IPO Note | Consumer Durables
November 25, 2016
Sheela Foam Limited
SUBSCRIBE
sue Open: November 29, 2016
Is
Mattress Matters
Issue Close: December 01, 2016
Sheela Foam is a manufacturer of mattress brand ‘Sleepwell’ and has
11 manufacturing facilities in India
(123,000 TPA capacity) and five
Issue Details
manufacturing facilities in Australia (10,500 TPA). It has strong distribution
network and derives 80% of domestic revenues from B2C channel.
Face Value: `5
Mattress Industry shifting from unorganised to organised players: The `9,000cr
Present Eq. Paid up Capital: `24.3cr
comfortable mattress industry is growing at 8-10% growth rate. As industry
(September 2016)
dynamics favor, organized player are growing faster (11-13%) than unorganized
Offer for Sale: *75.0 lakh -**69.9 lakh
players (6-8) implying that organised players are gaining market share. The
Shares
implementation of GST will further benefit the organised players in tax benefits
Post Eq. Paid up Capital: `24.3cr
and logistics costs and accelerate the shift from unorganized to organised players.
Issue size (amount): `510cr
Lower penetration in the industry: The mattress industry has low penetration levels
as 70% of population sleeps on traditional bedding and 30% sleeping on
Price Band: `680-730
comfortable mattresses. With rising disposable income and increasing
Lot Size: 20 shares and in multiple thereafter
urbanization, penetration is likely to increase benefitting branded players.
Post-issue implied mkt. cap: *`3,317.2cr -
Strong brand with significant market share: ’Sleepwell’, its popular mattress
**`3,551.1cr
brand, contributes 55% of its domestic revenue. Company is investing more in this
Promoters holding Pre-Issue: 100%
brand for further growth through ad spends. In FY12, its ad spends were 2.7% of
Promoters holding Post-Issue: 85.7%
net sales which grew to 4.4% in FY16. This will benefit it going ahead. Company
through its ‘Sleepwell’ brands holds ~20-23% market share.
*Calculated on lower price band
** Calculated on upper price band
Strong distribution network: Company has a pan-India distribution network
consisting of 100 exclusive distributors, 2,000 exclusive retail dealers and 2,500
Book Building
multi-brand outlets. Company sells its home comfort products through total ~1,600
exclusive ‘Sleepwell’ branded outlets as well as e-commerce portals. It is tapping all
QIBs
50% of issue
possible sales channels to increase its sales which is positive in our view.
Non-Institutional
15% of issue
Outlook and Valuation: On its FY17E’s PAT of `121cr, the issue on its upper
Retail
35% of issue
band is priced at P/E ratio of 27x which is at par with consumer durable peers
which have strong brand and higher B2C sales. We consider following strong
points as well 1) Net cash positive balance sheet 2) easing working capital cycle
from >40 days in FY12 to current 26 days 3) improving return ratios with better
Post Issue Shareholding Pattern
product mix and 4) promoters experience. Considering the market conditions we
would not suggest this IPO for listing gains but rather we recommend 'Subscribe'
Promoters Group
85.7
on this issue for medium to long term perspective.
DIIs/FIIs/Public & Others
14.3
Key Financials
Y/E March (` cr)
FY2014
FY2015
FY2016
1HFY17
Net Sales
1,271
1,418
1,550
796
% chg
10.6
11.5
9.3
-
Net Profit
28
43
105
66
% chg
(9.8)
53.3
145.6
-
OPM (%)
6.7
6.4
11.4
13.3
EPS (`)
5.7
8.7
21.5
13.5
P/E (x)
127.9
83.5
34.0
-
P/BV (x)
18.1
14.5
10.5
-
RoE (%)
14.2
17.4
31.0
-
RoCE (%)
15.0
17.0
32.5
-
Amarjeet S Maurya
EV/Sales (x)
2.9
2.5
2.2
-
+91 22 39357800 Ext: 6846
EV/EBITDA (x)
43.1
39.2
19.6
-
[email protected]
Source: Company, Angel Research
Please refer to important disclosures at the end of this report
1
Sheela Foam| IPO Note
Company background
Sheela Foam, incorporated in 1971, is a manufacturer of popular mattress brand
‘Sleepwell’. The company manufactures foam-based home comfort products such
as mattresses, furniture-cushioning, pillows, cushions, etc. It also manufactures
technical grades of polyurethane foam (PU foam) for end use in a wide range of
industries such as automobile, garments, shoes, etc.
