Buy Sheela Foam, target Rs 2,010: Edelweiss Financial Services

Edelweiss Financial Services has a buy call on Sheela Foam with a target price of Rs 2,010.

The current market price of Sheela Foam is Rs 1,737.

Time period given by the brokerage is one year when Sheela Foam price can reach the defined target.


View of the brokerage on the company:
Sheela Foam’s (Sheela) flagship Sleepwell is a mattress industry leader underpinned by superior branding, exclusive distribution and pricing power. Through its budget-segment brand Starlite, Sheela is eying a sizeable market, which together with Sleepwell is expected to drive a bouncy 20 per cent revenue CAGR over FY18–20E for the mattress segment. Besides, an improving product mix and easing raw material prices bolster our PAT CAGR of 35 per cent for FY18–20E and a jump in RoCE to 40 per cent (FY18: 35 per cent). Though Sheela is trading at a high valuation, we believe our target consolidated multiple of 40x FY20E EPS fairly reflects the stock’s potential given the opportunity size (large unorganised market) as well as the company’s solid brand, leadership in a stable industry, and sector-leading return ratios. Initiating with a ‘BUY’ at a target price of Rs 2,010.

Superior brand with strong distribution and pricing power: Over the past two decades, Sheela has cornered about 20-23 per cent of the organised mattress market largely due to investments in the Sleepwell brand, clearly visible in its advertising spend that is comparable to leading FMCG brands. Another key differentiator is its exclusive brand outlet (EBO) network, which accounts for about 80 per cent of revenue, much higher than any industry player. This along with launch of the ‘My Mattress’ concept (customized mattresses) has reinforced Sleepwell’s pricing power—evident from the cumulative 25 per cent hike effected over the last two years.

Broad-based growth, easing raw material prices and improving mix: Sleepwell is likely to be a key beneficiary of high growth in the mattress industry driven by its aggressive branding, deepening reach and product innovation. The company is eying a market much larger than the cumulative size of other segments via its budget category brand Starlite. Besides, TDI (key raw material; about 20 per cent of revenue) prices, which have been rising over the past two years, are finally beginning to ease. This given Sheela’s track record of limited rollback along with improving product mix (higher mattress share) should bolster EBITDA margin by about 340bps to 14.4 per cent by FY20E.

Outlook and valuations- Layers of potential; initiate with ‘BUY’: Though Sheela is trading at a high valuation, our target standalone multiple of 42x FY20E EPS reflects the opportunity size and the company’s brand strength, leadership in a stable industry, and high return ratios. We value the subsidiaries at 13x FY20E EPS (consolidated target multiple 40x FY20E EPS). Initiate with ‘BUY’ at a target price of Rs 2,010.