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Nov 30, 2016 08:26 AM IST | Source:

Sleepwell maker Sheela Foam IPO: Should you subscribe?

Recommending it to subscribe with caution, Choice India agrees that there is a bleak prospect of the issue to enjoy listing gains. It says the issue is favourable for investors with long term horizon.

As initial public open offer of India's first mattress company, Sheela Foam, opens Tuesday, analysts seem to be a bit cautious about it.

The issue of Sleepwell mattress maker which will close on December 1 is planning to raise Rs 510 crore. The issue is priced at Rs 680-730 per share. The company is issuing  0.7-0.75  crore  shares  worth Rs 510  crore  via  offer for sale  post  which  promoter stake is likely to be in range of 84.6-85.7 percent.

So, is its valuation too expensive to subscribe?

Angel Broking says that on its FY17’s net profit of Rs 121 crore, the issue on its upper band is 27 times of its price to earnings (PE) ratio which is at par with consumer durable peers which have strong brand and higher B2C sales. However, it recommends subscribing the issue for medium to long term perspective but does not think the IPO will give any listing gains considering current market conditions.

What the brokerage firm likes about the company is its net cash positive balance sheet, easing working capital cycle from over 40 days in FY12 to current 26 day, improving return ratios with better product mix and promoters experience.

Recommending it to subscribe with caution, Choice India agrees that there is a bleak prospect of the issue to enjoy listing gains. It says the issue is favourable for investors with long term horizon. "At higher price band of Rs 730, its share is valued at a P/E multiple of 34 times its FY16 earnings. Moreover, on P/BVPS and EV/EBITDA front, the company is available at 10.5 times and 19.6 times," it says in a note. It also adds that the mattress maker’s business may be impacted due to demonetisation as its 60 percent revenue is in cash.

According to, the issue at price band of Rs 680-730, the stock is available at a multiple of 25.1-27 times annualised FY17 earnings per share (EPS).

Hem Securities also suggests subscribing only for investors with high risk appetite and long term perspective, although its fundamentals look strong. “At price band of Rs 680-730, PE multiple will turn out to be 25-27 on post issue annualized H1FY17 EPS of Rs 27.03 per share of company,” it says.

Centrum Wealth feels investors comfortable with high valuation and such business model may look at the issue. It, however, adds that price performance of the stock post listing would also depend on the growth the company is able to achieve.

"At the higher end of the price band of Rs 730, the stock is valued at 19.1x EV/EBITDA and 34.0x P/E on FY16 basis which looks fully priced," the brokerage firm says.

Religare believes that good prospects, healthy and improving return ratios and low leverage (debt-equity has declined consistently from 1.8x in FY12 to 0.2x in H1FY17) should provide valuation comfort in the long term. According to the brokerage firm, at the upper end of the price band of Rs 730, the company is available at 34x PE at FY16 earnings.

SPA Research recommends subscribing to the issue with long term perspective. It is positive on the company due to its dominant market share and the mattress manufacturer is in a sweet spot due to shift to organised sector driven by GST implementation, rising urbanization, increase in disposable income, increase in health related issues of the Indian population and increasing awareness about sleep products.

The brokerage firm also feels that driven by revenue CAGR of 8 percent and improving operating margin due to stable raw material prices and benefit of operating leverage it expects Sheela Foam’s earning to grow at a CAGR of 15-20 percent overFY16-19.

“At the upper end of the price band, the stock will trade at PE multiple of 27x its FY17 which is reasonable compared to many consumer stocks which are trading at valuation of over 30 times  trailing twelve months (TTM) earnings and given SFL’s leadership position and scope for improvement in return ratios driven by higher operating leverage," it says.

Incorporated in 1971, Sheela Foam (SFL) manufactures 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.

Some of the brands under which it sells PU foam cores include Splash, Mystiq, Rainbow, Flexituf, Champion and Indigo, which vary in terms of thickness, density and grade.

It has a pan India distribution network that consists of over 100 exclusive distributors, over 2,000 exclusive retail dealers and over 2,500 multi-brand outlets, as on September 30, 2016.

In fiscal years 2015, 2016 and the six months ended September 30, 2016, its net revenues from the sale of home comfort products aggregated to Rs 916 crore, Rs 1016.49 crore and Rs 513.2 crore, constituting 64.61 percent, 65.58 percent and 64.5 percent respectively, of its total audited consolidated operating revenues for such periods.

The  company  reported topline/bottomline CAGR of 10.4 percent/91.3 percent in  FY12-16  to Rs 1550 crore/Rs 104.8 crore respectively.

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