Sheela Foam Limited (SFL) Q2 FY23 Earnings Concall Transcript

Sheela Foam Limited (NSE:SFL) Q2 FY23 Earnings Concall dated Nov. 08, 2022

Corporate participants:

Rahul Gautam — Managing Director

Tushaar Gautam — Whole-Time Director and Chief Executive Officer, India business

Rakesh Chahar — Whole-Time Director

Davinder Ahuja — Inside Sales Specialist

Analysts:

Karan Bhuwania — ICICI Securities — Analyst

Ritesh Shah — Investec — Analyst

Nihal Shah — Nuvama — Analyst

Sohini Andani — SBI Mutual Fund — Analyst

Resham Jain — DSP Investment Managers — Analyst

Lipit Jha — Chief Capital — Analyst

Resham Mehta — Green Edge — Analyst

Pankaj Tibrewal — Kotak Mutual Fund — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to the Q2 FY ’23 Earnings Conference Call of Sheela Foam Limited, hosted by ICICI Securities. [Operator Instructions] 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.

Karan Bhuwania — ICICI Securities — Analyst

Good evening, everyone. [Technical Issues]

Operator

Sorry to interrupt you, Mr. Karan, we are unable to hear you. Can you please speak bit louder?

Karan Bhuwania — ICICI Securities — Analyst

Sure, good evening everyone. It’s our pleasure at I-Sec to host Sheela Foam’s earnings conference call. From the management today we have Mr. Rahul Gautam, Managing Director; Mr. Rakesh Chahar, Whole-Time Director; Mr. Tushaar Gautam, Whole-Time Director and CEO of India Business; Mr. Nikhil Datye, Group Chief Financial Officer; and Mr. Davinder Ahuja, Group Finance Controller.

I’ll now hand over the call to Mr, Rahul Gautam for his opening remarks. Thank you. Over to you, sir.

Rahul Gautam — Managing Director

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.

So 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 Gurupurab. It’s my pleasure to welcome you all to the earnings conference call for the second 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 he was — he’s originally from Mumbai but he is — the process of transferring and changing and there were personal difficulties in getting admission for children etc., 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 second quarter under review, on a consolidated basis, we reported a revenue of INR722 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 profit stood at INR54 crores, which was down by about 30% 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 continue their consistent movement downwards, while TDI prices also cooled off and then have been fluctuating thereof. This has definitely resulted in an improvement in the gross margins across the various geographies that we update on.

Uncertainty still looms large, though clear indications of the volatility settling down are on the horizon. The year-on-year decline in revenues were 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, 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 too 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 form products on a year-on-year basis and quarter-on-quarter basis, although this quarter the mattress segment, furniture foam products and comfort foam products witnessed some decline on a year-on-year basis.

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 INR1,451 crores reflecting a growth of 9% with EBITDA margins at 9.94% and a net profit of INR96 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 will be — 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 ffforts in sales and marketing and the extra expenditure 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.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Ritesh Shah from Investec. Please go ahead.

Ritesh Shah — Investec — Analyst

Hi, sir, thanks for the opportunity. Couple of questions. First on the cash flows then on manufacturing and more to do with the revenue streams that we are looking at. So first on cash flow prior to conference calls, we had indicated that we would 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. That’s the first question. The second question is on 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 product? I think — I understand Starlite is one of the products which will be under third-party manufacturing. So more of rationale and some numbers over here? That’s the second question.

And the third question is into four parts. So one is exports, has it really come off from the Nandigram facility? I think earlier the problem was [Technical Issues], that seems to be cooling off. Any numbers over here will be useful. Second is any feedback on the e-commerce side? Last quarter you indicated that we have launched Sleepwell. How is it actually faring in the marketplace, so that’s the second part of the question. Third is Indian Railways, any numbers over here? Any updates? And fourth is timelines on Jabalpur expansion along with the launch for Mattress For Every Indian. Thank you so much, sir.

