Sheela Foam has a market share of 23 percent in the organised mattress market which is currently worth Rs 3,000 crore. The company, which makes the famous Sleepwell matresses, is planning to boost its market share to 30 percent in the next two years, says Rahul Gautam, Managing Director, Sheela Foam.
The promoters are reducing their stake in the company via the IPO, says Gautam. The promoters will hold 85.5 percent stale post IPO.
Gautam says the Goods and Services Tax is going to bring many benefits to the company, which it plans to pass on its customers.
The company launches its initial public offer today.
Below is the verbatim transcript of Rahul Gautam’s interview to Latha Venkatesh & Sonia Shenoy on CNBC-TV18
Sonia: What growth do you foresee for the organised Indian mattress industry say over the next three to four years?
A: If we take a cue from the recent past we have been tracking about 11-12 percent. However, with the kind of changes like the goods and services tax (GST) and in fact the demonetisation is almost like a half GST the expectation is that it will be closer to 17-18 percent.
Latha: Why, because you expect informal demand or unbranded demand to go away and come to you?
A: The unbranded demand doesn’t go away, but the unbranded demand gets converted to better value for the customer.
Latha: So, they pay tax and therefore become less of a threat?
A: When they pay tax it all becomes out in the open and then they can sort of brand the product, give a better product. Not hide what is inside the mattress and charge the right price for it.
Sonia: A lot of us have used your mattress Sleepwell and the good part is that the operational performance of your business has improved substantially. I mean four-five years back your margins were just about 7 percent and now as of last half your margins have crossed about 13 percent what has led to this operational improvement and should be expect that to sustain?
A: There are many things that happened and if I take FY16 that is where the real increase in the margins came about. Of course it was triggered by some raw material prices going down, but in branded products generally you never kind of reduce prices as we move along. There were many other issues that we took care of. One major part that we took care of was actually converting our multi-brand outlets (MBOs) into exclusive brand outlets (EBOs), so there is a unified or an integrated supply from manufacturing to distribution to the dealers which is exclusive.
The entire channel is exclusive and therefore they respect value they take care of price changes if there are any and that just helps. Plus, we have also done a lot of internal changes like the entire value change so starting from procurement to productivity increases to distribution and logistics improvements and as we go forward these things have fundamentally changed.
Latha: You sell all over India?
A: It is all over India.
Latha: So, GST would mean logistics benefits as well?
A: Sure, so currently like we supply, we supply to a commercial state. Then the supply points will be based on where it is best to supply from.
Latha: I mean GST would be less than value added tax (VAT) for you because you don’t have to pay some other things which were excluded from VAT, how does it work in an arithmetic way?
A: If I look at the current rate of taxation which is an excise duty plus central sales tax (CST) plus the VAT and equate it to if it was GST it will come to some 21.50 or something like that. Now either we should be in 18 or 20, most chances are we would be in 18 which would then help. As the government is saying to pass on those advantages to the consumer of course we would, that would bring the absolutely value down.
Latha: How much are you making in this IPO? Is the company making money, it is divestment and if the company is making money what will you do with it?
A: It is an offer for sale (OFS) which is existing shareholders selling this thing. The company is relatively debt free, for whatever projects it has; it has enough generation of its own. We thought that this is the best way to list.
Latha: The promoters are selling out, the promoting family?
Sonia: There are some very strong brands in the business, other brands like Kurl-on, Duroflex etc how has competition been for you and is there a lot of pressure currently?
A: If you look on a larger perspective we are all co-suppliers to the market. We are brands we do compete on a lower level; we do compete with each other. Sales people would be sort of one against the other and doing all the kind, but whatever is the potential in the market or the requirement in the market I think we have all kind of co-supplying in some manner or the other.
We do also cooperate in terms of systems in terms of sizes for examples sizing is a major issue.
Sonia: What is your market share currently and how much do you think it can grow over say over the next two to three years?
A: The organised mattress market is estimated at about Rs 3,000 crore and we have 23 percent of that share. We grow a little quicker than what the markets are growing. Plus the unorganised converting to organised side would only help. I expect this 23 to go up to 30 in about two years time.
Latha: what about this promoter share after the divestment, what will you be holding?
A: It will work out to about 85 percent, 85.5 to be prices.
Sonia: You told us about your growth in market share that you are forecasting 23 to 30 percent in two years what kind of topline growth would you be looking at? Currently, I think Rs 1,600 crore is what you did last in FY16 if I am not wrong over the next say one to two years what are you looking at?
A: I think there is a bit of a constraint at the moment to really talk about the future numbers because we are right in the middle of the IPO. However, let us say the growth would be higher than what it has been in the past and you are quite right that it was about Rs 1,600 with about Rs 300 coming from our overseas subsidiary Australia and the balance Rs 1,300 from here.