Sheela Foam Ltd Management Discussions

Global economy¹

The world economy is projected to maintain a steady growth rate of 3.2% throughout 2024 and 2025, mirroring the momentum observed in 2023. Amidst a dynamic global economic landscape, the emergence of inflationary pressures prompted a tightening of monetary policies across various regions. As a result, capital inflows in most nations have remained sturdy.

Following the peak of global inflation in mid-2022, economic activity has steadily expanded. There is stability in employment and income growth leading to favourable demand dynamics. This includes substantial government expenditure and household consumption, alongside an expansion in supply, supported by unexpected increases in labour force participation. Major advanced economies have stayed on track with their growth trajectories path despite significant adjustments in central bank interest rates. Risks are now broadly balanced, and households are observed tapping into their savings.

Outlook

As inflation moves closer towards targeted levels and central banks in several economies adopt a more relaxed policy stance, the implementation of tighter fiscal measures, aimed at addressing elevated government debt, is expected to potentially dampen growth prospects.

Projections indicate a decline in global headline inflation, with an estimated annual average of 6.8% in 2023, moderating to 5.9% in 2024 and further to 4.5% in 2025. Advanced economies are expected to reach their inflation objectives sooner compared to emerging markets and developing economies. A plausible growth acceleration is expected in G20 emerging markets that could support global growth and, with a positive correlation, affect the growth in other countries. Strengthening policy frameworks to absorb any potential shocks is needed.

Sources: Haver Analytics; and IMF staff calculations. Note: Panels 1 and 2 plot the median of a sample of 57 economies that accounts for 78 percent of World Economic Outlook world GDP (in weighted purchasing- power-parity terms) in 2023. Vertical axes are cut off at -4 percent and 16 percent. Panel 3 plots the median of a sample of 44 economies. The bands depict the 25^th to 75^th percentiles of data across economies. "Core inflation" is the percent change in the consumer price index for goods and services, excluding food and energy (or the closest available measure). AEs = advanced economies; EMDES = emerging market and developing economies; SAAR = seasonally adjusted annual rate.

Source: IMF World Economic Outlook, April 2024

Indian economy

Despite considerable global disruptions, India recorded a strong growth rate of 7.6% in FY 2023-24, improving upon the 7% growth achieved in the previous fiscal year, FY 2022-23². This growth rate stands as the highest among both advanced and emerging economies globally. The growth has been primarily supported by a targeted monetary policy aimed at maintaining inflation within the target levels, which has been crucial in promoting sustainable growth over the medium term. This policy has not only stabilised the economy but also increased consumer confidence, leading to higher demand across multiple sectors.

Moreover, capital expenditure saw a significant boost, increasing from H10.5 lakh crore in FY23 to H12.7 lakh crore in FY24³. This surge in spending has catalysed private investment and expanded economic activities across the country. The economy further benefited from a solid foundation of domestic demand, majorly driven by continuous private consumption and enhanced public infrastructure projects. Together with prudent fiscal management and strong tax revenue performance, these factors have laid a strong foundation for continued economic growth.

Outlook

The economic forecast for India in fiscal year 2024-25 is highly optimistic, with the GDP expected to grow by around 7%⁴. This substantial growth is driven by major infrastructure investments, supported by solid fiscal strategies and ongoing policy improvements. The growing workforce and focused development in smaller cities are poised to boost demand in critical sectors such as transportation, real estate, and consumer goods, which are crucial for long-term economic stability and growth.

Internationally, as economic conditions improve and developed nations adopt more relaxed monetary policies, India is likely to attract more private investments. This increase in investment is expected to enhance exports and stimulate additional economic activities, which could help reduce the fiscal deficit more swiftly. Although inflation remains a concern due to high consumer demand and rising food prices, increased private sector investment is expected to help stabilize prices and maintain economic momentum.

Health and wellness industry⁵

The wellness sector in India has undergone significant evolution shaping into a diverse ecosystem comprising consumers, providers, adjacent industries, facilitators, and increased government involvement. Consumers, predominantly a youthful demographic with increasing disposable incomes, are increasingly prioritising wellness solutions to address lifestyle challenges, driven by a desire to enhance both physical appearance and mental well-being.

Providers within the wellness industry offer a wide range of services and products catering to consumer needs, ranging from basic hygiene to curative and enhancement solutions. Adjacent industries, including healthcare, media, retail, gaming, hospitality, and education, are capitalising on the growth of the wellness sector. They are diversifying revenue streams, utilising existing capabilities, and offering a broader range of services and products to their existing customer base. This is further strengthened by promotions and word-of-mouth driving increased consumer engagement.

