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Sheela Foam Uncomfortable price The company’s Sleepwell branded mattresses account for around 20-23% of the organized Indian mattress market
Around 66% of FY 2016 consolidated revenues came from the home comfort segment, while rest came from technical foams. Around 82% of the total consolidated sales came from India and rest from international markets. The company sells its products through distributors, retail dealers, and multi-branded outlets. It had a pan India distribution network that consists of over 100 exclusive distributors, over 2,000 exclusive retail dealers and over 2,500 multi-brand outlets as on September 30, 2016. The company currently owns and operates 11 manufacturing facilities in India. All of its facilities are utilized for manufacturing home comfort products, while five of these facilities also manufacture PU foam. Its installed capacity for foam production in India is currently 1.23 lakh tonnes per annum (tpa). As part of its international footprint, it manufactures PU foam in Australia through its wholly owned subsidiary, Joyce Foam Pty Ltd. It has five manufacturing facilities in Australia, where it manufactures and process PU foams for selling it to manufacturers of furniture and automotive products in Australia and New Zealand. The company exports its products to around 32 countries including Middle East, USA, Europe, Brazil and Argentina. Based on revenues, Sleepwell branded mattresses account for around 20-23% of the organized Indian mattress market (end FY 2016). Exclusive Sleepwell outlets including Galleries, Worlds and Shoppes increased over 275% to 1,439 in FY 2016 from 383 in FY 2014. The Offer and the Objects The issue comprises offer for sale of Rs 510 crore by the selling shareholders, which at the lower price band of Rs 680 per share works out to an issue size of 75 lakh shares and at the higher price band of Rs 730 per share to an issue size of 70 lakh. The selling shareholders comprise promoter Polyflex Marketing Pvt Ltd. The minimum bid lot is 20 equity shares and in multiples of 20 equity shares. The issue is made through the book-building process and will open on 29 November and will close on 1 December, with anchor investor bidding date of 28 November 2016. The objects of the offer is to achieve the listing benefits of equity shares on the BSE and the NSE and to enhance the visibility and brand image among the existing and potential customers and provide liquidity to the existing shareholders. Strengths The Indian mattress industry was estimated to be of around Rs 9000 crore end FY 2016. Of this, two-thirds of the industry is unorganised. Implementation of GST and recent demonetisation of currency will aid the organised players in gaining market share from the unorganised players. The Indian mattress industry has recorded a CAGR of 8-10% over the past five years due to increase in disposable income, awareness of health problems such as back pain and rising urbanisation. Due to rising disposable incomes and the evolving perception of mattresses as health investments, the demand for premium segment mattresses is expected to grow at a faster pace than those in the economy and mid-range segments. Growth in the organised end-user industries such as hospitality, healthcare and housing will lead to higher growth because of its brand and reach. The company benefits from synergized business operations through the manufacture of home comfort products as well as the underlying foam. As a result, it need not source PU foam from external suppliers. Strong brands give pricing power. The margins for FY 2016 jumped nearly 500 basis points due to improved product mix and benefits of lower raw material prices. The company was able to retain the benefits of lower raw material prices. It intends to manufacture higher volumes of customized products as well as develop newer lines of personalized home-comfort products to improve the operating margins. The company intends to enter new product lines and target new consumer segments by creating a new range of base-line comfort products at lower price points, specifically aimed at the rural retail customers, and to leverage its existing distribution network going forward, resulting in higher sales. The company is among the leading manufacturers of flexible PU foam in India. The Indian flexible PU foam market is likely to record 11-12% CAGR over FY 2016-21, as demand from end-user industries increases. Weaknesses The home comfort products and foam manufacturing industry is competitive and fragmented. The industry is also characterised by low entry barriers and smaller scale of operations. The Sleepwell brand, the flagship brand, is not owned by the company, but by a group company called Sleepwell Enterprise Pvt ltd. The home comfort products and PU foam industry is subject to significant technological changes and introduction of new products. The company has to constantly invest in these technologies and respond at a fast rate. Diisocyanates such as polyols, TDI (toluene diisocynate) and other chemicals are major raw materials. Prices of these raw materials are dependent on crude oil prices and other international events as India does not have sufficient capacities and availabilities of these raw materials. The company does not have any long-term contracts with raw material suppliers. Any increase in prices of TDI, currently running at all-time high, can affect the margins. The manufacturing of PU foam involves exothermic chemical reactions between key raw materials, which results in the generation of a significant amount of heat, which, if not contained efficiently, may give rise to fires and industrial accidents. The company has witnessed such incidents in the past. Valuation Between FY 2013 to FY 2015, sales increased continuously but the OPM kept falling, touching low of 6.4% in FY 2015. Net profit fluctuated from Rs 30.85 crore in FY 2013 to Rs 27.84 crore in FY 2014 and then rose to Rs 42.67 crore in FY 2015. However, there was a sharp rise in profit in FY 2016 due to almost doubling of the OPM from 6.4% in FY 2015 to 11.4% in FY 2016. For FY 2016, net sales were up 9% to Rs 1549.99 crore. The OPM stood at 11.4% compared with 6.4% for FY 2015 thus leading to a 93% increase in OP to Rs 176.15 crore. Interest costs stood at Rs 11.67 crore down 28% and depreciation was up 5% to Rs 29.27 crore. After providing total tax of Rs 47.24 crore, PAT increased 146% to Rs 104.78 crore. On equity share capital of Rs 24.39 crore of face value of Rs 5 each, EPS for FY 2016 works out to Rs 21.5. At the higher price band of Rs 730 per equity share, the scrip is offered at P/E multiple of around 34. For the half year ended September 2016, the company reported net sales of Rs 795.50 crore, with the OPM of 13.3%, resulting in OP of Rs 105.80 crore. Interest costs stood at Rs 5.50 crore and depreciation at Rs 14.38 crore. After providing total tax of Rs 28.22 crore, PAT stood at Rs 65.95 crore. Net profit cannot be annualised to calculate EPS due to seasonality in business. There is no listed peer to compare with Sheela Foam. Overall, the company has a solid brand and an attractive business, but asking P/E of 34 on a sharply high FY 2016 EPS is not comfortable.
Sheela Foam: Consolidated Financials
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