Equity Research

August 22, 2020 INDIA

BSE Sensex: 38435
Sheela Foam ADD
ICICI Securities Limited Maintained
is the author and
distributor of this report Newer long-term opportunities are (likely)
opening up Rs1,365
Q1FY21 result review and SFL’s 1QFY21 revenue declined 59% (adjusting for Spanish acquisition) and is
earnings revision likely to remain under pressure in the near-term, as expected. That said, (newer)
long-term opportunities are opening up which are DCF-accretive and importantly
Consumer Staples & embellishes the narrative as well. Acquisition of the Spanish business (in Oct’19)
Discretionary is now turning out to be a masterstroke, as it (now) has the opportunity to grow
exports (likely gaining from China+ strategy of buyers in US, Europe). Opportunity
Target price Rs1,500
in furniture cushioning and manufacturing (SleepX brands launches bedroom
Earnings revision furniture) is also a positive (furniture sector recognized as a key sector for
(%) FY21E FY22E making India a manufacturing hub). India business recovery will likely get
Sales ↑ 2.7 ↑ 3.1 accelerated by (1) consumers realizing the importance of good quality mattresses
EBITDA ↓ 3.3 ↓ 3.0 in work from home situation, (2) competitive advantage through EBO network
PAT ↓ 6.3 ↓ 4.1 (establish a safe environment for consumer walk-ins, sell directly at home) and (3)
Target price revision expansion of the online business (SleepX brand). We gain confidence of long-
Rs1,500 from Rs1,600 term growth delivery. ADD.
 Underlying revenue declined 59% in 1Q: Consolidated revenue / EBITDA / PAT
Shareholding pattern declined by 48% / 55% / 70%. Adjusting for Spain acquisition, revenue / EBITDA /
Dec Mar Jun
’19 ’20 ’20 PAT declined by 59% / 73% / 88%. Performance was very similar across segments
Promoters 75.0 75.0 75.0 in India, branded mattresses (revenue declined 66%, volume declined 67%),
Institutional
investors 22.8 22.9 23.0
furniture cushioning (-75%), foam core (-70%), technical foam (-80%) and home
MFs and other 19.3 19.5 19.7 comfort (-72%). However, Australia business revenue grew by 4%. Revenue from
Banks, FI’s, recently acquired Spain business was Rs 600mn.
Insurance co 0.1 0.1 0.1
FIIs 3.4 3.3 3.2  Reduced scale of operations led to margin decline despite input cost tailwinds:
Others 2.2 2.1 2.0 Comparable gross margin declined by 150 bps to 46.7% due to reduced scale of
Source: BSE
operations, increased cost at ports and GST benefits getting over despite input cost
tailwinds as TDI at Rs 124 / kg declined 19% YoY. EBITDA margin declined was
Price chart higher at 180bps YoY to 10.4% despite significant cost control – employee costs
2,050
(+500 bps, -26% YoY) and other expenses (-475bps, -58% YoY). Underlying
1,850
1,650
EBIITDA margin (excluding Spain business) declined even further by 400bps to 8.1%
1,450 as Spain business has higher (than rest of the business) EBITDA margin at c.18%.
Gross margins are expected to be under pressure due to inflationary input cost.
(Rs)

1,250
1,050  Valuation and risks: We cut earnings FY20-22E estimates by 4-6%; modelling
850 revenue / EBITDA / PAT CAGR of 17% / 15% / 13% over FY20-22E. Maintain ADD
650 with a DCF-based revised target price of Rs1,500 (was 1,600). At our target price,
Feb-18