Company also has presence in Australia through its wholly owned subsidiary,
Joyce Foam which also manufactures PU Foam which is used in comfort products,
home furniture and end industries like auto components, sound absorption, etc.
Company currently own and operate 11 manufacturing facilities in India, all of
which are utilized for manufacturing home comfort products, while five of these
facilities also manufacture PU Foam. Currently installed capacity for foam
production in India is currently at 123,000 TPA. Joyce operates five manufacturing
facilities in Australia that exclusively manufacture PU Foam, primarily through
variable pressure foaming technology, and has a total installed production
capacity of 10,500 TPA in Fiscal Year 2016.
Exhibit 1: Revenue mix (%)
Exhibit 2: Product mix (%)
20.8
19.8
15.7
64.5
79.2
India
Others
Home comfort products
PU Foam
Joyce Corporation Australia
Source: Company, Angel Research
Source: Company, Angel Research
November 25, 2016
2
Sheela Foam| IPO Note
Issue details
Through this IPO, existing shareholder (Polyflex Marketing Pvt Ltd) is selling some
of its stake in the company worth `510cr. Polyflex Marketing is a corporate
promoter of the company and currently holds 27.75% stake in Sheela Foam. Three
of the Sheela Foam’s directors who hold shares in Polyflex Marketing are selling
their shares through the OFS.
Considering that the IPO is subscribed at the higher band, the total no of shares
which will be sold works out to be 69.9 lakh, indicating 14.3% of its total
outstanding shares.
Exhibit 3: Pre and Post-IPO shareholding pattern
Entity
Pre-Issue (%)
Post-Issue (%)
Promoters
Ms. Sheela Gautam
36.0
36.0
Mr. Rahul Gautam
20.4
20.4
Polyflex Marketing Private Limited
27.8
13.4
Promoter Group
15.8
15.8
Promoter and promoter group
100.0
85.7
Public
0.0
14.3
Total
100.0
100.0
Source: RHP, Angel Research
Objects of the offer
Achieve the benefits of listing of the equity shares on the stock exchanges
November 25, 2016
3
Sheela Foam| IPO Note
Investment Rationale
Operating in an underpenetrated industry: Sheela Foam is operating in mattress
industry which is underpenetrated by branded players and dominated by local
outfits specialising in hand-made mattresses. While traditional bedding represents
a dominant part of this industry, a shift from cotton bedding to comfortable
bedding has been a prevalent trend. These comfortable bedding market is pegged
at `9,000cr and includes mattresses made of foam, coir and combinations
thereof. The industry has secular growth drivers such as increasing unbanisation,
growing income levels, shifting towards brands, etc.
Exhibit 4: Different types of mattresses
Source: Company, Angel Research
The unorganized players represent 70% of sales in the industry, which shows a
strong potential for branded players. The industry is growing at 8-10% growth rate
which we believe is an attractive growth rate. The organized players are gaining
higher market share of this industry which can be seen from the growth numbers
of organized market which is growing at growth rate of ~11-13% vs. unorganized
market which is growing at rate of 6-8%. This is a very favorable dynamic for
branded players like Sheela Foam which holds ~20-23% market share in this
industry through its ‘Sleepwell’ brand.
Exhibit 5: Distribution of the domestic mattress market
Exhibit 6: Huge opportunity for branded players
30%
70%
Unorganised (` cr)
Organised (` cr)
Source: Company, Angel Research
Source: Company, Angel Research
GST regime, a strong positive for branded players: The implementation of GST is
likely to accelerate further shift of the industry from unorganized to organised. The
GST regime is expected to benefit the industry through (1) bring tax savings in
terms of phasing out of sales tax of 2% and (2) dropping logistics costs to the level
of 1-1.5%. Due to the decline in the sales tax, the companies will be able to move
November 25, 2016
4
Sheela Foam| IPO Note
closer to the demand areas which will help them to operate efficiently as well as
reach out to the untapped areas and gain market share. So the GST will benefit
companies by giving tax benefits, reducing logistics costs and helping them gain
the market share.