Facilitators including employers, insurance companies, and educational institutions are poised to play a pivotal role in promoting and instilling pro-wellness behaviours among consumers in the future. The Government plays a multifaceted role in the wellness industry, serving as a provider, facilitator, enabler and regulator. It actively shapes and ensures adherence to standards contributing to the sectors growth and sustainability.

The overall wellness market in India is estimated at INR 490 billion, with wellness services making up 40% of this share. Key trends in the industry include:

The wellness industry in India is attracting both domestic and international players due to its expansion.

Established players are broadening their horizons and venturing into new markets globally and domestically. Franchising has emerged as a favoured strategy for this expansion.

Companies are actively seeking public and private investments to fuel their growth plans.

While there is optimism about future growth prospects, the timeline for investment recovery may extend longer than initially anticipated.

Micro-segmentation offers a chance to tailor value propositions more precisely to meet consumer needs. Additionally, there is a growing trend towards commercialising traditional Indian home remedies.

Indian mattress industry⁶

Both branded and non-branded players co-exist in the market utilising local distribution channels. To meet evolving consumer preferences, companies are expanding their product availability through both online and offline channels. While the unorganised sector maintains dominance, the organised sector is steadily driven by an increased demand for high quality mattresses. Factors such as rising income levels, heightened health consciousness, and expansion in the real estate and hospitality sectors is driving the growth of the Indian mattress industry.

The competition in the marketplace has driven manufacturers to integrate smart technological innovations incorporating smart features such as the ability to record sleeping patterns. With a prospective sales growth of 10%-15%, the market leaders are penetrating new markets and introducing innovative products in existing markets. Moreover, the booming housing industry in major metropolitan cities presents further opportunities for these brands.

Strategic growth drivers for the mattress industry

The mattress industry is experiencing significant growth driven by several key trends:

Focus on Sleep Health: There is a growing awareness of the importance of quality sleep for overall health and well-being. This has led to an increased demand for mattresses designed to promote better sleep, incorporating features like pressure point relief, cooling technology, and adjustable firmness.

Growing Population and Urbanisation: With a rising global population, particularly in urban areas, the need for more housing units is increasing, resulting in a higher demand for mattresses.

E-commerce and Direct-to-Consumer: The rise of online shopping platforms and direct-to-consumer models has revolutionised the mattress industry. This offers greater convenience to customers, a wider range of options, and often more competitive pricing.

Product Innovation: Mattress companies are constantly innovating with new materials, technologies, and designs. This includes features like smart mattresses that track sleep patterns, offer adjustable comfort levels, and use of eco-friendly materials.

Expanding Commercial Use: The hospitality industry (hotels) and healthcare facilities are significant consumers of mattresses, and their growth translates to a larger market for mattress manufacturers.

Specialised and Orthopaedic Mattresses: There is a growing emphasis on health and wellness driving demand for specialised mattresses tailored to specific needs, such as back pain relief or allergy control.

Analysis of the Indian mattress market

The Indian Mattress Market is segmented based on type, application, and distribution channels. Types include innerspring, memory foam, latex, and others such as hybrid, gel, air beds, and celliant-infused mattresses. Application-wise, the market is categorised into residential and commercial sectors. Distribution channels comprise specialty stores, multi-brand outlets, online platforms, and other channels like manufacturers retailers, warehouse clubs, discount retailers, distributors, and omnichannel sellers.

As of 2024, the India Mattress Market is estimated to be valued at USD 2.13 billion, with projections to reach USD 3.21 billion by 2029. This reflects a Compound Annual Growth Rate (CAGR) of 8.54% during the forecast period (2024-2029).

Several factors contribute to the growth of the Indian mattress market, including rising income levels, increased health consciousness among consumers, and expansions within the real estate and hospitality sectors. Notably, there is a shift in consumer preferences towards prioritising comfort and functionality in mattresses. In response to these changing preferences mattress manufacturers have expanded their sales channels to include both offline and online avenues aiming to better cater to consumer demands

Overview of the foam industry in India

The foam industry in India is thriving, fuelled by urbanisation, rising disposable incomes, and evolving consumer lifestyles. The shift towards modern living, particularly in urban areas, has led to a surge in demand for foam-based furniture such as sofas, chairs, mattresses, and cushions. Additionally, foam materials play a vital role in footwear manufacturing, with foam-based insoles and midsoles providing enhanced comfort and reducing foot impact during walking or running.

Foam also finds extensive usage in apparel for padding, shaping, and creating lightweight garments, contributing to market expansion. With consumers increasingly prioritising quality sleep and overall well-being, there is a growing demand for high-quality foam mattresses and bedding

products. Foams ability to provide support, conform to body contours, and offer pressure relief makes it a preferred choice among Indian consumers seeking better sleep experiences. Moreover, the development of specialty foams with unique properties like flame retardancy, antimicrobial features, and improved durability further drives market growth.