Feb-19

Feb-20
Aug-17

Aug-18

Aug-19

Aug-20

the stock will trade at 28x P/E multiple Mar-22E. Key downside risks are (1) adverse
movement in prices of key inputs – TDI and polyol together contribute c.73% to total
input costs and (2) increase in competitive intensity from global players or Indian e-
commerce.
Market Cap Rs68.1bn/US$907mn Year to March FY19 FY20 FY21E FY22E
Reuters/Bloomberg SHVF.BO / SFL IN Net Revenue (Rs mn) 21,415 21,736 19,849 29,959
Shares Outstanding (mn) 48.8 Net Profit (Rs mn) 1,338 2,063 992 2,632
Research Analysts: 52-week Range (Rs) 1672/1141 Dil. EPS (Rs) 27.4 42.3 20.3 54.0
Free Float (%) 25.0 % Chg YoY 0.0 54.2 (51.9) 165.5
Manoj Menon
manoj.menon@icicisecurities.com FII (%) 3.2 P/E (x) 49.8 32.3 67.1 25.3
+91 22 6637 7209 Daily Volume (US$'000) 342 CEPS (Rs) 35.5 54.4 35.7 71.2
Vismaya Agarwal, CFA Absolute Return 3m (%) (1.0) EV/EBITDA (x) 30.4 21.3 33.4 16.0
vismaya.agarwal@icicisecurities.com
+91 22 2277 7632 Absolute Return 12m (%) 18.4 Dividend Yield (%) 0.0 0.0 0.1 0.1
Karan Bhuwania Sensex Return 3m (%) 25.1 RoCE (%) 24.5 24.1 9.2 22.2
karan.bhuwania@icicisecurities.com
Sensex Return 12m (%) 4.9 RoE (%) 20.2 24.9 10.1 22.8
+91 22 6637 7351
Please refer to important disclosures at the end of this report
Sheela Foam, August 22, 2020 ICICI Securities

Table 1: Q1FY21 results review

(Rs mn)
Q1FY21 Q1FY20 YoY (%) Q4FY20 QoQ (%) FY20 FY19 YoY (%)
Net Revenue 2,690 5,142 (48) 5,041 (47) 21,736 21,415 2
COGS (1,435) (2,665) (46) (2,541) (44) (11,046) (11,817) (7)
Gross profit 1,255 2,478 (49) 2,500 (50) 10,690 9,598 11
Staff cost (453) (612) (26) (510) (11) (2,204) (1,773) 24
Other opex (523) (1,244) (58) (1,251) (58) (5,482) (5,729) (4)
Total opex (976) (1,856) (47) (1,761) (45) (7,686) (7,503) 2
EBITDA 278 622 (55) 739 (62) 3,005 2,095 43
Other income 108 93 17 122 (11) 400 291 37
Finance Cost (41) (23) 81 (53) (23) (130) (96) 35
D&A (172) (96) 79 (270) (36) (590) (395) 49
PBT 174 596 (71) 538 (68) 2,684 1,894 42
Tax (56) (209) (73) (96) (42) (621) (557) 11
Recurring PAT 118 387 (70) 442 (73) 2,063 1,338 54
EPS 2.4 7.9 (70) 9.1 (73) 42.3 27.4 54

Costs as a % of sales
COGS 53.3 51.8 152 bps 50.4 293 bps 50.8 55.2 -437 bps
Gross margin (%) 46.7 48.2 -153 bps 49.6 -294 bps 49.2 44.8 436 bps
Staff cost 16.8 11.9 495 bps 10.1 672 bps 10.1 8.3 185 bps
Other opex 19.5 24.2 -475 bps 24.8 -536 bps 25.2 26.8 -154 bps
EBITDA margin (%) 10.4 12.1 -175 bps 14.7 -431 bps 13.8 9.8 404 bps
Income tax rate (%) 32.2 35.1 -288 bps 17.8 1434 bps 23.1 29.4 -627 bps
Source: Company data, I-Sec research

Table 2: Q1FY21 segment results review

(Rs mn)
Q1FY21 Q1FY20 YoY (%) Q4FY20 QoQ (%) FY20 FY19 YoY (%)
Segment Revenue
Mattresses 670 1,969 (66) 1,706 (61) 7,780 7,530 3
Furniture Foam 170 685 (75) 620 (73) 2,720 2,890 (6)
Foam Core 230 774 (70) 750 (69) 3,040 3,460 (12)
Technical Foam 160 785 (80) 700 (77) 3,250 3,680 (12)
Home Comforts Products 40 144 (72) 120 (67) 760 580 31
Australia 820 786 4 610 34 3,160 3,277 (4)
Spain 600 - 530 13 1,030 -

Segment Volume (Mattress in '000 Nos., Other in Tons.)

