IPO Note | Consumer Durables

November 25, 2016

Sheela Foam Limited

sue Open: November 29, 2016

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

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

105

% 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

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

November 25, 2016

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

Mr. Rahul Gautam

20.4

Polyflex Marketing Private Limited

27.8

13.4

Promoter Group

15.8

Promoter and promoter group

100.0

85.7

Public

0.0

14.3

Total

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

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

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

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

5.0

4.4

4.2

4.5

4.0

3.5

2.8

2.9

2.7

3.0

2.5

2.0

1.5

1.0

0.5

27.8

32.2

36.5

49.3

68.1

33.3

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

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

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

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

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

103

119

128

139

Others Expenses

248

270

292

327

407

209

EBITDA

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

EBIT

147

% 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

Other Income

(% of PBT)

49.3

31.4

1.5

18.4

11.1

8.8

Share in profit of Associates

Recurring PBT

152

% chg

230.3

(8.8)

59.1

164.3

Prior Period & Extraord. Exp./(Inc.)

PBT (reported)

152

Tax

(% of PBT)

34.8

22.2

23.0

25.8

31.1

30.0

PAT (reported)

105

Add: Share of earnings of asso.

Less: Minority interest (MI)

PAT after MI (reported)

105

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

Sheela Foam| IPO Note

Balance Sheet

Y/E March (` cr)

FY12

FY13

FY14

FY15

FY16 1H1FY17

SOURCES OF FUNDS

Equity Share Capital

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

Deferred Tax Liability

(2)

(0)

(1)

Total Liabilities

381

376

367

374

454

490

APPLICATION OF FUNDS

Net Block

269

295

298

325

Capital Work-in-Progress

Investments

Current Assets

265

290

356

385

481

474

Inventories

116

124

118

105

132

Sundry Debtors

115

104

120

114

117

134

Cash

117

217

133

Loans & Advances

Other Assets

Current liabilities

159

191

258

306

334

319

Net Current Assets

106

146

155

Deferred Tax Asset

Mis. Exp. not written off

Total Assets

381

376

367

374

454

490

November 25, 2016

Sheela Foam| IPO Note

Cash Flow Statement

Y/E March (` cr)

FY12

FY13

FY14

FY15

FY16 1H1FY17

Profit before tax

152

Depreciation

Change in Working Capital

(68)

Interest / Dividend (Net)

Direct taxes paid

(20)

(6)

(2)

(47)

(39)

Others

(1)

(4)

(5)

(9)

(4)

Cash Flow from Operations

124

147

176

(Inc.)/ Dec. in Fixed Assets

(64)

(32)

(31)

(58)

(37)

(51)

(Inc.)/ Dec. in Investments

(2)

Cash Flow from Investing

(4)

(30)

(27)

(49)

(34)

(53)

Issue of Equity

Inc./(Dec.) in loans

(34)

(27)

(42)

(31)

(29)

Finance costs

(23)

(19)

(16)

(12)

(5)

Others

(56)

(7)

Cash Flow from Financing

(64)

(56)

(53)

(59)

(43)

(34)

Inc./(Dec.) in Cash

(8)

100

(84)

Opening Cash balances

117

217

Closing Cash balances

117

217

133

November 25, 2016

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

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

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)

Receivables (days)

Payables (days)

WC cycle (ex-cash) (days)

November 25, 2016

Sheela Foam| IPO Note

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

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