant finance function and independent internal reviews. Risk evaluation exercises prioritise risks facing the business based on which strategies are formulated. The Audit Committee periodically reviews and takes suitable action for any deviation, observation or recommendation suggested by the internal auditors. The Company strives to follow the best practices in corporate governance. Well-documented policies and procedures enable it to strictly adhere to all applicable procedures, laws, rules and statutes. The Companys robust IT systems safeguard its sensitive data and ease the audit process. Accounting standards are strictly followed while recording transactions. A host of strategies are devised, in addition to robust MIS systems, for real-time reporting so as to control expenses. Any variance from budgetary allocation is promptly reported and corrected to ensure strict compliance.

Human resources

The development and success of an organisation depend heavily on its human resources. The Companys professional and experienced workforce ensures business continuity and develops strategies and procedures to adapt to a changing business environment. To increase individual and organisational productivity, the Company organises several human resource programmes. It promotes a secure and beneficial work environment and guarantees that everyone has equal access to opportunities for professional progression. These programmes help the Company recruit and keep the best people while enhancing employee satisfaction and productivity.

The Company has received approval from the stock exchanges for its Employee Stock Option Plan (ESOP) scheme which is further expected to form a key part of the Companys HR strategy. The Company believes that the ESOP scheme will be a valuable tool for attracting and retaining top talent.

2,747

Total employee strength

Cautionary statement

The statements in the Management Discussion and Analysis Report that describe your Companys projections, estimates and expectations are "forward-looking statements". They are within the meaning of applicable securities laws and regulations. Actual results could differ from those expressed or implied depending on the economic conditions affecting demand and supply, the price scenario in the domestic and international markets in which it operates, changes in government regulations, tax laws and other statutes. Your Company undertakes no responsibility to publicly amend, modify or revise any forward-looking statements on the basis of any subsequent developments, information or events.