Mattresses 185 562 (67) 508 (64) 2,190 1,829 20
Furniture Foam 477 2,006 (76) 1,824 (74) 7,939 7,597 5
Foam Core 1,525 4,668 (67) 4,873 (69) 19,567 20,735 (6)
Technical Foam 583 2,748 (79) 2,514 (77) 11,500 11,785 (2)

Segment Realisation (Mattress in Rs/No., Other in Rs/Kg)

Mattresses 3,615 3,503 3 3,359 8 3,553 4,117 (14)
Furniture Foam 353 341 3 340 4 343 380 (10)
Foam Core 153 166 (8) 154 (1) 155 167 (7)
Technical Foam 274 286 (4) 278 (1) 283 312 (9)
Source: Company data, I-Sec research

2
Sheela Foam, August 22, 2020 ICICI Securities

Sheela Foam Q1FY21 call takeaways

 Operations and recovery: Sheela Foam has recovered to 80-85% of business in
India in July’20. Management expects normalcy to return by Q4FY21 or Q1FY22.
Australia and Spain are witnessing second wave of Covid infections. Revenue
from auto industry took time to recover but has recovered to 100% (could be pent
up demand) in July’20. Smaller towns have recovered faster than metro and tier-1
cities. Organised industry has recovered faster than unorganised sector.
 Export and furniture industry opportunity: Opportunity to export mattresses,
foam blocks and mattress covers to the USA and Australia which were earlier
importing from China is still under discussions. Further there is opportunity in
furniture cushioning and manufacturing as govt. has recognised furniture as a key
sector for making India as a manufacturing hub. Currently furniture industry is
mostly unorganised with 60% of organised furniture being imported.
 Margins: Gross margins are going to be under pressure as input costs are
inflationary - TDI prices has gone up to Rs 160/kg and Polyol prices has gone up
to Rs 135 -140 / kg. Margins will recover once input costs are transferred to
consumers which will take some time.
 Organised sector and market share: Management expects organised mattress
sector to increase its share from 35% to 50% in 3-5 years with Sheela Foam
increasing its market share in organised sector from 30% to 40%.
 E-Commerce: Online channel contributed ~4-5% of overall mattress industry.
Sheela Foam entered late into this channel and is still catching up, however it
grew by more than 50% post lockdown (growing at 35% for last 2 years).
 Ad-spends: Trade spends have shifted to consumer promotions during these
times with similar level of overall spends. However, management expects
reduction of marketing investment of brand as it believes the brand has now got
good salience.
 Capex: Management expects maintenance capex of ~450-500 mn during the
year. In addition to that they have bought some land in Jabalpur and expect
additional capex of around 500-600 mn.

3
4
(%)

0
2
4
6
(%) 8
12
14
16
0
10

10
20
30

10
20
30

(%)15
25

0
5
(60)
(50)
(40)
(20)
(10)

(30)
Q3FY16 25.1 Q3FY16 13.9 Q3FY17 8
Q4FY16 27.2 Q4FY16 11.6
Q4FY17 17
Q1FY17 23.0 Q1FY17 14.1
Q2FY17 12.8 Q1FY18 10
Q2FY17 19.2
Q3FY17 18.1 Q3FY17 13.5 Q2FY18 18
Q4FY17 21.3 Q4FY17 5.4 Q3FY18 10
Q1FY18 18.9 Q1FY18 10.7
Q4FY18 15
Q2FY18 22.8 Q2FY18 11.9
Q3FY18 11.5 Q1FY19 20
Q3FY18 21.0

Source: Company data, I-Sec research

Source: Company data, I-Sec research
Source: Company data, I-Sec research
Q4FY18 9.9 Q2FY19 10
Sheela Foam, August 22, 2020

Q4FY18 20.9
Q1FY19 21.1 Q1FY19 10.1 Q3FY19 7
Q2FY19 23.2 Q2FY19 7.9
Q4FY19 1
Q3FY19 20.9 Q3FY19 10.7
Q4FY19 26.8 Q4FY19 10.4 Q1FY20 2

Chart 3: EBITDA margin (consolidated)

Q1FY20 12.1
Chart 1: Revenue growth (consolidated)

Chart 5: Other expenses as a % of sales

Q1FY20 21.1 Q2FY20 (7)
Q2FY20 22.5 Q2FY20 14.2 Q3FY20 16
Q3FY20 22.8 Q3FY20 14.3
Q4FY20 (6)
Q4FY20 21.2 Q4FY20 14.7
Q1FY21 16.4 Q1FY21 10.4 Q1FY21 (48)

(% YoY growth)

(%)
(%)

10
12
16
18

14

0
4
6

2
8
37
39
43
45
47
49
51
53

35
41

20
40
80
100
120
140

60

(80)
(60)
(40)
(20)
Q1FY17 Q3FY16 8.2 Q3FY16 47.2
Q2FY17 Q4FY16 9.4 Q4FY16 48.3
Q3FY17 Q1FY17 10.2 Q1FY17 52.1
Q2FY17 9.5 Q2FY17 46.6
Q4FY17
Q3FY17 8.1 Q3FY17 43.8
Q1FY18
Q4FY17 7.9 Q4FY17 38.6
Q2FY18 Q1FY18 Q1FY18
9.4 44.1
Q3FY18 Q2FY18 8.3 Q2FY18 46.8