Strong brand name and higher B2C sales: Sheela Foam generates 80% of its
revenues from domestic operations and the rest
20% from its Australian
operations. In India, company sells its products under its flagship brand
‘Sleepwell’. It also has another brand named ‘Feather Foam’. Sleepwell is its
popular brand which contributes
55% of its domestic revenue. Total B2C
contribution in the domestic business is 80% while that in the consolidated business
is 65%.
Company ensures that its brands have high visibility through advertising and hence
it is investing in its brands by increasing the advertising spends every year. In FY12,
company spent 2.7% of net sales in advertising which grew to 4.4% of its net sales
in FY16. This is likely to benefit the company going ahead.
Exhibit 7: Increasing ad spends to strengthen brand strength
80
5.0
4.4
4.2
4.5
70
4.0
3.5
60
3.5
2.8
2.9
50
2.7
3.0
40
2.5
2.0
30
1.5
20
1.0
10
0.5
27.8
32.2
36.5
49.3
68.1
33.3
0
-
FY2012
FY2013
FY2014
FY2015
FY2016
1HFY17E
Advertising expenditure (` cr)
% of net sales
Source: Company, Angel Research
Strong distribution network: Company has a pan-India distribution network
consisting of 100 exclusive distributors, 2,000 exclusive retail dealers and 2,500
multi-brand outlets. On franchisee basis, company sells its home comfort products
through total 1,602 exclusive ‘Sleepwell’ branded outlets. Company also has e-
commerce presence as its products are also sold through e-commerce websites.
This represents that the company is tapping all possible channels, in line with other
players in consumer durables industry, to generate higher sales. We believe that
the distribution network is robust in nature and in line with the competition.
Customized orders are helping the company to gain more market share: There are
18 different mattress sizes in India and vis-à-vis 4 standard sizes seen in the
developed countries. While it is difficult cater to all sizes, company has used this as
an opportunity to grab the market share by addressing this section of the industry
as well. For this, company has a set a mechanism in which a representatives takes
the measurements of the beds and recommends mattresses. Foam is then cut in its
facilities and mattress is prepared according to the order and delivered to the
November 25, 2016
5
Sheela Foam| IPO Note
customers place. This has also helped the company to grab higher market share
as customers prefer road side vendors for these types of customized orders.
The company is also planning to set up two processing facilities (cutting, shaping
of mattresses) near Jabalpur/Indore and Varansi. This will also help the company
to further move close the demand centers and further increase its market share.
Exhibit 8: Manufacturing facilities near the major demand areas
Source: Company, Angel Research
Sheela Foam’s other businesses: Sheela foam also has B2B presence in which it
generates revenues by selling foam products to end industries in India and
Australia. These products are manufactured in five of its Indian manufacturing
facilities as well as all of its Australian units. These are technical grades of
polyurethane foam (PU foam) to be used in the end industries. PU Foam has wide
applications in range of industries such as automobile, furniture garments, shoes,
sound industry, etc. This business represents 35% of its consolidated revenues and
is growing at a CAGR of 7.5%. The wide array of industrial applications of the PU
Foam, is a growth factor of this business and as end industries growth, this
business will also show further growth.
Recent financial performance: Company in FY2016 reported 11% yoy growth in its
domestic home comfort revenues to `1,017cr. While domestic revenues from
technical foam increased by 13% to `249cr. Revenues from Australian operations
remained flat at `285cr. Owing to strong decline in the raw material prices and
better product mix, company reported ~500bps expansion in its EBITDA margins
to 11.4%. FY16 PAT came at `105cr, vs. `43cr in FY2015. With the strong growth,
company also saw improvement in its RoE from 17.4% in FY2016 to 31.0% in
FY2016.
In H1FY17, the strong performance has continued with company reporting total
revenues of `796cr and PAT of `66cr. EBITDA margins were at 13.3%, showing
further expansion due to the decline in raw material and product mix.
Company has a strong balance sheet with debt to equity ratio of less than 0.2x. It
has consistently been able to reduce its debt from `244cr in FY12 to `86cr in
FY16. The business has a decent working capital cycle which was at 44 days in
November 25, 2016
6
Sheela Foam| IPO Note
FY12 which eased to 26 days in FY16. The company has annual maintenance
capex requirement of `30cr and has planned `80cr potential capex for aforesaid
two processing plants.