Regional market dynamics

In the Indian foam market, South India emerges as the leading region capturing the largest market share. This dominance is propelled by several factors. Firstly, the regions robust automotive sector drives demand for foam products used in car interiors, enhancing comfort and aesthetics for consumers. Additionally, the rapid growth of the construction and infrastructure industry in South India necessitates foam materials for thermal insulation and acoustic solutions in buildings and commercial spaces. The flourishing furniture market in the region contributes to the demand for foam products in crafting comfortable and stylish upholstery items. Moreover, South Indias emphasis on sustainability fosters the adoption of eco-friendly and recyclable foam materials, driving innovation within the industry.

The presence of research and development centres and educational institutions specialising in polymer sciences and material engineering in the region stimulates technological advancements in foam production. This results in the creation of high-quality and specialised foam products tailored to meet industry requirements.

Market breakdown by category and type

The India foam market is segmented based on categories such as furniture, automotive, building and construction, apparels, packaging, appliances, and others. Among these categories, furniture holds the largest market share, driven by several factors. Rising disposable incomes and urbanisation contribute to increased consumer spending on furniture, particularly foam-based products like sofas, chairs, and mattresses. Additionally, the industrys growing focus on sustainability drives the adoption of eco-friendly foam options, meeting the demand for environmentally conscious furniture choices.

The emergence of the e-commerce sector further expands the market reach, making foam-based furniture more accessible to a wider consumer base. Flexible foam stands out as the most widely used category, owing to its versatility and affordability. Its applications span across automotive interiors, furniture manufacturing, thermal insulation in buildings, and packaging, thanks to its customisable properties that cater to diverse industry needs. Polyurethane foam dominates the market share within foam types, owing to its versatility and wide-ranging applications across industries such as automotive, construction, and healthcare.

Threats:

1. Competition from New Entrants: The Indian mattress market is becoming increasingly competitive, with both established players and new startups vying for market share. This competition may trigger price wars and put pressure on profit margins.

2. Higher Prices of Raw Materials: Fluctuations in the prices of raw materials such as cotton, foam, and steel can significantly impact production costs. This could result in either price increases for consumers or tighter profit margins for manufacturers.

3. Limited Presence in Tier 2 & 3 Cities: Many mattress companies face challenges in establishing strong distribution networks in smaller cities. This limitation hinders their ability to tap into the vast potential customer base beyond major metropolitan areas.

4. Economic Downturns: Economic slowdowns can negatively impact consumer spending, potentially leading to reduced demand for mattresses, especially luxury or higher-priced options.

Company overview

Established in 1971 in Uttar Pradesh, Sheela Foam embarked on a journey that led to the creation of its flagship brand Sleepwell in 1994, becoming the most preferred choice of urban Indian households. Over the years, it diversified its offerings by introducing rubberised coir products and collaborating with companies in USA and UK for mattress manufacturing. Expanding its footprint. Sheela Foam established Indias largest polyurethane foam plant in Greater Noida while also venturing into markets like Punjab and Sikkim, to reach a wider audience.

In 2005, the Company ventured into the global market making significant acquisitions like Joyce in Australia and expanding further into Europe by acquiring Interplasp S.L. in Spain.

The Company prides itself on its impeccable track record supported by an extensive distribution network and a skilled workforce that drives innovation in the market.

With the launch of revolutionary technologies with Impressions, Latex Plus, Resitec Air, Duet Luxury, Durafirm, Serenity, Amity, and many more, Sheela Foam has revolutionised the mattress industry. Its commitment to excellence has been recognised with numerous awards including the Dataquest Gold CIO Award, Indian Express Intelligent Enterprise Award and the Information Week Silver Edge Award. Moreover, Sheela Foam remains dedicated to societal wellbeing with its CSR efforts. The Sleepwell Foundation has positively impacted 15.6 million lives through various social initiatives.

Mattresses segmentation

My Mattress, Spring Range, Technology Range, Custom Cell Range, Back Support Range, Flexi PUF Range, Showroom Range, Economy Range, Online Brand

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

Technical foam

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

Furniture foam

Sleepwell Resitec, Sleepwell Cool Gel, Primo

Manufacturing prowess

With the most recent successful acquisition, the Company has expanded its facilities to 21 manufacturing units across India, Australia and Spain boasting a total foaming capacity of 1,46,000 MTPA. The strategically located manufacturing facilities ensure easy access to both consumer markets and raw material sources showcasing the Companys commitment to. The Company exhibits outstanding capabilities in high-quality production and technological advancements.

The Australian facilities, strategically located in five locations have a combined capacity of 11,000 MT per year while the facility in Spain boasts a foaming capacity of 22,000 MT per year. Notably, the Indian facilities, in Jabalpur and Nandigram, have played an important role in the Companys operations. The Jabalpur plant, centrally located and well connected to the distribution market, is an integrated manufacturing hub equipped with cutting-edge technology such as Variable Pressure Foaming (VPF) aimed at reducing costs while maintaining great quality.