Rahul Gautam — Managing Director

Thank you, Ritesh, thank you. That’s a lot of questions. So let me first begin with the first question that you’ve asked regarding acquisitions. You see, we don’t do this day in and day out and what we are experiencing that these things always take a little longer time than what you think. They should, when you especially go down into details. I would only say that a couple of them is — 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 of time.

Ritesh Shah — Investec — Analyst

Sure.

Rahul Gautam — Managing Director

On the third-party manufacturing, I presume that you are talking about outsourcing manufacturing of Starlite. Is that correct?

Ritesh Shah — Investec — Analyst

That’s right.

Rahul Gautam — Managing Director

Right. Okay, so we are doing that on a standard basis and I think there are two units who do that for us. And 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 of that in-house and lesser from outside. So there is flexibility on it.

There was a question on the Indian Railways…

Ritesh Shah — Investec — Analyst

Sir, can I — sorry to interrupt. Sir, can I just ask you for the rationale for this particular outsourcing or third-party manufacturing? Is it purely lead-time or is that — we are looking to improve the ROCE’s, working capital, how should one understand it, sir?

Tushaar Gautam — Whole-Time Director and Chief Executive Officer, India business

It’s Tushaar. I’ll take that. I think the rationale for that is very simple. It’s a very low-value item. We are anyway sourcing bulk of the core 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, volume of outsourcing moves up and down depending on how much free capacity we have ourselves.

Ritesh Shah — Investec — Analyst

Sure.

Rahul Gautam — Managing Director

Okay, so before I let Rakesh take the railways question, I just want to update you on the Jabalpur project, so that is the Mattress For Every Indian. Last time and 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, etc., 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 and I’m sure that by the — 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, etc., is already in place or getting in place. We are looking at possibilities where we can manufacture — before the machine arrive, 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. And while 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, etc.

Now just, I request Rakesh to update us on the railways bit, please.

Rakesh Chahar — Whole-Time Director

Yeah. So railways is progressing well. The material has got very well-established now. So whatever kind of specifications, so the existing material lobby, so that all seem to kind of getting settled down. And so we are now getting to a good run rate monthly. And it’s progressing well.

Ritesh Shah — Investec — Analyst

So would it be possible for you to give some numbers or some inkling into what all regional divisions that we’re already supplying to, what’s the opportunity size?

Rakesh Chahar — Whole-Time Director

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 230 coaches a month, which is growing month by month. In terms of revenue, it will be about INR4 crores to INR5 crores a month. That’s the current run rate that we are doing.

Ritesh Shah — Investec — Analyst

Yes, sir, and sir two more questions pending, one was on exports and secondly was on e-commerce feedback on Sleepwell.

Rahul Gautam — Managing Director

Okay. Tushaar, you want to take the one on the export?

Tushaar Gautam — Whole-Time Director and Chief Executive Officer, India business

Yeah, so the export side, like we discussed last time, was primarily struggling on account of extremely high freight charges. 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, lot of our customers had stuck inventories which they had already imported, all of that’s kind of eased off and from first week of October or so 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. And that ramp-up that we had planned for should actually start to accelerate now.

Rahul Gautam — Managing Director

And Rakesh, can you just respond to the e-com position, please?

Rakesh Chahar — Whole-Time Director

So Sleepwell is introduced on both the platforms, Amazon and Flipkart in late September. So the response in October was very encouraging, both on the marketplace and also on our website. So now we are ramping that up and we also will be running our campaigns for promotion of the three SKUs that we’ve introduced and this is actually a omnichannel, I mean these products are. And also we book from the offline channel. So I think it is settling down but the initial response has been quite encouraging at the price points that we have positioned it.

Ritesh Shah — Investec — Analyst

Sure, thank you so much for the detailed answers. I’ll join back in the queue. I appreciate it.

Operator

Thank you. The next question is from the line of Nihal Shah from Nuvama. Please go ahead.

