VISIT NOTE

SHEELA FOAM
Navigating the current scenario
India Equity Research| Miscellaneous

In our conversations, Mr. Rahul Gautam, CMD, Sheela Foam (SFL) EDELWEISS RATINGS
highlighted: 1) the recently launched budget brand Starlite’s Absolute Rating BUY
performance remains robust. Going forward, SFL is planning to shift this Investment Characteristics Growth
brand’s distribution away from Sleepwell’s EBOs & primarily focus on
MBOs; 2) premium Sleepwell brand, akin to other discretionary
categories, has been impacted by the general slowdown; and 3) MARKET DATA (R: NA , B: SFL IN)
management perceives huge growth potential for Interplasp as its CMP : INR 1,250
current share is mere ~1% of the European Union—world’s largest Target Price : INR 1,489
polyurethane foam (PU) market. Factoring in management’s cautious 52-week range (INR) : 1,660 / 1,073
outlook, we revise down FY20E revenue/EBITDA 3/6%. However, the Share in issue (mn) : 48.8

lower tax rate leads to 3% YoY upwards revision in PAT. Maintain ‘BUY’ M cap (INR bn/USD mn) : 61 / 0

with revised TP of INR1,489 (INR1,456 earlier). Avg. Daily Vol. BSE/NSE (‘000) : 16.0

Starlite gaining heft; Slowdown pangs in Sleepwell SHARE HOLDING PATTERN (%)

Akin to other discretionary categories, SFL has also been impacted by the recent Current Q1FY20 Q4FY19
Promoters * 44.0 44.0 44.0
slowdown. The company’s premium Sleepwell brand has been especially impacted,
MF's, FI's & BKs 6.0 5.7 5.8
which management attributes to the product being an ultra discretionary item.
FII's 11.5 11.4 11.5
However, SFL has continued with its strategy of raising prices and recently hiked it 3%
Others 38.5 38.8 38.7
as it believes such a marginal hike is unlikely to dent demand further. On the positive
* Promoters pledged shares : NIL
side, Starlite continues to remain strong, possibly due to down trending underway in (% of share in issue)
the current scenario. Going forward, management is planning to not stock Starlite in
Sleepwell stores and distribute it separately, mainly via MBO’s. PRICE PERFORMANCE (%)
BSE Midcap Stock over
Stock
Huge growth potential for Interplasp in EU market Index Index
Joyce Foam, SFL’s Australian foam subsidiary, commands ~30-35% of the Australian 1 month 2.1 16.4 14.3
market and has become a mature business. However, management perceives huge 3 months (4.4) 17.5 21.9
growth potential for Interplasp as it currently has mere ~1% market share in the 12 months (4.2) 89.6 93.8
European Union—world’s largest polyurethane foam market. SFL believes
management focus can help drive growth in Interplasp. In addition, Morocco and
North Africa also remain potential growth drivers.

Outlook and valuation: Tax benefit mitigates impact; maintain ‘BUY’

Though margin levers exist, adjusting for the muted outlook in the mattress business
we revise down FY20E revenue/EBITDA 3/6%%. However, adjusting for the lower tax
rate, we revise PAT up by 3%. We value the standalone business at 40x September
2020E EPS and subsidiaries at 13x September 2020E EPS with revised TP of INR1,489.
Financials
Year to March FY18 FY19 FY20E FY21E
Net revenues (INR mn) 19,653 21,414 23,623 27,490
Revenue growth (%) 13.4 9.0 10.3 16.4 Nihal Mahesh Jham
EBITDA (INR mn) 2,163 2,095 2,890 3,430 +91 22 6623 3352
Adj. profit (INR mn) 1,337 1,337 1,933 2,218 nihal.jham@edelweissfin.com

RoACE (%) 34.6 28.3 29.7 26.9

Diluted P/E (x) 44.7 44.7 30.9 26.9 October 18, 2019

Edelweiss Research is also available on www.edelresearch.com,

Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Miscellaneous
Chart 1: Revenue growth has moderated since Q2FY19
30.0
Standalone revenue growth
24.0

18.0

(%)
12.0

6.0

0.0

Q1FY18

Q2FY18

Q3FY18

Q4FY18

Q1FY19

Q4FY19

Q1FY20
Q4FY17

Q2FY19

Q3FY19
Source: Company, Edelweiss research

Starlite launch unleashes massive new market

While organised players are targeting the mid (INR8,000–30,000) to premium (INR30,000–
75,000) categories, a huge market lies in economy and unorganised segments (<INR8,000).

This market has not been explored hitherto because of lack of required distribution reach
and, more importantly, the challenge of rolling out a profitable product given the low price
range. However, since the introduction of GST, bulk of the price differential issue has been
addressed as the unorganised category is now expected to start paying taxes. As per our
analysis, this will open up a market more than double the size of the current market served
by these players.