Brand development

Through ongoing investments in research and development, the Company has created customised products that cater to changing customer preferences and unique requirements. Marketing initiatives have bolstered the flagship brand, Sleepwell, establishing a strong reputation in the market. Furthermore, the Company owns two other brands FeatherFoam and Starlite, which cater to price-conscious consumers with affordable mattress options. These moves have contributed to the Companys expanded market share in the organised mattress segment.

New foam for mass production in India (M5)

Quilting foam

Financial overview

In FY24, the Companys net revenue from operations on a standalone basis was H 1879.52 crore as compared to H 2038.57 crore in FY23. Profit after tax for the current year was H 168.23 crore in contrast to H 171.09 crore in FY23. Net revenue from operations in Australia was AUD 74.63 million as compared to AUD 79.56 million in the previous year. The net profit after tax was AUD (0.22) million as compared to AUD 0.94 million in FY23. The net revenue from operations in Spain was Euro 36.48 million as compared to Euro 47.21 million in FY23. The net profit after tax was Euro 1.12 million as compared to Euro 2.89 million in FY23. On a consolidated basis, net revenue from operations stood at H 2982.31 crore as compared to H 2873.32 crore in the previous year. Consolidated net profit after tax decreased to H 183.93 crore from H 200.84 crore registered in FY23.

Key financial ratios standalone operation according to the SEBI Listing Obligations and Disclosure Requirements (Amendment) Regulations, 2018

New market entry

The Company aims to capitalise on the untapped potential of the unorganised mattress market by transitioning it into an organised sector. To achieve this it plans to introduce affordable yet high quality products tailored to meet the markets needs. Leveraging Variable Pressure Foaming (VPF) Technology, the Company aims to streamline processes and reduce costs ensuring competitive pricing.. The newly established manufacturing plant at Jabalpur will support the production capacity further supporting the Companys efforts to penetrate the unorganised mattress market and establish a strong foothold in the organised sector.

Driving profitability through acquisition synergies

With its recent acquisition of Kurl-on, the Company is focusing on synergies across procurement, manufacturing, logistics and distribution. By integrating these key areas, the combined entity aims to achieve improved realisation economics and enhance net margins over time. Additionally, the expanded manufacturing capabilities will facilitate strong volume and revenue growth for the Company further solidifying its position in the market.

Expanding distribution network

In India, Kurlon has a strong presence in East and South regions while the Company has presence the North and West. With the acquisition, the combined entity will enjoy a strong market presence across all regions for its diverse range of products. This move allows the Company to leverage the full market opportunity and capitalise on the strengthened distribution channels resulting from the merger.

Foray into branded furniture network

The Company is looking to collaborate with an online furniture platform to create innovative products and blend foam technology with furniture designs. This presents an exciting opportunity to cross-sell the mattresses and other products on the online platform. With limited players in the furniture and furniture rental segment, the early mover advantage will be a significant one.

Internal controls

The Companys internal control framework focuses on strong governance, a vigilant finance function, and independent internal reviews. Risk assessment exercises prioritise the businesss key risks, guiding the formulation of strategies. The Audit Committee regularly reviews and takes appropriate action based on any deviations, observations, or recommendations from internal auditors. The Company is committed to upholding best practices in corporate governance, supported by well-documented policies and procedures to ensure compliance with all relevant regulations. Robust IT systems are in place to protect sensitive data and streamline the audit process. Accounting standards are strictly adhered to when recording transactions. Alongside robust Management Information Systems (MIS), the Company employs various strategies for real-time expense reporting to maintain control. Any deviations from budget allocations are promptly identified and corrected to ensure strict compliance.

Human resources

At the heart of every successful Company lies its dedicated workforce, serving as the cornerstone of business continuity. Employees bring invaluable expertise, passion, and adaptability to the table, making them indispensable assets in navigating the dynamic external and internal landscapes. Their role in crafting and executing strategic plans, coupled with their keen ability to identify and mitigate risks, is paramount in driving the Companys growth and resilience.

The Company cherishes the profound contributions of its employees, recognising their instrumental role in propelling our success forward. Through collaborative efforts and innovative strategies, our workforce has been pivotal in shaping the trajectory of our growth. To nurture and empower its employees further, the Company has implemented a range of human resources programmes aimed at fostering motivation, engagement, and well-being. These initiatives not only cultivate a secure and supportive work environment but also prioritise career development and upskilling opportunities, ensuring that our employees thrive and remain instrumental in our continued success.

3,241

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. The Company undertakes no responsibility to publicly amend, modify or revise any forward-looking statements on the basis of any subsequent developments, information, or events.