Nihal Shah — Nuvama — Analyst

Yes, thank you so much and good evening to the management. Sir, couple of questions from my side. First, you did highlight that the current environment remains a little impacted specifically on the mattress side. But if were to just ask you that at least the activity from a lot of the other D2C 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 added to you and to the overall consumer sentiment?

Rahul Gautam — Managing Director

Nihal, I’m just going to repeat that question so that I have understood well. You are referring to 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?

Nihal Shah — Nuvama — Analyst

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 four, five of them. So is that a bigger reason than maybe the overall slowdown, which is, say, impacting the performance across the offline mattress industry, not just, say, specifically to Sleepwell or Starlite or Sheela Foam?

Rahul Gautam — Managing Director

Rakesh, why don’t you take this?

Rakesh Chahar — Whole-Time Director

Yeah. So I think you’re referring to the e-com brands 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 is also looking at the same kind of bargains 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. And second is, I think it’s — because it’s still a small market growing at a faster rate than offline, about 25%, 30% so — but it is still in the realm of 1,200 [Phonetic] about maybe 6%, 7% of the total market. So I would say that, yes, it is an upcoming channel, which is getting evolved, but the impact on offline is more new channel having its own ways of servicing customers, offers, COD, 100 free nights. So 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 has more to do with the environment and the consumer sentiment.

Rahul Gautam — Managing Director

If I may add to this, that all this heightened activity that is there, to my mind, it’s only expanding the mattress — 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 and the 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. I mean eventually people will have to figure out ways to exist there, that is by margins or reducing discounts, etc. But otherwise, it’s not a sustainable business. So just these two points, one, whatever activities, whatever rupees are going into advertisements and talking points etc., and the noise it’s creating, good for the business; not so good for the companies who are doing this.

Nihal Shah — Nuvama — Analyst

Understood. And just the follow-up on that would be that from our side we have Sleep X as a brand, which is purely online and we have limited SKUs of Sleepwell which you have recently got on Amazon and Flipkart, that is the way we are approaching this channel. That could be a right understanding?

Rahul Gautam — Managing Director

That is correct and also ensuring that there is some sanity in this wild thing which is going on where the brand has an opportunity to grow, where you still make some money out of it etc., and give your larger market of offline enough foundation and enough strong feet to stay strong.

Nihal Shah — Nuvama — Analyst

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’ve highlighted about a spurt in sales and marketing, but would there be pricing action on our products if raw materials stays lower?

Rahul Gautam — Managing Director

Sorry, I didn’t hear that clearly, but you are talking about reduction of prices, are you?

Nihal Shah — Nuvama — Analyst

Yes, so given that we’ve seen a correction on the raw material price, and assuming that sustains, would we reduce the prices of our products?

Rahul Gautam — Managing Director

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 because the markets 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 other thing — additional thing needs to be given with a mattress, we will do that. But price reduction is not the order of the day.

Nihal Shah — Nuvama — Analyst

Understood. Thank you so much and wish you all the best.

Operator

Thank you. The next question is from the line of Sohini Andani from SBI Mutual Fund. Please go ahead.

Sohini Andani — SBI Mutual Fund — Analyst

Hello?

Rahul Gautam — Managing Director

Yes.

Sohini Andani — SBI Mutual Fund — Analyst

Yeah, good afternoon. I just wanted little more understanding on the increase in sales and marketing expenses that we’ve seen both year-on-year and quarter-on-quarter and also the fact that our mattress’ sales have basically declined during this period. So if you could just explain and what areas have we spent this and the dichotomy a bit in terms of actual mattress’ sales being lower. So it would be good if you could explain this in some detail.

Rahul Gautam — Managing Director

All right. Thank you. I think Tushaar will do that, which is, I think primarily your question is increase in the sales and marketing expense, while the number of mattresses have declined. So they’ve — I think both are following a different curve. Tushaar, can you just explain that?

