Sheela Foam

By Geetanjali Kedia

Sheela Foam is entering the primary market on Tuesday 29^th November 2016 to raise Rs. 510 crore via an offer for sale (OFS) by promoter, in the price band of Rs. 680 to Rs. 730 per share. At the upper end, OFS will comprise of 70 lakh equity shares of Rs. 5 each, which represents 14.32% of the post issue paid-up share capital. Issue closes on Thursday 1^st December.

Sheela Foam manufactures mattresses and other foam-based home comfort products such as furniture cushioning, pilliows, bolsters, cushions, sofa-cum-beds, under the brands Sleepwell, Feather Foam, Restwell and Lamiflex, accounting for 65% of H1FY17 sales. Balance revenue come from sale of technical grades of polyurethane (PU) foam for industrial use. Enjoying 20-23% share of the organised mattress market in FY16, company has an extensive pan-India distribution reach of 100 exclusive dealers, 2,000 exclusive retail dealers and 2,500+ multi brand outlets. It has 11 manufacturing facilities in India (aggregate installed capacity of 1.23 lakh TPA) and 5 in Australia (10,500 TPA), through wholly owned subsidiary Joyce Foam Pty Ltd.

While FY16 revenue grew 10% YoY to Rs. 1,567 crore, as EBITDA jumped 90% YoY to Rs. 193 crore, as raw material prices (primarily polyol and TDI which are crude oil and natural gas dependent) declined sharply, leading to increased EBITDA margin of 12.4%, vis-à-vis 7.2% clocked in FY15. This coupled with lower interest cost pushed net profit higher to Rs. 105 crore, from Rs. 43 crore in FY15, leading to an EPS of Rs. 21.48 for FY16. Thus, net margins which have historically been in the 2.2-3% range, shot up to 6.8% in FY16, all thanks to lower crude prices. 

Revenue for six months ended 30^th September 2016 stood at Rs. 804 crore, and EBITDA margin improved further to 14.3% on back of falling crude prices, earning EBITDA of Rs. 114 crore. Cost of raw materials which stood at ~65% of revenue in FY14, are down steeply by 1000 bps (!) to 55% of revenue, in H1FY17. Thus, company’s net margin for first half of the year has swelled to its highest ever, 8.3%, on net profit of Rs. 66 crore, translating into an EPS of Rs. 13.52 for H1FY17, on expanded equity of Rs. 24.39 crore, post 1:2 bonus issue in June 2016. 

As of 30^th September 2016, consolidated net worth stood at Rs. 405 crore, while total debt was Rs. 86 crore, mainly short term. Cash and equivalents stand at Rs. 133 crore, leading to cash surplus of Rs. 10 per share. Thus, company is cash rich, and entire offer proceeds being OFS, will flow to the promoter. Promoter stake, currently at 100%, will shrink to 85.68% post offer. Company’s working capital position is also sound – both inventory and debtors outstanding for 1 months, and remaining more-or-less at these levels over the years.

As long as crude oil and natural gas prices rule soft, company stands to benefit in the form of lower input costs and hence higher margins. Thus, outlook for short term (read H2FY17) remains positive. However, if the tide turns, its financial take a 180 degree turn, as till FY15, its net margins were very low at sub-3% levels. Thus, uncertainty laments on the stock.

At the upper end of Rs. 730, company will have a market cap of Rs. 3,560 crore and enterprise value (EV) of Rs.3,514 crore, which leads to a PE multiple of 34x and 28x, on FY16 and FY17E EPS respectively, while EV/EBITDA multiple is 18x and 15x. While there are no comparable listed peers, an indicative comparison can be made with discretionary household product makers such as paints (Asian, Berger, Kansai) and sanitary ware (Cera, Somany) which are curenlty ruling at PE multiples in the range of 26-42x, based on FY17E earnings. Thus, pricing of the issue is not too stretched.

However, given the market conditions, where existing blue chips and quality mid-caps are ruling at mouth-watering valuations, investors and market may not pay much heed to the issue. Faulty timing may harm on the issue adversely.

Expecting subdued response given the ongoing market bearishness, coupled with near term negative impact of demonetisation, one can give the issue a miss, despite good fundamentals.

Disclosure: No Interest.