IPO Analysis: Sheela Foam

Sheela Foam is coming out with a public offer this week. However, investors may prefer to buy the shares of Sheela Foam from the secondary market instead.

The leading manufacturers of mattresses in India marketed under the brand "Sleepwell" may see a meaningful fall in the earnings in the coming quarters, on the account of two things - drop in sales due to demand destruction from demonetization and sharp rise - upto 100% in the prices of a key raw materials.

The valuation that the IPO demands is 34 times on its FY16 earnings, which is slightly expensive and does not give any margin of safety against this uncertainty in earnings.


However, in the long term it will benefit from its leadership position in the underpenetrated market.

Company & Business

The North based company is into manufacturing of mattresses, other foam based home comfort products and technical grades of PU Foam products : mattresses and other cushioning products through its 11 manufacturing facilities in India.

According to the management, the company has sufficient capacity to handle higher demand for the next few years.

The "Sleepwell" brand is owned privately but Sheela Foam has an agreement to use the brand at a nominal rate of Rs 5 lakh per annum for the next ten years.

According to a CRISIL report, organized market is around one third of the total mattress market in India and is expected to grow at a compounded rate of 11%-13% for the next five years.

Sheela owns 20%-23% of the organized mattress market and has seen a compounded revenue growth of 10% from FY12-FY16

While 82% of Sheela's revenues are from domestic markets, 18% come from exports of technical foam. It also has presence in Australia through its wholly owned subsidiary - Joyce Foam.

Financials & Valuations

In the first half of FY17, consolidated net profit was Rs 66 crore on sales of Rs 796 crore. Its EBIDTA (earnings before interest depreciation and tax) margin was at 13.2%.

Toluene Diisocyanate (TDI), a chemical used for foam manufacturing has seen its price double post September - from Rs 150 per kg to close to Rs 280 per kg. In FY16, TDI cost was over 11% of the company's sales.

The company has taken 7-9% price hike in November across products to pass on the cost. But it may not be very clear how this would impact the demand, whether customers will move to other kind of mattresses. Demonetization too will impact the near term demand.

The company's debt has been reducing and was only Rs 29 crore(long term debt) in the end of September. Its return on equity in the first six months of FY17 was 16.3%.