Tushaar Gautam — Whole-Time Director and Chief Executive Officer, India business

The way that we are looking at that is from a baseline, let’s say, of H1 last year or even quarter two last year, which were very, very unusual. There was — Q1 was virtually a dead quarter and a lot of these, especially the marketing side of it and even some trade promotions and channel and all of that wasn’t there. We’ve — over a period of 12 months, it’s certainly come back to what the normalized level used to be two or three years ago. What is really — that’s on the sales side, but what is really extra is marketing expense and that’s something that we are focusing on getting the brand more visible, also investing in some of these newer channels where we are starting to expand the Sleepwell brand like the e-com side has come now, but there are a couple of other developments like this that are ongoing of special — channel special businesses in which we intend to expand this Sleepwell brand. So there are some marketing investments that are related to that which have gone up or which have been front-loaded at the moment.

Sohini Andani — SBI Mutual Fund — Analyst

Sure, sure. Thank you.

Operator

Thank you. The next question is from the line of Resham Jain from DSP Investment Managers. Please go ahead.

Resham Jain — DSP Investment Managers — Analyst

Yeah. Hi, good afternoon, sir. So I have a few questions. So first one is on the — in the past, when we didn’t had Starlite and Feather Foam or rather the high-value products there, the mix was higher. I think the larger 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’re 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?

Rahul Gautam — Managing Director

So I would say yes, wedding times continues to be a strong time for us to market or to sell and this time the — what are the dates Rakesh that the weddings, they’ve started yesterday or [Speech Overlap]? Okay, so right through up to 19th of December, I think, is it?

Rakesh Chahar — Whole-Time Director

14th of December.

Rahul Gautam — Managing Director

So this is a strong season and you can always feel in the air that mattresses are being sold more. But definitely this is the strong time and we should have [Technical Issues]

Rakesh Chahar — Whole-Time Director

I mean it’s a 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.

Rahul Gautam — Managing Director

Yeah, because I think the other zones, they marry whenever they want. So for sure, the point that you’re making, Resham, is strong. This is a good time and you would see goods sales at this time.

Resham Jain — DSP Investment Managers — Analyst

Okay, this should improve the mix as well right, the price points?

Rahul Gautam — Managing Director

Yes.

Resham Jain — DSP Investment Managers — Analyst

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 because with the aggression on the e-commerce side, the relevant spend also has to happen, which is unlike a traditional company where the 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?

Tushaar Gautam — Whole-Time Director and Chief Executive Officer, India business

Generally I — 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 platforms, 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 brands then will be and a lot of the traditional spend are slowly ramping down and those resources are getting transitioned into digital. 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 seven to eight times of what we normally do in a month. And I don’t see that slowing down. So as we move along, you’ll see more and-more of that.

Resham Jain — DSP Investment Managers — Analyst

Okay, understood. Can I ask one more? Just to understand on the e-commerce side, the Sleep X 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 more from Sleep X perspective, but now you have to do for Sleepwell as well? So how should one think about this?

Tushaar Gautam — Whole-Time Director and Chief Executive Officer, India business

So I think just to think about it in a way that we started Sleep X a couple of years ago when all of these other brands were coming in. Looking at the modules, looking at the conflicts between online and 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’ve started about a couple of months ago. Like Rakesh ji said, good first indications, it’s a product and a module which we worked very hard to develop a omnichannel experience where I can compete on an Amazon, Flipkart website and compete with all of these other new 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. So from our perspective, we think the Sleepwell brand, getting access to this new channel which is, let’s say, about 6%, 7% of the overall market is the sustainable way to progress and therefore the resource allocation of marketing will be more and more towards Sleepwell.

Resham Jain — DSP Investment Managers — Analyst

Okay, sir. Perfect.

Rahul Gautam — Managing Director

And if 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 and therefore all the exploration, all the initial experience etc., was done using Sleep X 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 Sleep X for sure.

Resham Jain — DSP Investment Managers — Analyst

Okay, thank you, sir. All the best.

Operator

Thank you. [Operator Instructions] The next question is from the line of Lipit Jha [Phonetic] from Chief [Phonetic] Capital. Please go ahead.

