Sheela Foam IPO review (Apply)

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Review By Dilip Davda on November 26, 2016

Sheela Foam Ltd (SFL) is a leading manufacturer of mattresses in India marketed under its flagship brand “Sleepwell”. In addition, the company manufactures other foam-based home comfort products targeted primarily at Indian retail consumers, as well as technical grades of polyurethane foam (“PU Foam”) for end use in a wide range of industries. As part of its international footprint, the company manufactures PU Foam in Australia through wholly owned subsidiary, Joyce Foam Pty Ltd. According to CRISIL, based on revenues, Sleepwell branded mattresses constituted a share of around 20-23% of the organized Indian mattress market as of 2015-2016. SLF is among the leading manufacturers of flexible PU Foam in India.

As part of home comfort range, it offers a product portfolio that appeal to consumers of widely differing attributes and preferences. Company’s home comfort line comprises of products such as mattresses, furniture-cushioning, pillows, cushions, sofa-cum-beds as well as PU foam cores utilized for manufacturing finished home comfort products. Our mattress line, offered under Sleepwell range, encompasses pure foam mattresses as well as hybrids of spring and coir with foam that are capable of bespoke customization as per the requirements of consumers. SFL’s furniture-cushioning line, offered under Sleepwell and Feather Foam brands, comprises PU Foam that constitutes upholstery material of varying densities to ensure greater comfort and durability. Its home comfort portfolio also includes pillows, bolsters and cushions that are intended to provide varying physiological and comfort solutions, sofa-cum-beds and comfort accessories like bed sheets, baby care sheets and mattress protectors.

Under technical grade foam range, it manufactures and supplies PU Foam grades to a diverse range of industries, including automotive foam used to manufacture auto parts; reticulated foams utilized 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. Apart from technical foam, through its Australian business, the company manufactures 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.

For listing benefits and providing exit route to some of its stakeholders, the company is coming out with a maiden IPO under ‘offer for sale’ via book building route to raise Rs. 510 crore. The company is issuing 6986301 to 7500000 (based on upper and lower price band) equity share of Rs. 5 each in a price band of Rs. 680-730 per share. Minimum application is to be made for 20 shares and in multiples thereon, thereafter. Issue opens for subscription on 29.11.16 and will close on 01.12.16. Post allotment, shares will be listed on BSE and NSE. BRLMs to the issue are Edelweiss Financial Services Ltd and ICICI Securities Ltd. Link Intime India Pvt Ltd is the registrar to the issue. Except having issued few shares at a price of Rs. 150 per share (on Rs. 5 FV basis) in March 2006, it has issued most of equity at par and has also issued bonus shares in the ratio of 1 for 1 in 1994 and 1996 in the ratio of 11 for 1 in 2004 and 1 for 2 in June 2016. Its current paid up equity capital of Rs. 24.39 crore remains same as this is secondary offer.

On performance front, the company has posted turnover/net profits of RS. 1271.65 cr. / Rs. 27.84 cr. (FY14), Rs. 1428.24 cr. / Rs. 42.67 cr. (FY15) and Rs. 1566.80 cr. / Rs. 104.79 cr. (FY16). It has reported net profit of Rs. 65.95 cr. on a turnover of Rs. 803.75 cr. for first half of current fiscal. If we annualize this earning and attribute to the current equity then asking price is at a P/E of 25 to 27 based on lower and upper price band, which appears to have been fully priced in for the immediate future trends. As per information given in RHP, the company has no listed peer to compare with. Company reaps benefits of lower raw material prices for higher margins which may not continue going forward.

On BRLM’s front, they have handled 25 public offers in the past three years, out of which 8 offers closed below the offer price on the listing date.

Conclusion: Demonetization has taken a toll of recent IPO of Greensignal that could not garner the required quota of QIB. Even earlier IPO of Varun Beverages too received poor response than expected even when demonetization was not there. This shows shaky mind set of big ticket investors in current weaker trends of secondary as well as primary markets. As the main raw material prices have shoot up drastically in recent times, company may find it difficult to maintain the earnings shown in the recent past. Considering this and the fully pricing of the IPO, risks aver investors with surplus funds may consider investment for medium to long term.

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