Sheela Foam IPO Review: Should you Sleepwell?

When Sheela Foam IPO opens for subscription next week, it will face a daunting task of attracting investors in a market that has suddenly turned hostile to longs. With FIIs dumping Indian equities following Donald Trump’s surprise win in the US, Sense and Nifty benchmark indices have become considerably light.

Against this backdrop, Sheela Foam IPO will open for bidding on 29 November. Priced in the range of INR680 -730 per share, the share sale is aimed at raising INR510 crore. Bids can be placed in multiples of 20 shares. The IPO will be managed by Edelweiss Financial Services and ICICI Securities while Link Intime has been appointed the registrar.

The Ghaziabad-based company is a leading player in India’s mattress market and sells its products under the Sleepwell brand name. It claims to have more than 20% share in the organized market. Here are more details about the upcoming IPO

Sheela Foam IPO Review: Sale of existing shares, no fresh issue

Sheela Foam IPO will be purely a sale by existing shareholders and the shares will be offered by Polyflex Marketing which is one of the promoters of the company. As a result, Sheela Foam will not receive any proceeds from the upcoming IPO. Polyflex Marketing owns 13,537,674 shares or nearly 27.75% equity stake in Sheela Foam.

Here is the list of major shareholders in Sheela Foam and it is important to note that there are no external investors in the company. The company is led by Rahul Gautam who is also a promoter.

Sheela Foam IPO Review: Beyond Sleepwell and India

Sleepwell is a strong brand and it is used on a range of home comfort products including furniture-cushioning, pillows, cushions, sofa-cum-beds, pillows, bolsters and cushions, sofa-cum-beds and comfort accessories like bed sheets, baby care sheets and mattress protectors. The home comfort business generated 65.6% of the company’s top line in FY2016. Sheela Foam’s mainstay is undoubtedly the Sleepwell brand but there is certainly more to the company than just the consumer facing mattress business. Sheela Foam’s India base includes 11 manufacturing facilities which are used for manufacturing home comfort products. Five of these also manufacture PU Foam.

Since the company’s main product is foam, it is a natural strategy to supply varieties of this product to other industries. It supplies technical grade foam to a diverse range of industries, including automotive foam used to manufacture auto parts; reticulated foams utilised in filtration systems; ultra-violet stable foams used for the manufacture of garments, shoes and innerwear; and technical foams that are used in industrial sound absorption systems.

The company also expanded beyond India and made an acquisition in Australia in the last decade. Through the Australian business, it makes PU Foam that is supplied to manufacturers of comfort products and home furniture and industrial PU Foams supplied to manufacturers of auto components, sound absorption systems, medical equipment and food packaging material. In FY2016, revenues from technical and PU foam business stood at INR533.5 crore, or 34.42% of the company’s annual revenue. The Australian business, operated through the fully-owned subsidiary Joyce, includes five manufacturing facilities that make PU Foam.

Sheela Foam IPO Review – Financial Performance

As figures from the red herring prospectus indicate, Sheela Foam’s financial performance has been quite strong as sales have expanded in each of the last four years. This is understandable as buyers are increasingly turning to branded products and Sleepwell is right there as a well recognized and established mattress brand. The company has also done well to expand the brand name to other home comfort products. All in all, Sheela Foam’s business has grown steadily thanks to robust growth in both verticals.

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However, it is the surge in profits in recent years which take the center stage in Sheela Foam IPO Review. From less than 1% in FY2012, the company’s net profit margin enhanced to 6.6% in FY2016. Raw material is typically the highest cost for Sheela Foam and the variation in profit margins is largely due to changes in material costs. We are usually wary of sudden changes in profit margins and cost accounting and Sheela Foam’s surge in profit margin doesn’t inspire confidence.

Sheela Foam IPO Review – Should you subscribe?

Without doubt, Sheela Foam’s Sleepwell has a strong brand value in India and it helps as the current season has hugely favoured IPOs of companies with strong retail connect such as Dr Lal Path Labs, Thyrocare and ICICI Prudential Life Insurance. Besides, Sheela Foam comes across as a solid business with strong fundamentals in place. A business like making and selling mattresses is much more than just a function of a strong brand. A strong sales and distribution network is a prerequisite for physical goods and it comes especially handy if the products in question are bulky like mattresses. This naturally shields the business from venture funded e-commerce players.

Sheela Foam is participating in an industry-wide trend of consumers increasingly opting for branded products instead of traditional cotton beddings. Several key factors such as growth of income levels and disposable incomes as well as increase in health problems such as back pain, spine related problems, orthopedic ailments are expected to offer tailwinds to the INR9,000 crore industry. Branded players like Sheela Foam are in a particularly sweet spot as the above mentioned points prompt buyers to opt for branded products. Despite the visible growth in recent years in favour of organized market, the unorganized market still accounts for nearly 70% of the sales in the mattress industry. This represent a huge opportunity for leading players and it is unlikely that their market leading position will be challenged anytime soon.

In terms of valuations, Sheela Foam IPO is richly valued. Its FY2016 earnings per share (EPS) of INR21.5 put a valuation of 33.9X in terms of price by earnings (P/E) ratio for the upper price band. On the lower end of the price band, the company is asking for a multiple of 31.6 on its FY2016 earnings. These are not very attractive valuations although we have seen a number of high-growth companies rewarded by the stock markets in the recent past. And Sheela Foam’s success is without blemish in this regard.

Despite all the positives we have found in Sheela Foam IPO Review, there is no denying that this public offer comes at a time when investors’ interest levels and risk appetite is very low. Some of the well-known companies which brought their IPOs in the last 12 months have either gone down or are struggling close to their IPO rates now. This warrants caution on the part of IPO investors and thus, Sheela Foam IPO may not be a good fit for small investors. This is not to suggest that the IPO party is over after two years of strong activity. Once the demonetization dust settles and interest rate cuts revive economic activity, environment will be a lot better for further investments. If someone is still feeling brave, our page on Sheela Foam IPO discussion may offer some help with grey market activity.