Exhibit 9: Improving profitability
Exhibit 10: Improving RoE
200.0
13.3
14.0
35.0
180.0
11.4
12.0
30.0
160.0
10.0
25.0
140.0
120.0
7.1
6.7
6.4
8.0
20.0
100.0
5.3
6.0
15.0
80.0
60.0
4.0
10.0
40.0
2.0
5.0
20.0
0.0
-
0.0
FY2012
FY2013
FY2014
FY2015
FY2016
1HFY17
FY2012
FY2013
FY2014
FY2015
FY2016
1HFY17*
EBITDA (` cr)
Margins (%)
ROE (%)
Source: Company, Angel Research
Source: Company, Angel Research *1HFY17RoE is annualised
Outlook and Valuation: On its FY17E’s PAT of `121cr, the issue on its upper
band is priced at P/E ratio of 27x which is at par with consumer durable peers
which have strong brand and higher B2C sales. We consider following strong
points as well 1) Net cash positive balance sheet 2) easing working capital cycle
from >40 days in FY12 to current 26 days 3) improving return ratios with better
product mix and 4) promoters experience. Considering the market conditions we
would not suggest IPO for listing gains but rather we recommend 'Subscribe' on
this issue for medium to long term perspective.
Key risks
Raw material prices: Major raw materials of the company are TDI and Polypol. TDI
price remain volatile like any other commodity and recently has seen very high
volatility due to supply constraints. The sustained rise in TDI prices may impact the
company financials going ahead as TDI makes 25% of its total raw material mix.
Higher competition: The industry in which company operates is dominated by
unorganized players. While there are secular growth trends in the industry, higher
competition may lead to lower pricing power for the company leading to decline in
its profitability.
November 25, 2016
7
Sheela Foam| IPO Note
Income Statement
Y/E March (` cr)
FY12
FY13
FY14
FY15
FY16
1H1FY17
Total operating income
1,045
1,149
1,271
1,418
1,550
796
% chg
10.0
10.6
11.5
9.3
Total Expenditure
989
1,067
1,186
1,327
1,374
690
Cost of Materials
649
694
775
871
828
402
Personnel
93
103
119
128
139
79
Others Expenses
248
270
292
327
407
209
EBITDA
56
82
85
91
176
106
% chg
47.2
3.6
7.5
93.4
(39.9)
(% of Net Sales)
5.3
7.1
6.7
6.4
11.4
13.3
Depreciation& Amortisation
25
31
30
28
29
14
EBIT
30
50
55
63
147
91
% chg
65.7
8.8
15.3
132.7
(% of Net Sales)
2.9
4.4
4.3
4.5
9.5
11.5
Interest & other Charges
24
23
19
16
12
5
Other Income
6
12
1
11
17
8
(% of PBT)
49.3
31.4
1.5
18.4
11.1
8.8
Share in profit of Associates
-
-
-
-
-
-
Recurring PBT
12
40
36
58
152
94
% chg
230.3
(8.8)
59.1
164.3
Prior Period & Extraord. Exp./(Inc.)
-
-
-
-
-
-
PBT (reported)
12
40
36
58
152
94
Tax
4
9
8
15
47
28
(% of PBT)
34.8
22.2
23.0
25.8
31.1
30.0
PAT (reported)
8
31
28
43
105
66
Add: Share of earnings of asso.