Lipit Jha — Chief Capital — Analyst

Yeah. Hi, thank you for an opportunity. Sorry I’m just looking at your company for the first time. So my question may be little novice. Just wanted to understand our geographical growth opportunity. So I have kind of historical data, but how do you see the things moving in next two to three-year time horizon? How do you see the opportunity size and scale? One is that question and second is, are we looking at any complementary businesses apart from mattresses what we sell as of now as an opportunity to give a kind of a bouquet of product to the customer who walks into our store or buy our products? And second is are looking at any complementary businesses apart from mattresses what we sell as of now as an opportunity to give a kind of a bit of product to the customer who walks into our store or buy our products.

Rahul Gautam — Managing Director

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? And that of India we are talking about. Is that correct?

Lipit Jha — Chief Capital — Analyst

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? Yes.

Rahul Gautam — Managing Director

So our philosophy or our thinking on this is clear that when we look outside of India, we look at an opportunity, which is on the operations side, the 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 that is where we look at India, and that is how we are structured and integrated here, because 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 geographical growth, undoubtedly, we are strong in the northern part, the western part. We’re getting stronger on the southern part. We may be 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. 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 as 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 where the brand has similar kind of dominance as we have in the northern and western part of it. And therefore, the 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 bed sheets, we do comforters, we do bet sets, and anything which goes on top of the bed. They are doing it, and this is going into the stores and in times to come, will act 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 sold together. So it’s very fragmented. It’s very — the varieties and the SKUs and all that are phenomenal. However, we have a play on this, and we have some programs. At this point, I’ll only say that we have some programs, I may not be in a position to discuss them any further.

Lipit Jha — Chief Capital — Analyst

Yes. Thank you so much. Just one broad last question from my side. In terms of while answering previous question, you kind of alluded about technical capability and also manufacturing excellence. Could you also give us some sense on — because historically, if you see a decade back also, people were not very choosy or selective about the foam in which they sleep or they sit or they’re using their furniture. But now that 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 a broader sense will be very helpful. That’s it from my side, sir, I wish you all the best.

Rahul Gautam — Managing Director

Thank you. Thanks a lot.

Operator

Thank you. The next question is from the line of Resham Mehta from Green Edge. Please go ahead.

Resham Mehta — Green Edge — Analyst

Yes, 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 how big is this channel for mattresses in India? And also, what would be our market share? And would feather foam and Starlite be also available on the e-comm channel? So that’s the first question.

Rakesh Chahar — Whole-Time Director

Okay. Tushar, would you answer that? It is there, how big is the e-com channel? What’s our share on it?

Tushaar Gautam — Whole-Time Director and Chief Executive Officer, India business

The overall mattress market would be approximately INR15,000 crores to INR16,000 crores for the consumer. E-com this year projected is approximately anywhere between INR1,000 crores to INR1,200 crores. And we should finish the year at about 10% market share. On your second question, feather foam and Starlite will not be available now.

Resham Mehta — Green Edge — Analyst

Okay. So what will be the positioning of — or rather what is the difference in the positioning of Starlite and feather foam brands? Because I believe both are sold through MBOs are in the price range of INR5,000 to INR20,000 if I’m not wrong?

Tushaar Gautam — Whole-Time Director and Chief Executive Officer, India business

Starlite is lower, Starlite is a lower-end brand, and that’s only anywhere from INR4,000 to INR8,000 or INR9,000. Feather foam is the little more premium larger offering brand from INR5,000 to INR20,000, now a little higher as well.

Resham Mehta — Green Edge — Analyst

And out of the total mattress India revenue, how much would be coming from Starlite and Feather foam?

Tushaar Gautam — Whole-Time Director and Chief Executive Officer, India business

About 10%.

Resham Mehta — Green Edge — Analyst

Okay. And on the export front, if you could just give a general sense on that after China seeded this place, which are the major countries that are exporting to US and EU. And would our exports be branded or white labeled and just the margins and working capital reserve?

