Sheela Foam has 20-23 per cent market share in the organised mattress making sector via its flagship 'Sleepwell' brand. A leadership position, almost debt-free balance sheet, growing financials and good growth prospects are key reasons for long-term investors to consider its Initial Public Offer (IPO) of equity.
However, due to the current high volatility in equity markets, the possibility of listing gain is low.
Feather Foam and Lamiflex are its other key brands. The company also makes other foam-based products such as pillows, mattress protectors, bolsters, back cushions, sofa-cum beds, bedsheets, and baby care sheets, as well as furniture cushioning products. About 80 per cent of its revenue comes from these products; the rest is from business to business segments. In this, technical foam or polyurethane foam is used for various applications in automobiles, shoes, packaging, oil/water filters and other sectors.
As nearly half of Sheela Foam's mattresses were bought on a cash basis prior to demonetisation, the company has had a 20-22 per cent dip in sales since November 9. While the management remains confident of a decent show in this quarter, with its highest-ever sales in October, analysts believe there could some impact on near-term earnings.
In the long run, though, measures such as demonetisation and the coming goods and services tax (GST) will accelerate the pace of shift from the unorganised sector (two-thirds of the mattress industry), in favour of the organised one. And, companies such as Sheela Foam will gain.
Well-integrated operations and experienced management are among other key strengths. Sheela Foam will continue to focus on increasing its market share by leveraging the Sleepwell brand. The company will also ramp up its website, Sleepedia,d to increase its online presence. High competition, with counterfeiting or imitation of its products, are among the downside risks.
The current IPO issue of Rs 510 crore is an offer for sale by promoter company Polyflex Marketing, which has 27.75 per cent stake. As there is no new issue of shares, none of the proceeds will flow into the company.
However, that should not worry investors. While its debt to equity ratio is only 0.2, the company grown its revenue by 14 per cent annually over FY12-16. It enjoys healthy operating margins and return ratios. After annualising its first-half results, the earnings could grow 26 per cent this financial year. This growth values the issue at 25-27 times the FY17 estimated earnings. Given the demonetisation impact and possibility of the company delivering lower earnings growth, analysts say these numbers will have to be modified.
Overall, the positives outweigh the potential downsides. The company remains a play on rising urbanisation and consumers upgrading from the unorganised to organised sector. "Good prospects, healthy and improving return ratios, and low leverage should provide valuation comfort in the long term," says Mehernosh Panthaki, consumer analyst at Religare Capital Markets.Issue details