Rahul Gautam, Managing Director, Sheela Foam Ltd, talks about the impact of lockdown on quarter numbers, recovery and demand, international business, expansion plans, digital presence and sales, M&A opportunities and liquidity position of the company among others during a candid chat with Swati Khandelwal, Zee Business. Edited Excerpts:

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Q: The overall numbers have been weak on all the fronts. Do you think that it is a lockdown effect and should we expect that better numbers will be seen in the coming quarters?

A:  Yes, it is an impact of the lockdown completely and both production and sales were completely zero for almost a month and a half in that quarter. After that when the ramping of the process started then it increased a bit in June and now, we are coming close to the last year’s numbers or the pre-COVID numbers. We have reached a mark of 80-985% by now.

Q: By when the full recovery is expected and also tell us the kind of demand you are seeing on the ground?

A: I feel about 95% of the markets have been opened after the lockdown and if we have a look at their performance then there are time limits like they close early and start a little late, but 95% of the markets are open. I believe that we will be able to attain the pre-COVID levels between Diwali and the New Year. You have said earlier that the Vaccine is likely to be launched before the end of the year, so that brings a lot of confidence in people and we expect that it will happen.

Q: Let us know about the raw material prices, especially TDI, in the recent past? Was there any increment in them, if yes, then how do you predict it for the full year FY21?

A: The prices were quite stable at the lower level a month ago but the prices of TDI have been increasing for the last three weeks. It is not because there are issues related to supply Vs demand but is a supply chain matter, therefore at the macro level, the companies should have built up their stocks or have continued with the supply chains but because of CORONA/ COVID, the planning was not okay. But still, I think the levels at which it was available a month-ago will not be there. TDI was available at around Rs 110 per kilo then and now is available at around Rs 163-165 per kilo and will go max up to Rs 180 per kilo.

Q: Update us about the international business and the type of activities that is visible there and how it is performing? Also, tell about the operations in Spain and what are the operating levels in the plant there?  

A: First of all, would like to provide a background that the impact of Corona in both, Australia and Spain, was almost as much as it is today in our country. They also saw lockdown but in a limited manner and it continues to happen but the manufacturing was never stopped there. Ever since the opening started a bit, the return of the business is far better even than the pre-COVID times. It is difficult to find the reason behind this growth but it can be a pent-up demand. Secondly, we believe that mattresses and furniture are a non-essential item but people have been at their homes for so many days and this would have had made them realize its importance. The other factor, I think it is very big, is China, which was supply material to all these nations and I think that it was supplying more than what we believed. So, the performance of both Australia and Spain is better than even last year.

Q: Do you think that the trend will continue as these factors are going to stay in the coming days, especially if we have a look at the Chinese issue? What are your projections in these two geographies in terms of how the sales will pan out and do you think that expansion will be needed to cater to the demand?

A: Currently, almost close to 100% capacity is being utilized at both the places, so there will be a need to plan for expansion. The impact of China is just an estimate right now but the sentiments towards Chinese goods and products are similarly bad there as it is here. The need and requirement for localized production will increase substantially and we are already thinking of and in the next month or so we will start planning an expansion of capacities in both, Australia and Spain.

Q: Can you give the cues about the level at which expansions will be made and the kind of investments that will be made there? Not just these two markets also tell us about the other markets where you have focus and you can see the opportunities where you can enter?

A: Australia is a matured market and has a limited population. Certain growth is happening there and Chinese products are being replaced. Our market share is already at a high level there around 35-36%, so there will be a limited expansion. But in Spain, we have just 1% of the entire European Union in terms of capacity and there is a lot of headroom for growth. Plus, new opportunities have also opened from there to supply to the US markets and the Northern African markets, their potential is very high. So, we will have more focus in terms of expansion will be in Spain. There is no need to look at any other market. Recently, we can grow as much as we can from Spain for the European Union, American markets and the North African markets that should be a sizeable opportunity for the coming few months.

Q: While looking at your numbers found that the labour charges have increased significantly as the percentage of sales has shot up. What kind of labour challenges you are facing and how will you address it?

A: Total quantum of labour charges has gone down but as a percentage has increased because the sale has not happened. As the sales are going up the percentage of labour charges has actually gone down in India. So, we don’t need to address more than what we have already done. Along with this, I am also saying that the process of automation and increase productivity is going on but our actual cost in absolute terms has gone down.

Q: There is a huge digital push and every sector and industry are talking about online sales. During our last talk, you also talked about a platform for online sales. So, let us know about the kind of response that you have received there and what are the further plans online Vs offline or brick and mortar setup?

A: Undoubtedly, the preference for online has increased more due to Corona and will continue to grow. For one time, I feel that the level where it has reached in the developed countries, which is almost 15-17% of the market, then In India we are far away and am talking primarily of the metro segment. That’s why a lot of scopes is available and as I said that it has increased a lot after the Corona. So, we have our presence in the market places, which is both, Amazon and Flipkart, and it is substantial. Apart from this, we are also present on other dot coms’ and our website and they are geared up to cater to this demand. And, during the big day sales that ended in August on both, Amazon and Flipkart, the numbers were very encouraging.

We hope that this will grow but we will have to look at the supply channel and fulfilment channel because we as a company are not geared up to supply individual mattresses. So, when these orders will reach us then we will have to supply piece by piece for which the logistic part should be streamlined but otherwise, we are completely geared up to take to this challenge.

Q: There are opportunities to grow and there is an increase in the demand of mattresses including the international market. So, are you looking forward towards merger and acquisition (M&A) opportunities and any opportunity for organic growth in the domestic or international market, if yes, then please provide some detail about it?

A: M&A opportunities always remain there but at this point, I believe that those opportunities will be revealed after a month or two. But the impact of our markets for a one-and-a-half month or two months on the companies where the cash flows have been a problem or availability of the cash has been a problem will be analysed in next two to three months. And that will be the time when the opportunities will be absolutely upfront. So, I will wait till that time for commenting on that.

Q: Please update us on the liquidity position of the company as you have said that there will be a need to expand in the international market. So, let us know about the funds that you can invest, what is the debt situation?

A: Fortunately, we are well funded and are debt-free. A reasonable amount of cash is there with the company. The exact break-up of the cash and debt will be announced when we go ahead with an M&A or while funding some project. But there is no issue as far as availability of cash is concerned.

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Q: Can you tell us about the amount that has been lined-up for investment?

A: Anything between Rs 40-50 crores.