Rakesh Chahar — Whole-Time Director

Yes. So exports generally from the China plus one piece, what’s really happened in the export of mattresses to the US is step one, there were antidumping duties and resistance to buy from China, primarily the Chinese mattress exporters, shifted shop to Vietnam, Indonesia and places like that, even some in Eastern Europe and things like that. Those have all got covered under the antidumping regime of the US. And therefore, India is still in a good position to export. That was primarily our play there. In the interim, two things that are negative has happened. One was the escalation in transport costs. So container freights 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 consumable demand in the US really dropping and a lot of inventory stuck in the system and all of that. So all that’s kind of gone. That’s why we are starting to see good traction from customers for supply of white label mattresses into the US starting to happen for the last 45 days a year. The only other thing — sorry, did I answer all your questions?

Resham Mehta — Green Edge — Analyst

Yes. So margins and working capital here. And also, what we sell is essentially white labeled mattresses, right?

Rahul Gautam — Managing Director

That’s correct.

Resham Mehta — Green Edge — Analyst

Okay. And the margins and working capital here and also India is not seeing any antidumping duties?

Rahul Gautam — Managing Director

Well, not yet. Not yet. And let’s hope not, always. So that’s why we kind of hedged that US supply by also supplying product out of our Spanish entity with the assumption that a European Union country coming on the anti-dumping from the US will be a very, very tough ask. Even if India gets covered, we have the capability to service customers from space.

Resham Mehta — Green Edge — Analyst

Got it. And working capital and margins here.

Rakesh Chahar — Whole-Time Director

So working capital, we are generally very conservative on, and payment terms are at best 20 days or so at best.

Resham Mehta — Green Edge — Analyst

Okay. Okay. And lastly, on the rural distribution plan, if you can elaborate on this? And also, I think it was mentioned that we may enter the furniture segment. So any progress there?

Rakesh Chahar — Whole-Time Director

So I’ll park the furniture question maybe for three months down the line. Like Rahul ji said, we’re not in a position to respond to that at the moment. On the rural side of things, Rahul ji has already commented on the capital expenditure in Jabalpur with this intent and the status of that. What we are doing parallelly 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 nine to 10 months away. That’s generally the outlook on that.

Resham Mehta — Green Edge — Analyst

Right. And if I can squeeze in one more. What would be our revenues from metros, Tier 1, Tier 2, Tier 3 rural currently, like, let’s say, on an annualized FY ’22 basis?

Rakesh Chahar — Whole-Time Director

So I’d say metro Tier 1 is about 70% and Tier 2, Tier 3 would be about 30%. The rural will be virtually 0. I mean — so 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.

Resham Mehta — Green Edge — Analyst

Right. Alright. Thank you and all the best.

Rahul Gautam — Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] Next question is from the line of Pankaj Tibrewal from Kotak Mutual Fund. Please go ahead.

Pankaj Tibrewal — Kotak Mutual Fund — Analyst

[Technical issue]

Operator

Sorry to interrupt Mr. Tibrewal, we cannot hear you, sir. You are sounding very low, sir.

Pankaj Tibrewal — Kotak Mutual Fund — Analyst

Can you hear me now?

Operator

Yes, much better. Please go ahead.

Pankaj Tibrewal — Kotak Mutual Fund — Analyst

Yes. So my first question is that though we have seen improvement in gross margins on a consol basis, but that has not slowed down to the EBITDA and the PAT. And finally, what you explained is the marketing overheads, which you have done. As you move into the second half, maybe comfort you can give us on the margin expansion from an 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 because in a rising, in a bad environment where revenues have gone down, we have seen a very sharp expansion on margins in Spain. And that has led to overall company gross margin also kind of improving. And 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 second[Phonetic].

Rahul Gautam — Managing Director

Thank you, Pankaj. Thanks a lot. Tushaar, will you take the first one on the H2, I mean, to give some comfort without giving all the details.

