Equity Research: Sheela Foam Limited

Sheela Foam Ltd, formerly Sheela Foam Private Ltd, manufactures mattresses underneath the Sleepwell logo. The Company manufactures other foam-based home comfort products focusing primarily on Indian retail consumers, in addition to technical grades of polyurethane (PU) foam for end use in various industries. Its home comfort line consists of products, inclusive of furniture cushioning, cushions and sofa-cum-beds, as well as PU Foam cores utilized for manufacturing finished home comfort merchandise, and comfort add-ons, which include bed sheets and toddler care sheets. Its mattress line, supplied below its Sleepwell range, consists of pure foam mattresses, in addition to hybrids of spring and coir with foam that can be customization as in keeping with the necessities of purchasers. Its furniture-cushioning line, offered underneath Sleepwell and Feather Foam manufacturers, includes PU Foam that constitutes upholstery material of various densities. Through its subsidiary, it manufactures PU Foam in Australia.

Sheela Foam Limited

ABOUT

• Sheela Foam Limited (SFL) was founded in 1971 and has become a major player in India’s mattress and foam industry. SFL are the country’s leading producer of polyurethane (PU) foam. Since 1994, the flagship brand "Sleepwell" has captured a large share of the Indian market and has also expanded internationally. SFL’s other key brands include Feather Foam (Pure PU foam) and Lamiflex (Polyester foam laminates). The company has a strong presence in the Western and Northern regions of India.
• In 2023, SFL reinforced its market dominance by acquiring Kurlon Enterprises Limited (KEL), boosting its share of the branded mattress market to over 30%. Additionally, SFL ventured into the branded furniture market by acquiring a 35% stake in Furlenco.
• Now they are a combined entity SFL and KEL with 21 manufacturing units in India, 5 in Australia and 1 in Spain. It has an integrated manufacturing plant with capacities of 129,000 MTPA in India, 11,000 MTPA in Australia, and in Spain (where Kurlon contributes an additional 17,000 MTPA). It has a distribution network of about 100 exclusive distributors — of which the KEL network was strengthened after the acquisition — and 6,100 exclusive brand stores (EBO) and 12,000 multi-brand stores (MBO) including our legislators. Arvind Juneja, CEO, GoldensonsThe foundation stone of the new production unit at Maneri near Jabalpur was laid later that week, the one that is going to process foam, despite challenges.
• As of March 31, 2023, SFL has 6 subsidiaries and 5 step-down subsidiaries. One of the subsidiaries Joyce Foam Ptv Ltd. in Australia holds a 40% market share in the Australian foam market, which caters to various industries including bedding, furniture, and medical applications. Another subsidiary, Interplasp in Spain holds a market share of 1% of the European market.
• Market Leader in the Domestic Mattress Market:

• Extensive Pan India Sales and Distribution Network:

• • The combined entity has established a strong position across all regions with a market share of 70% in the North, 75% in the West, 50% in the South and 60% in East.
  • Focused expansion in the MBO channel and leveraging Kurlon’s dominance in MBOs will provide better access to Sheela Foam’s products
  • Long-term associations with distributors & continuous engagement with expanded in-house sales force to drive penetration and volume growth.
  • IT-enabled distribution network to reduce TAT and enhance logistical efficiency.
• Optimal Manufacturing Presence In Domestic Markets:

• Australia: 

  Sheela Foam Limited and its activities are done through its wholly-owned subsidiary in Australia, specifically Joyce Foam Pty Ltd ("Joyce Foam"). The wholly-owned foreign subsidiary, Joyce Foam, was registered in Australia in 1998. Since then, Sheela Foam has broadened its operations in Australia by incorporating polyurethane (PU) foam and polystyrene manufacturing businesses acquired from 3 Australian companies in 2005. Joyce Foam currently owns and operates 5 modern manufacturing facilities in 4 cities in Australia, namely Adelaide, Canberra, Melbourne, Perth, and Sydney.

  We manufacture raw materials for branded mattress makers, and cater to moulded products, foam furniture, medical, industrial and polystyrene.

  
  
  

• Spain: 

  Sheela Foam Limited’s stronghold in Europe is its wholly-owned subsidiary, Interplasp. A highly technology-driven company and an innovation leader, Interplasp is one the top flexible polyurethane foam manufacturers in Europe. Interplasp is located in Yecla in Spain, which is one of the most cost-effective manufacturing hubs and offers the company plenty of competitive advantage in the European region.

  Interplasp is well-placed to expand into the European and US markets, too, thanks to US trade restrictions against rivals. The company is already exporting ‘Bed-in-a-box’ mattresses, laid out in salted boxes, from its Spanish factory, to the US.

PRODUCT PORTFOLIO

• Mattresses: SFL offers a diverse range of mattresses including foam, spring, technology, comfort cell, back support, flexi PUF, showroom, economy, and its online brand SleepX.

• Technical Foam: This segment includes automotive foams (seat covers, sound absorption systems, etc.), reticulated foams (filtration systems, outdoor furniture, etc.), UV stable foams (sportswear, lingerie, etc.), and Slientech foams (theatres, recording studios, etc.).

• Furniture Foam: The company provides various furniture items such as sofas, chairs, custom sofas, sofa-cum-beds, with specialized cushioning technologies like Sleepwell Resitec, Sleepwell Cool Gel, and Primo.

• Comfort Foam and Home Care Products: This category encompasses foam sheets, blocks, comfort accessories, pillows, bedsheets, comforters, mattress protectors, and sofa-cum-beds.