Fig. 1: Market size by category

2 Edelweiss Securities Limited

 Sheela Foam

SFL has rolled out a budget series brand Starlite with an eye on tapping the unrogansied
mattress market (~INR60bn), including a cotton mattress, which is estimated to be more
than INR120bn—the biggest category. Initial response to the budget brand has been
encouraging. While the Sleepwell range starts from INR7,500 a pair, Starlite is priced within
INR4,800–5,200. In fact, INR5,000 a pair is one of the cheapest mattresses in this category.
In the unorganised segment, a pair sells for INR3,500–4,000, which has risen to INR4,000–
4,500 post GST.

Interplasp: Targeting expansion into Europe and economies in raw material sourcing
SFL has paid EUR42mn – ~1.4x CY18 sales–higher than global foam peers. Key reasons for
the acquisition are: 1) Geographical expansion: The acquisition will give SFL a presence in
Europe—the world's largest polyurethane foam market. Interplasp also markets some of its
foam in Morocco, which gives it an opportunity to grow in Morocco and a few other North
African markets; and 2) Economies of scale in sourcing raw materials: SFL also expects to
benefit from cross-fertilization of technologies and product portfolios in India, Australia and
Europe. SFL will set up a 100% subsidiary in Spain, which will acquire 93.7% stake in
Interplasp; balance will be held by three key managers of Interplasp with SFL having the
right of first refusal.

Set up in 1987, Interplasp manufactures and markets slab-stock polyurethane foam for
bedding, furniture and other applications, primarily in Spain. It also markets foam to
mattress manufacturers in Portugal and foam converters in Morocco. The company has a
single plant with capacity to produce 22,000MT; it currently produces 11,000MT. Interplasp
reported a turnover of EUR31.6mn in CY18 (41% CAGR over CY16–18).

SFL had cash of INR2.9bn (as of Mar-19), which is sufficient to fund the acquisition worth
about INR3.2bn (EUR42mn). Being a foam manufacturing business, Interplasp’s current
returns profile is close to SFL’s Australian subsidiary Joyce, but lower than the branded
business.

Table 1: Change in Estimates

FY20E FY21E
New Old % change New Old % change Comments
Net Revenue 23,623 24,454 (3.4) 27,490 28,470 (3.4) Lower growth in Mattress segment
EBITDA 2,890 3,081 (6.2) 3,430 3,658 (6.2) Lower growth in Mattress segment
EBITDA Margin 12.2 12.6 12.5 12.8
Adjusted PAT 1,933 1,886 2.5 2,218 2,184 1.6 Lower tax rate of 25%
Net Profit Margin 8.2 7.7 8.1 7.7
Capex 5,820 5,820 0.0 950 950 0.0

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Miscellaneous

Company Description
Incorporated in 1971, Sheela Foam is a leading manufacturer of mattresses in India marketed
under its flagship brand Sleepwell. In addition, the company manufactures other foam-based
home comfort products targeted primarily at Indian retail consumers and technical grades of
polyurethane foam (PU foam) for end use in a wide range of industries. As part of its
international footprint, Sheela manufactures PU foam in Australia through its wholly owned
subsidiary Joyce Foam (Joyce).

The company commenced manufacturing PU foam in 1972. Installed capacity for foam
production in India is currently 123,000 tonnes per annum (TPA). In addition to its domestic
facilities, Joyce operates five plants in Australia that exclusively manufacture PU foam
primarily through the variable pressure foaming technology.

Investment Theme
Superior brand with strong distribution and pricing power
Over the past two decades, Sheela has cornered about 20-23% 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 ~80% 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%
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; ~20% 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.

Key Risks
Launch of organised home décor outlets and increasing online share
Launch of any organised home décor outlets such as IKEA (which has already opened its first
store in India) could disrupt the sales channel and impact the brand Sheela has built via
Sleepwell. Moreover, increasing online share would reduce barriers to entry for new brands
looking for a foothold.

Size of planned acquisition

Sheela Foam has been clear in its intent of acquiring a company in the mattress or bedding-
related category. The planned acquisition is expected to be in a range of INR1.5-4.5bn.
While we believe Sheela Foam will make a prudent acquisition, it does create uncertainty.