-
-
-
-
-
-
Less: Minority interest (MI)
-
-
-
-
-
-
PAT after MI (reported)
8
31
28
43
105
66
ADJ. PAT
7.8
30.9
27.8
42.7
104.8
66.0
% chg
294.5
(9.8)
53.3
145.6
(% of Net Sales)
0.7
2.7
2.2
3.0
6.8
8.3
Basic EPS (`)
1.6
6.3
5.7
8.7
21.5
13.5
Fully Diluted EPS (`)
1.6
6.3
5.7
8.7
21.5
13.5
% chg
294.9
(9.8)
53.3
145.6
November 25, 2016
8
Sheela Foam| IPO Note
Balance Sheet
Y/E March (` cr)
FY12
FY13
FY14
FY15
FY16 1H1FY17
SOURCES OF FUNDS
Equity Share Capital
16
16
16
16
16
24
Reserves& Surplus
123
153
180
229
322
380
Shareholders’ Funds
139
170
197
245
338
405
Minority Interest
-
-
-
-
-
-
Total Loans
244
207
170
127
113
86
Deferred Tax Liability
(2)
(0)
1
2
2
(1)
Total Liabilities
381
376
367
374
454
490
APPLICATION OF FUNDS
Net Block
269
269
269
295
298
325
Capital Work-in-Progress
-
-
-
-
-
-
Investments
5
8
0
0
10
10
Current Assets
265
290
356
385
481
474
Inventories
92
116
124
118
105
132
Sundry Debtors
115
104
120
114
117
134
Cash
21
32
77
117
217
133
Loans & Advances
30
30
29
28
34
49
Other Assets
8
7
6
7
8
26
Current liabilities
159
191
258
306
334
319
Net Current Assets
106
99
98
79
146
155
Deferred Tax Asset
-
-
-
-
-
-
Mis. Exp. not written off
-
-
-
-
-
-
Total Assets
381
376
367
374
454
490
November 25, 2016
9
Sheela Foam| IPO Note
Cash Flow Statement
Y/E March (` cr)
FY12
FY13
FY14
FY15
FY16 1H1FY17
Profit before tax
12
40
36
58
152
94
Depreciation
25
31
30
28
29
14
Change in Working Capital
20
13
34
53
39
(68)
Interest / Dividend (Net)
24
23
19
16
12
5
Direct taxes paid
(20)
(6)
0
(2)
(47)
(39)
Others
(1)
(4)
5
(5)
(9)
(4)
Cash Flow from Operations
60
97
124
147
176
3
(Inc.)/ Dec. in Fixed Assets
(64)
(32)
(31)
(58)
(37)
(51)
(Inc.)/ Dec. in Investments
60
2
4
10
4
(2)
Cash Flow from Investing
(4)
(30)
(27)
(49)
(34)
(53)
Issue of Equity
-
-
-
-
-
-
Inc./(Dec.) in loans
15
(34)
(27)
(42)
(31)
(29)
Finance costs
(23)
(23)
(19)
(16)
(12)
(5)
Others
(56)
1
(7)
-
-
-
Cash Flow from Financing
(64)
(56)
(53)
(59)
(43)
(34)
Inc./(Dec.) in Cash
(8)
12
45
40
100
(84)
Opening Cash balances
28
21
32
77
117
217
Closing Cash balances
21
32
77
117
217
133
November 25, 2016
10
Sheela Foam| IPO Note
Key Ratios
Y/E March
FY12
FY13
FY14
FY15
FY16 1H1FY17
Valuation Ratio (x)
P/E (on FDEPS)
455.9
115.4
127.9
83.5
34.0
-
P/CEPS
107.8
57.2
61.6
50.4
26.6
-
P/BV
25.6
21.0
18.1
14.5
10.5
-
Dividend yield (%)
0.0
0.0
0.0
0.0
0.0
-
EV/Sales
3.6
3.2
2.9
2.5
2.2
-
EV/EBITDA
68.0
45.6
43.1
39.2
19.6
-
EV / Total Assets
7.00
6.58
5.84
5.25
4.37
-
Per Share Data (`)
EPS (Basic)
1.6
6.3
5.7
8.7
21.5
-
EPS (fully diluted)
1.6
6.3
5.7
8.7
21.5
-
Cash EPS
6.8
12.8
11.9
14.5
27.5
-
DPS
0.0
0.0
0.0
0.0
0.0
-
Book Value
28.5
34.7
40.3
50.2
69.4
-
Returns (%)
ROCE
7.9
13.4
15.0
17.0
32.5
-
Angel ROIC (Pre-tax)
8.5
15.0
18.9
24.8
65.4
-
ROE
5.6
18.2
14.2
17.4
31.0
-
Turnover ratios (x)
Asset Turnover (Net Block)
3.9
4.3
4.7
4.8
5.2
-
Inventory / Sales (days)
32
37
36
30
25
-
Receivables (days)
40
33
34
29
28
-
Payables (days)
28
26
28
29
27
-
WC cycle (ex-cash) (days)
44
44
42
31
26
-
November 25, 2016
11
Sheela Foam| IPO Note
Research Team Tel: 022 - 39357800
E-mail: [email protected]
Website: www.angelbroking.com
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12