Sheela Foam soars 15% as Street cheers Kurlon buyout, Furlenco acquisition

Kurl-on and Sleepwell brands complement each other in products and regions, as the former is coir focused with a higher market share in south and east India while the latter is in foam and a leader in north and west.

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Shares of Sheela Foam shot up 15 percent on July 18 after the company confirmed the buyout of rival Kurlon Enterprises and announced its decision to pick up a 35 percent stake in furniture rental company Furlenco, also known as House of Kieraya Ltd, for Rs 300 crore.

Sheela Foam will acquire a 94.66-percent stake in Kurlon Enterprises at an equity valuation of Rs 2,150 crore, the company said in a regulatory filing.

“This is an attractive price considering the FY20 PAT of Rs 0.8bn, which implies 26 times,” said Nuvama Institutional Equities.

The transaction will allow Sheela Foam to acquire a total of 3.46 crore equity shares in the company.

At 9:28 am, shares of the company were trading 7.6 percent higher at Rs 1,278 on the BSE.

Kurl-on and Sleepwell brands complement each other in products and regions. Kurl-on is coir focused with a higher market share in south and east India while Sleepwell is in foam and a leader in north and West.

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What analysts are saying

Sheela Foam and Kurlon Enterprises will now have a combined market share of around 21 percent in India's modern mattress market. They have complementary distribution networks, with Sheela Foam mainly using an exclusive distribution network and Kurlon Enterprises having a strong presence in multiple distribution channels. Additionally, their manufacturing facilities complement each other, enabling the combined entity to serve customers more efficiently and reduce logistics costs, highlighted Nuvama Institutional Equities.

Rahul Gautam, Chairman and Managing Director, Sheela Foam, told CNBC-TV18 that the combined market share in organised industry will be 40 percent.

He pointed out that the acquisition funding of Rs 850 crore will be through cash, while the balance Rs 1,500 crore will be by way of debt and equity. Also, the full advantage of this acquisition will be visible from FY25 onwards. However, it will add about 300 bps in synergy benefits with kurlon immediately, he added.

Read more | Exclusive: Sheela Foam to now buy Kurlon Enterprise for Rs 2,150 crore

Meanwhile, the acquisition of Furlenco will also allow Sheela Foam to enter the branded furniture market and facilitate cross-selling between the two companies, it added.

However, even as the deal is financially attractive, both the brands need to focus on reviving growth, according to Nuvama Institutional Equities. “This is based on the premise of cost synergies playing out and Kurl-on’s profitability reviving or exceeding FY20 performance.”

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.