4 Edelweiss Securities Limited

 Sheela Foam

Financial Statements
Key Assumptions Income statement (INR mn)
Year to March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E
Macro Net revenue 19,653 21,414 23,623 27,490
GDP(Y-o-Y %) 7.2 6.8 6.8 7.1 Materials costs 10,945 11,732 12,373 14,295
Inflation (Avg) 3.6 3.4 4.0 4.5 Employee costs 1,627 1,773 2,039 2,241
Repo rate (exit rate) 6.0 6.3 5.3 5.0 Other Expenses 4,919 5,814 6,320 7,524
USD/INR (Avg) 64.5 70.0 72.0 72.0 Total operating expenses 17,490 19,320 20,733 24,061
Company EBITDA 2,163 2,095 2,890 3,430
Mattress rev. growth (Y-o-Y %) 6 3 1 8 Depreciation 352 395 532 702
Tech. foam rev. growth (Y-o-Y %) 31 10 - 10 EBIT 1,811 1,700 2,359 2,728
Starlite revenues (INR mn) 70 700 1,100 1,320 Less: Interest Expense 87 96 136 165
Furniture cushioning (Y-o-Y %) 18 1 5 10 Add: Other income 210.64 290.49 371.44 420.91
Standalone gross margin (%) 43 44 47 47 Profit Before Tax 1,935 1,894 2,594 2,984
Subsidiary gross margin (%) 53 53 50 50 Less: Provision for Tax 598 557 661 766
Subsidiary rev. growth (Y-o-Y %) 2 6 49 46 Reported Profit 1,337 1,337 1,933 2,218
Adjusted Profit 1,337 1,337 1,933 2,218
Shares o /s (mn) 49 49 49 49
Adjusted Basic EPS 27.4 27.4 39.6 45.5
Diluted shares o/s (mn) 49 49 49 49
Adjusted Diluted EPS 27.4 27.4 39.6 45.5
Adjusted Cash EPS 34.6 35.5 50.5 59.9
Dividend per share (DPS) - - 4.0 4.5
Dividend Payout Ratio(%) - - 11.7 11.7

Common size metrics

Year to March FY18 FY19 FY20E FY21E
Materials costs 44.3 45.2 47.6 48.0
Staff costs 8.3 8.3 8.6 8.2
S G & A expenses 25.0 27.2 26.8 27.4
Depreciation 1.8 1.8 2.3 2.6
Interest Expense 0.4 0.4 0.6 0.6
EBITDA margins 11.0 9.8 12.2 12.5
Net Profit margins 6.8 6.2 8.2 8.1

Growth ratios (%)

Year to March FY18 FY19 FY20E FY21E
Revenues 13.4 9.0 10.3 16.4
EBITDA 10.3 (3.2) 38.0 18.7
PBT 8.8 (2.1) 36.9 15.1
Adj. net profit 6.5 - 44.6 14.8
EPS 6.5 - 44.6 14.8

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 Miscellaneous

Balance sheet (INR mn) Cash flow metrics

As on 31st March FY18 FY19 FY20E FY21E Year to March FY18 FY19 FY20E FY21E
Share capital 244 244 244 244 Cash flow from ops 1,337 1,377 2,249 2,639
Reserves & Surplus 5,729 7,057 8,764 10,723 Financing cash flow (201) (270) 1,083 (446)
Shareholders' funds 5,973 7,301 9,008 10,966 Investing cash flow (801) (2,457) (5,449) (529)
Long term borrowings 83 56 1,596 1,596 Net cash Flow 336 (1,350) (2,117) 1,663
Short term borrowings 397 250 155 133 Capex (911) (528) (5,820) (950)
Total Borrowings 479 305 1,751 1,729 Dividend paid - - (226) (260)
Long Term Liabilities 701 776 860 995
Deferred tax (net) 20 65 65 65 Profitability and efficiency ratios
Sources of funds 7,173 8,448 11,683 13,755 Year to March FY18 FY19 FY20E FY21E
Net Block 3,402 4,035 7,743 7,992 ROAE (%) 25.2 20.1 23.7 22.2
Capital work in progress 522 7 7 7 ROACE (%) 34.6 28.3 29.7 26.9
Intangible Assets 82 82 1,662 1,662 Inventory Days 53 56 57 54
Total Fixed Assets 4,006 4,124 9,413 9,661 Debtors Days 27 26 25 24
Non current investments 375 492 492 492 Payable Days 51 45 43 42
Cash and Equivalents 2,188 2,887 770 2,434 Cash Conversion Cycle 29 36 38 37
Inventories 1,726 1,871 1,974 2,280 Current Ratio 1.9 2.2 1.5 1.9
Sundry Debtors 1,473 1,522 1,678 1,953 Gross Debt/EBITDA 0.2 0.1 0.6 0.5
Loans & Advances 284 333 367 427 Gross Debt/Equity 0.1 - 0.2 0.2
Other Current Assets 375 388 426 494 Adjusted Debt/Equity 0.1 0.1 0.2 0.2
Current Assets (ex cash) 3,858 4,113 4,445 5,155 Net Debt/Equity (0.3) (0.4) 0.1 (0.1)
Trade payable 1,468 1,432 1,510 1,745 Interest Coverage Ratio 20.9 17.7 17.3 16.5
Other Current Liab 1,786 1,738 1,928 2,243
Total Current Liab 3,254 3,170 3,438 3,988 Operating ratios
Net Curr Assets-ex cash 604 943 1,007 1,167 Year to March FY18 FY19 FY20E FY21E
Uses of funds 7,173 8,448 11,683 13,755 Total Asset Turnover 3.0 2.7 2.3 2.2
BVPS (INR) 122.4 149.7 184.7 224.8 Fixed Asset Turnover 5.9 5.6 3.5 2.9
Equity Turnover 3.7 3.2 2.9 2.8
Free cash flow (INR mn)
Year to March FY18 FY19 FY20E FY21E Valuation parameters
Reported Profit 1,337 1,337 1,933 2,218 Year to March FY18 FY19 FY20E FY21E
Add: Depreciation 352 395 532 702 Adj. Diluted EPS (INR) 27.4 27.4 39.6 45.5
Interest (Net of Tax) 60 68 102 123 Y-o-Y growth (%) 6.5 - 44.6 14.8
Others (17) (205) (337) (379) Adjusted Cash EPS (INR) 34.6 35.5 50.5 59.9
Less: Changes in WC 395 219 (20) 25 Diluted P/E (x) 45.6 45.6 31.5 27.5
Operating cash flow 1,337 1,377 2,249 2,639 P/B (x) 10.2 8.4 6.8 5.6
Less: Capex 911 528 5,820 950 EV / Sales (x) 2.9 2.6 2.5 2.1
Free Cash Flow 426 849 (3,571) 1,689 EV / EBITDA (x) 27.4 27.9 21.4 17.6
Dividend Yield (%) - - 0.3 0.4

