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SPA Research in its research report on Sheela Foam IPO.
Sheela Foam Ltd (SFL) is a leading manufacturer of mattresses in India marketed under flagship brand Sleepwell, which holds ~20-23% market share in the organized Indian mattress market. The company manufactures foam-based home comfort products (65.6% of revenues in FY16) for Indian retail consumers and technical grades of polyurethane foam (PU Foam) for wide range of industries. SFL operates in India through 11 manufacturing facilities having installed capacity of 123000 TPA. In addition to domestic facilities, SFL operates five manufacturing facilities in Australia that exclusively manufacture PU Foamhaving installed capacity of 10500 TPA. The company has pan-India distribution network that consists of 100+ exclusive distributors, 2000+ exclusive retail dealers and 2500+multi-brand outlets. Its topline and bottomline has registered CAGR of 10.5% and 50.3% respectively between FY13-16.
Over last two decades, SFL has successfully built a brand that is associated with comprehensive and quality home comfort solutionswhich is reflected in its dominant market share of ~23% in the organized mattress sector. Webelieve that due to dominant market share, SFL is in a sweet spot due to shift to organized 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. Driven by revenue CAGR of ~8% and improving operating margin due to stable raw material prices and benefit of operating leverage (current capacity utilization is ~35%),we expect it’s earning to growat a CAGR of ~15-20%over FY16-19E.At the upper end of the price band, the stockwill trade at PEmultiple of 27x its FY17E which is reasonable compared to many consumer stocks which are trading at valuation of >30x TTMearnings and given SFL’s leadership position and scope for improvement in return ratios driven by higher operating leverage.We recommend SUBSCRIBE to the issue with long term perspective.