Tushaar Gautam — Whole-Time Director and Chief Executive Officer, India business

I think on two fronts. One, I would just say the quarter two results that have been released right now are also distorted from July, August, September perspective, September being extremely good on the margin front. The average, of course, is what has been released. What that means is that the September P&L or the margin issue of September is going to continue or we’re seeing it continue in October, November, coupled with better mix and higher sales on account of quarter three season, marriage season, Sleepwell products selling more than — or having more of a ratio in overall sales, et cetera. So — sorry. So just reiterating that point. So September was better than August. August was better than July in terms of margins and we see that continuing. And of course, the extra sales and the better product mix for quarter three. So that should be maintainable and comfortable. What’s the second question?

Pankaj Tibrewal — Kotak Mutual Fund — Analyst

The second question was on Spain.

Tushaar Gautam — Whole-Time Director and Chief Executive Officer, India business

Spain, Pankaj ji, I think something very strange is going on. Yes, the market is depressed, raw material is short. But prices — prices of raw materials are still a bit higher than India or significantly higher. But because there is a shortage of raw materials, we are able to maintain our margins, we’re able to pick our customers, we’re 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 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 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 markets. 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 material, but those supply chains we have changed over to Asia now. And now that we have enough raw material, we have started to go out after growth. And 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?

Rahul Gautam — Managing Director

Cash flows, I think, primarily, Pankaj ji, because of lower sales and — or Davinder, why don’t you answer that?

Davinder Ahuja — Inside Sales Specialist

Yes. So there is sales and there are certain expenses which have gone up this time which resulted in lower cash from operations. Besides that, there are also working capital requirement in the market, where we have extended certain credits[Phonetic], which is well taken to lower operating cash flow.

Rahul Gautam — Managing Director

So I think it’s just lower sales and an extended credit, which is brought out. But the credit is temporary and very secured.

Pankaj Tibrewal — Kotak Mutual Fund — Analyst

Okay. Okay. Okay. And just last one, Spain has seen a normal increase in gross margin from 22%, 23% to 31%. Do you see the situation where in the second half, India does much better, recoup all our gross margin losses, Australia continues to be steady, but Spain again sees a setback on gross margins and then the overall control margins again. Is that a probability? Or you think Spain can sustain the margins as the situation is today?

Rahul Gautam — Managing Director

So I think the 20-odd percent that you were talking about, that was the unsteady point. I mean that was the bottom point that was there, that when the raw materials were violently fluctuating around. But actually slowly kind of steadying down — slowly kind of — even if the Ukraine war continues, that people are finding ways, whether it’s getting the raw material from the Asian region or importing elsewhere doesn’t and manufactured out of here, et cetera. So I think the 20-odd percent, 22% was the low one, it will go up. I think it should be steady between 35% and 40%. And as 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 here.

Pankaj Tibrewal — Kotak Mutual Fund — Analyst

Thank you and wish you all the best.

Rahul Gautam — Managing Director

Thank you Pankaj Ji. Thanks. Thanks a lot.

Operator

Thank you. The next question is from the line of Resham Jain from DSP Investment Managers. Please go ahead.

Resham Jain — DSP Investment Managers — Analyst

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? And what could be the optimal throughput from this plant?

Rakesh Chahar — Whole-Time Director

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 have put some of our interim products through this. I mean it’s ready to respond to any demand that comes from the export side. So there are no issues on ramping up the facility at all.

Resham Jain — DSP Investment Managers — Analyst

No, my question was to ramp up the whole facility to, let’s say, 80% to 100%, how much time will it take? Do you think it will take three months, six months, one year? And once it reaches that level, how much throughput can come from this plant additionally?

Rakesh Chahar — Whole-Time Director

You’re talking about the demand side then, right?

Resham Jain — DSP Investment Managers — Analyst

Yes, yes. On the export because that plant is dedicated for exports. So I was just thinking from that plant perspective because those kind of products can be manufactured only from that particular plant?

Rakesh Chahar — Whole-Time Director

Approximately from the customer order side, approximately five to six months to ramp that up to full capacity. And at that point in time, it should be doing close to five containers a day.