6 Edelweiss Securities Limited

 Sheela Foam

Additional Data
Directors Data
Rahul Gautam Executive Director V K Chopra Independent Director
Namita Gautam Executive Director Som Mittal Independent Director
Rakesh Chahar Executive Director Ravindra Dhariwal Independent Director
Tushaar Gautam Executive Director Anil Tandon Independent Director
Lt Gen (Dr.) VK Ahluwalia Independent Director

Auditors - S.P. Chopra & Co

*as per last available data

Holding – Top10
Perc. Holding Perc. Holding
SBI Funds Management 9.71 DSP 3.19
UTI Asset Management Co Ltd 2.96 Kotak Mahindra Asset Management 1.68
Goldman Sachs Group Inc/The 1.01 Reliance Capital Trustee Co Ltd 0.88
Reliance Capital 0.88 ICICI Prulife 0.24
MDO Management 0.09 ICICI Pru AMC 0.08
*as per last available data

Bulk Deals
Data Acquired / Seller B/S Qty Traded Price

No Data Available
*as per last available data

Insider Trades
Reporting Data Acquired / Seller B/S Qty Traded
05 Jul 2019 Tushaar Gautam Buy 17561880.00
01 Apr 2019 Rahul Gautam Sell 3745934.00
01 Apr 2019 Tushaar Gautam Sell 1463486.00
*as per last available data

7 Edelweiss Securities Limited

 Miscellaneous

Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com

ADITYA
Digitally signed by ADITYA NARAIN
Aditya Narain DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
ou=SERVICE,
2.5.4.20=3dc92af943d52d778c99d69c48a8e0c89
Head of Research e548e5001b4f8141cf423fd58c07b02,

NARAIN
postalCode=400011, st=MAHARASHTRA,
serialNumber=e0576796072ad1a3266c27990f20
bf0213f69235fc3f1bcd0fa1c30092792c20,
aditya.narain@edelweissfin.com cn=ADITYA NARAIN
Date: 2019.10.18 13:43:43 +05'30'

Coverage group(s) of stocks by primary analyst(s): Miscellaneous

AIA Engineering, Apar Industries Ltd, Balkrishna Industries, CCL Products India, Essel Propack, Orient Refractories, Polyplex Corporation Ltd., Sheela Foam
Ltd, Uflex Ltd., Vesuvius India, VIP Industries
`
Recent Research
Date Company Title Price (INR) Recos
07-Aug-19 Sheela Mattress stable, but spurt 1,192 Buy
Foam awaited; Result Update
26-Jul-19 Sheela Acquires foam manufacturer 1,275 Buy
Foam in Europe; Edel Flash
08-May-19 Essel Stable quarter; upside limited; 133 Hold
Propack Result Update

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation

Buy Hold Reduce Total Rating Expected to

Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11

One year price chart

1,700

1,580

1,460
(INR)

1,340

1,220

1,100
Dec-18

Aug-19
Oct-18

Oct-19
Apr-19
Nov-18

May-19
Feb-19

Sep-19
Jan-19

Mar-19

Jun-19

Jul-19

Sheela Foam

8 Edelweiss Securities Limited

 Sheela Foam
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 Sheela Foam

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