SHAREHOLDING PATTERN

For the fourth quarter of FY24, the promoter holding was comfortable and stood at 65. 48% The foreign Institutional investors (FII) as a percentage, has shown a rise from 6. Q3: Compared to 12% in Q3, the foreign direct investment in the Republic of Korea has now reduced to only 6%. 32% in Q4. At the same time on the resources of the Domestic Institutional Investors (DII), there was a slight downtrend from 24. 99% to 24. 52% to others; The SBI Magnum Mid Cap Fund is the key big public shareholder with 9. The Kotak Emerging Equity Scheme was at 5% while the remaining 78% of the funds were invested in other schemes. The two major equity funds are the IDBI Primetime Tri-Index Fund at 34%, and the DSP Midcap Fund at 2. 38%.

FINANCIALS

• Sales Growth: For the five years ended March 31, 2012, Sheela Foam Ltd experienced a Compound Annual Growth Rate of 7 %. 5% In FY 23, it achieved a turnover of ₹2,873 crore with technical foam Y-o-Y growth of 21 % ≥ Technical Foams Net sales during FY20 and FY23 were ₹2,598 crore & ₹2,873 crore respectively. Nonetheless, other portions in the production of polyurethane including mattresses, furniture foam, and comfort foam fell by 1. 2%, 5%, and 11. 6% respectively. Whereby the technical foam and comfort foam registered improved growth even though there was a slight drop in sales volume in India.
• EBITDA Growth: The return to investors based on the company’s EBITDA is considered over the 5-year period hence the five-year compound annual growth rate for EBITDA is 6. 6%. Due to increasing inventory costs such as an increase in employee expenses, EBITDA in the current year, that is FY23 was ₹ 297 crore. TDI and Polyols – Key raw materials, witnessed a volatility that affected requisite margins in the company. Some of the key financial ratios for 2013 were as follows: The EBITDA margin for FY23 was 10%. 4%, in turn, declined primarily due to high-cost inventory despite raw materials oriented slightly downwards. The company predicts the marketing cost to be on the level with the marketing expense remaining between 12% and 12% EBITDA margin. 5% going forward.
• PAT Growth: During the 5-YR period, PAT has been in constant growth and CAGR 8. 7%.” For the financial year 2023, the PAT has dropped to ₹203 crore from ₹22 crore. 3% YoY. The PAT margin was 7. 1% in FY23 and 5. Besides, the government has set an ambitious target of securing not less than 1% of global exports and 5%. 9% for 9M FY24, mainly affected by raise in depreciation and finance expenses resulting from acquisitions.
• Cash Flows: During FY23, the operating cash flow was ₹212 crore, favourably impacted by lower tax expenses. Under this head, the total amount invested gave an outward direct ₹268 crore through the purchase of property plant & equipment and investment made in bonds and mutual funds. The financing activities resulted in ₹56 crores by adopting the borrowings such as long as well as short-term borrowings.
• Raw Material Prices and Gross Margins: 

MANAGEMENT

Rahul Gautam, associated with SFL since its inception, has transitioned from Managing Director to Whole-time Director and Chairman as of November 2, 2023. Tushaar Gautam has been appointed as the new Managing Director. Post-acquisition, it is anticipated that the founders of the target companies will not hold directorial positions on SFL's board.

SECTOR REVIEW

The modern Indian mattress market has substantial growth potential. It is projected to grow at a compound annual growth rate of 10% and cross INR 25,000 crores by 2030.

• Market Segmentation: The Indian market is fragmented with many branded as well as unbranded players operating locally through different distribution channels offering a wide variety of mattresses. The branded segment constitutes only 40% of the total modern mattress market in India.
• Major Players: There are 25 key companies within this space; among them, Sleepwell and Kurlon hold leading positions.

Government Initiatives:

• PM Awas Yojana: INR 48,000 crore has been earmarked in the budget for the completion of 80 lakh houses under Pradhan Mantri Awas Yojana during the financial year 2022-23. This scheme aims at providing homes to eligible beneficiaries in rural and urban areas.
• Indian Railways’ Infrastructure: Indian Railways is busy enhancing its coach infrastructure as well as searching for import substitution possibilities. It is noteworthy that by 2025 a plan to introduce 400 new energy-efficient Vande Bharat trains is expected to result in business worth about INR 40,000 crore thereby creating employment and related opportunities.

The Growth of Real Estate:

The real estate sector in India is growing rapidly and is expected to reach a market size of US$ 1 Trillion by 2030 from the current US$ 200 Billion as of 2021. It is estimated that this will contribute 13% of GDP of the country by 2025. This growth involves retail, hospitality and commercial real estate to meet the increasing infrastructure requirements of the nation.

The Future of Foam Industry:

There are bright prospects for the foam sector in India with many opportunities in different fields. They may be used in the building & construction industry; bedding & furniture sector; transport systems (including the automobile industry); and electrical appliances fields among others showing favorable signs towards growth as well as innovation.

VALUATION & FUTURE OUTLOOK

• Within Australia and Spain, Kurlon and Furlenco have been acquired thus marking its presence in the mattress industry but more importantly, also in the furniture market which has always been our key goal moving forward considering we are one of the leading Indian mattresses.
• Sheela Foam Limited is expected to have persistent growth and the top spot in the foam and mattress industry due to strategic takeovers, a wide range of products as well as an increasingly extensive supply chain network.
• Plan, Action, and Strategy: 

Valuation: At present SFL is trading at a TTM PE multiple of 62.11x. The company’s growth prospects in Australia, Spain among other countries coupled with possible recovery within the domestic markets will keep it going strong. Its recent acquisitions have brought diversity into its product line while also improving manufacturing capacities thus creating distribution synergies.

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