Sheela Foam: Promise of firm support

Sheela Foam, which sells mattresses under the brand ‘Sleepwell’ is making an initial public offer as one of its promoter entities — Polyflex Marketing — is selling out partially. At the higher end of the price band (₹680-730), the company is asking for a price-earning multiple of 27 times its expected earnings (consolidated) for 2016-17.

This is reasonable, given that many consumer stocks including Whirlpool of India and V-Guard Industries are trading at a valuation of 30-37 times. A strong brand, well-spread dealer-distributor network and a large product portfolio make a case for investment in this consumer facing company. The Indian mattress industry has grown at a compounded annual rate of 8-9 per cent in the last five years.

A similar or stronger growth is expected over the next five years given the rising population, rapid urbanisation and increasing buying power of the middle class. The organised market in mattresses in India constitutes around 35 per cent of the total market and is growing at a faster pace, thanks to increasing preference for branded products among consumers. Sleepwell holds 20-23 per cent market share in the organised segment, according to CRISIL.

Investors looking for an exposure to the consumer market may consider this IPO in view of the relatively not-so-pricey valuation. Benefits from improved economic growth and advantages from GST — of a level playing field between organised and unorganised players which will help companies such as Sheela Foam increase market share — should help.

Sheela Foam has been in the business of manufacturing mattresses since 1971. It owns and operates 11 manufacturing facilities in India and five in Australia (through its wholly owned subsidiary Joyce).

The company has a total foam manufacturing capacity of 123,000 tonnes per annum (tpa) in India and 10,500 tpa in Australia. The company’s manufacturing facilities are in close proximity to the large distributors and the consumer market which reduces carriage expenses and minimises the possibility of damage to products.

The company has a large product portfolio with a wide range in mattresses, pillows and cushions. Under the Sleepwell range, the company sells pure foam mattresses as well as hybrids of spring and coir with foam.

Sleepwell competes with brands including Kurl-on and Duroflex in the mid and high-end segment. About 45 per cent of the company's products are in the price range of ₹7,000-20,000 and another 45 per cent in the range of ₹20,000-75,000.

Under its home comfort products, the company also manufactures and sells furniture cushioning material, sofa-cum beds, pillows and cushions. Technical foam products (used in seat covers, sound absorption systems, microphones, headphones and sportswear) which make for about 30-35 per cent of revenue are sold to a diverse range of industries.

In the domestic market in India, the company has a wide distribution network — 100 plus exclusive distributors, over 2,000 retail dealers and 2,500 plus multi-brand outlets across the country. There is also a chain of company owned outlets — 239 Sleepwell Worlds, 433 Sleepwell Galleries and 930 Sleepwell Shops.

Sheela Foam has seen revenue (consolidated) grow at a compounded annual rate of 10 per cent in the last four years; profits have grown at the rate of 9 per cent. In 2015-16, the consolidated revenue of the company was ₹1,550 crore (up 9.3 per cent) and profit ₹104.7 crore.

Profit growth was very sharp in 2015-16, thanks to expansion in operating profit margins- 11.4 per cent, versus 6.4 per cent in the previous year. The company attributes this to lower input costs and the change in product mix with higher sales volumes in high-end products. In the first half 2016-17, the margins further improved to 13.3 per cent.

The key raw materials for the company are all crude oil derivatives, but, the price movements are dependant also on the specific input’s the demand-supply dynamics. Sheela Foam sources its inputs from both domestic and overseas suppliers. Price is fixed on a monthly basis and there are no long-term contracts with suppliers. As long as prices rule soft, it is an advantage for the company, but when they go up, the absence of a long-term fixed price contract may hurt.

Sheela Foam faces stiff competition both from the organised and unorganised players in the market — Kurl-on, Duroflex and Coirfoam besides a few international brands. In the home-comfort segment (pillows and cushions) again, there is large competition from brands including Kurl-on, Duroflex, Centuary Fibre Plates and Peps Industries.

The company, however, hopes to play on its brand and distribution reach to garner a higher share of the market in the coming years. It also intends to increase retail presence through higher marketing spends and focus on developing personalised products.

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