Sleepwell or Sleepless nights with Sheela Foams??

About the Issue
Sheela Foam is coming up with an IPO from November 29- December 1, 2016 in the price band of Rs 680- Rs 730 per piece for the face value of Rs 5. This is an offer for sale where one of the promoters, Polyflex Marketing Pvt. Ltd., which holds 27.75 per cent in company, will raise upto Rs 510 crore through this OFS.

Purpose of the issue
Purpose of the IPO is to get brand equity and provide liquidity to shareholders by listing the equity shares in stock exchange.

Industry Outlook
Sheela Foam is engaged in business of manufacturing of mattresses, other foam-based home comfort products and technical grades of PU Foam. It also has strong presence in Australia through its wholly owned subsidiary, Joyce Foam Pty Ltd (“Joyce Foam”). India mattress industry, comprising rubberised coir, polyurethane foam and spring mattresses, is estimated to become Rs 130-140 billion by FY20-21 at 8-10% CAGR over past five years on account of rising population and urbanisation plus increasing disposable income and health problems.

Indian mattress' markets are divided into two sectors- organised and unorganised. Organised and unorganised sectors are growing at 11-13% / 6-8% CAGR respectively over FY20-21P. Currently organised market constitutes ~31 per cent of the total market and is growing at a faster pace than the unorganised sector. Sleepwell accounts for 20-23% in organised sector as of FY16 and can reap benefit from growth pace of organised sector.

Polyurethane Foam (PU) mattress accounts for ~50% share of the organised mattress markets in India. Demand for PU mattress is increasing due to inherent quality, durability, comparable pricing, falling demand for rubberised coir mattresses (20-22% share in organised markets) and rising demand for spring mattresses (28-30% share in organised markets) from urban regions with higher margins.
    
If we look at distribution channel classification of organised markets, we see this market is more attributable to higher share of 87-89% by distribution and dealer network followed by 9-11% owned/franchisee stores. It has got opportunity in online sales as it's only 3% exposed to online portals.

Company Outlook
Sheela Foam with backward integration is engaged in the manufacturing of home comfort (66%) and technical foam (34%) products of PU foam. Its Indian wing has got 11 manufacturing facilities. Five of them produce PU foam with capacity of 123,000 TPA and rest manufactures home comfort products. Its product portfolio consists of mattresses, furniture- cushioning material, pillows, bolster cushions, sofa-cum beds and other products. Company benefits from PAN India distribution network (100+ exclusive distributors, 2,000+ exclusive retail dealers and 2,500+ multi-brand outlets).


It earns 82% from India and 18% by exporting to Middle East, South Asia, Europe, United States, Brazil and Argentina. Sheela Foam caters to Australian and New Zealand markets under Australia based wholly owned subsidiary- Joyce Foam.  Its one facility manufactures PU foam while rest four are engaged in manufacturing of home comfort products and technical foam products like automotive components, outdoor furniture, safety fuel tanks, etc.

It is growing at a tepid pace of 8% CAGR over last five years with new launches and strategic mergers with additional capacities. The company is benefiting due to recognised brand image, PAN India distribution network, high margin products and quality manufacturing capabilities. It’s reaping benefit from strategic advertisement spend by 3.5-4.4% in last few years. Such business synergies tend to reduce company’s operating expenses and help to improve on profit margins. Going forward demand for customised products, urbanisation, higher disposable income and GST implication will benefit the company. The company was going through deleveraging process and has reduced its net debt to Rs (47) cr in H1FY17 from Rs 228 cr in FY12 and is tilting towards becoming a debt free company.

Financial Performance
Revenue has shown growth of 9% to Rs 1550 in FY16 YoY. EBITDA has risen by 94% to Rs 176 cr in FY16 on a yearly basis. We see continuous improvement in EBITDA margin due to reduction in operating expenses. PAT margin also has improved to 13.3% in H1FY17 from 0.7% in FY12 owing to improvement in finance cost. PAT also has shown continuous growth and we expect it to reach Rs 1600 cr in FY17E.

Peer Comparison and Valuation
There is no listed peer of the company. Sheela Foam with EPS of 18.49 is expected to trade at upper price band P/E of 39.48x which looks overvalued for the time being. Considering overvalued status and demonetisation wave in economy, we keep a NEUTRAL view on the scrip for short term and suggest that one can take position in scrip after evaluating its performance with 2-3 years of vision, once it gets listed.