Resham Jain — DSP Investment Managers — Analyst

Okay. Okay. In terms of revenue sales, because containers doesn’t — we will not be able to understand what will be the revenue potential.

Rakesh Chahar — Whole-Time Director

[Technical issue] Roughly about between INR1 crores to INR1.5 crores a day.

Resham Jain — DSP Investment Managers — Analyst

Okay. Perfect sir. Great. Thank you. Thank you sir.

Operator

Thank you. The next question is from the line of Ritesh Shah from Investec. Please go ahead.

Ritesh Shah — Investec — Analyst

Hi, sir. Thanks for the opportunity again. Sir, just wanted your views on the distribution side. Most of the online-only players in the marketplace, they are also now looking at omnichannel and looking to aggressively add stores. I think based on the recent checks we did find out that we have been appointing new MBOs as well and also basically putting some accountability in the system, I think we didn’t have any targets for EVOs and MBOs over the last two to three years, probably it went back to COVID. So sir, I just wanted to have your sense on distribution. Also, if you could give numbers on how many shoppes, galleries and world we have right now?

Rahul Gautam — Managing Director

So Rakesh, would you take that question that the total number of worlds, galleries, and shoppes. And the question is, that because of the COVID times, et cetera, there were no incentives for those people. So are you thinking anything in that direction?

Rakesh Chahar — Whole-Time Director

Yes. So as far as the showroom format, which we call them world and gallery, they are 1,500 plus. The shoppes are about 2,200, and rest would be the exclusive dealers. And they also — the network has been also growing, like just to give you a sense, since April, we have 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 deputed people to help retailers to get on to these metrics and start with the baseline and then start improving on the conversion on the ASP. And because that’s where we believe the sale is going to come from the same store. So that’s the EBO part of it. I hope I have answered your questions.

Ritesh Shah — Investec — Analyst

Yes. And on the MBO side, I think we were not very aggressive on adding MBOs, that is something which has probably changed over the last six months. Also, I think on the incentives on how we are actually incentivizing the guy to actually also put to Sleepwell into the shop to make the sale happen today?

Rakesh Chahar — Whole-Time Director

So we have started a new network. We are calling it a cushioning partner. And so we’ve started this program in this year from, let’s say, end May between June, right? So we have created about 1,500 such people who have some products of Sleepwell and a complete range of feather foam. So here, the belief is to instead of approaching thousands of MBOs to focus on this set of we have the plan to go up to 2,000 dealers in this year and focus on them and push them towards its usability. So that’s what our plan is with this network. And MBO, since we also deal in comfort foam and Starlite, so that is the less for MBO where — I mean, there is a team which is working on that, both on the comfort foam and Starlite MBO. But there also, we are growing not by the number but to deal with maybe 1,000 MBOs and get better extraction out of it, because our learning in past has been that we were able to appoint many MBOs because they all wanted some connection with K12 and Sheela Foam, but the extraction was very poor. We are 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 kind of — I mean we are approaching more for extraction now as far as MBO businesses.

Ritesh Shah — Investec — Analyst

Sir, this is very useful. Just one follow-up. Sir, what is the end result that we are looking at? Do we have any metric when we are looking at revenues for EBO or MBO?

Rakesh Chahar — Whole-Time Director

What we are looking is that we need to expand our EBO network. Currently, it stands at 5,000 plus what I — 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% plus.

Ritesh Shah — Investec — Analyst

Sure. [Indecipherable] Thank you so much.

Rahul Gautam — Managing Director

Thank you.

Operator

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments.

Rahul Gautam — Managing Director

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. And if you do have any further questions or would like to know more about the company or it’s working, please reach out to our investment relationship managers at Valorem Advisors. I want to conclude today with this note, that whatever recently 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 a country of the decade or is going to be the country of the decade with at least a 6% to 7% growth. And soon, recently, of course, we have become the fifth largest but soon, we would become the third largest, which 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 interactions. With those words, I’d just say good night and sleep well.

Operator

[Operator Closing Remarks]