Chart 6: TDI price change

Q4FY18 Q3FY18 7.7 Q3FY18 43.9

Source: Company data, I-Sec research

Source: Company data, I-Sec research
Source: Company data, I-Sec research

Q1FY19 Q4FY18 7.9 Q4FY18 42.5

Q2FY19 Q1FY19 8.8 Q1FY19 43.8
Q2FY19 8.3 Q2FY19 43.9
Chart 4: Staff cost as a % of sales

Q3FY19
Q4FY19 Q3FY19 7.7 Q3FY19 43.6
Chart 2: Gross margin (consolidated)

Q4FY19 8.3 Q4FY19 47.9

Q1FY20
Q1FY20 11.9 Q1FY20 48.2
Q2FY20
Q2FY20 10.0 Q2FY20 50.1
Q3FY20
Q3FY20 8.9 Q3FY20 49.0
Q4FY20 Q4FY20 10.1 Q4FY20 49.6
Q1FY21 Q1FY21 16.8 Q1FY21 46.7
ICICI Securities
Sheela Foam, August 22, 2020 ICICI Securities

Financial summary
Table 3: Profit & Loss statement Table 6: Cashflow statement
(Rs mn, year ending March 31) (Rs mn, year ending March 31)
FY19 FY20 FY21E FY22E FY19 FY20 FY21E FY22E
Net Revenues 21,415 21,736 19,849 29,959 Operating Cash flow 1,598 2,730 1,650 2,749
Operating Expenses 19,304 18,732 17,933 25,964 Working Capital
EBITDA 2,110 3,004 1,916 3,994 (219) (1,094) 755 23
Changes
% margins 9.9 13.8 9.7 13.3 Capital Commitments (528) (1,834) (800) (880)
Depreciation & Amortisation 395 590 750 840 Free Cash Flow 851 (199) 1,605 1,892
Gross Interest 96 130 178 141 Cash flow from
Other Income 276 400 337 504 (2,457) (2,946) (641) (516)
Investing Activities
Recurring PBT 1,894 2,684 1,325 3,518 Issue of Share Capital - 70 - -
Less: Taxes 557 621 334 885 Inc (Dec) in Borrowings (301) 1,686 (300) (300)
Less: Minority Interest - - - - Dividend paid - - - (59)
Net Income (Reported) 1,328 1,943 992 2,632 Change in Deferred
Extraordinaries (Net) (9) (120) - - (1,379) 273 1,464 1,897
Tax Liability
Recurring Net Income 1,338 2,063 992 2,632 Chg. in Cash & Bank
Source: Company data, I-Sec research 203 446 1,910 3,807
balance
Source: Company data, I-Sec research
Table 4: Balance sheet
(Rs mn, year ending March 31) Table 7: Key ratios
FY19 FY20 FY21E FY22E (Year ending March 31)
Assets FY19 FY20 FY21E FY22E
Total Current Assets 6,857 7,569 7,934 11,778 Per Share Data (Rs)
of which cash & cash eqv. 203 446 1,910 3,807 EPS 27.4 42.3 20.3 54.0
Total Current Liabilities & Cash EPS 35.5 54.4 35.7 71.2
3,970 4,151 3,807 5,777
Provisions Dividend per share (DPS) - - 1.0 2.0
Net Current Assets 2,887 3,418 4,127 6,001 Book Value per share (BV) 149.7 190.2 210.5 263.3
Investments 1,276 774 706 1,066
Net Fixed Assets 3,478 7,991 8,041 8,080 Growth (%)
Capital Work-in-Progress 7 180 180 180 Net Sales 9.0 1.5 (8.7) 50.9
Goodwill 82 2,371 2,371 2,371 EBITDA (2.5) 42.4 (36.2) 108.4
Total Assets 7,648 12,362 13,054 15,328 PAT 0.0 54.2 (51.9) 165.5
DPS - - - -
Liabilities
Borrowings 282 2,915 2,615 2,315 Valuation Ratios (x)
Deferred Tax Liability 65 172 172 172 P/E 49.8 32.3 67.1 25.3
Minority Interest - - - - P/CEPS 38.4 25.1 38.2 19.2
Equity Share Capital 244 244 244 244 P/BV 9.1 7.2 6.5 5.2
Face Value per share (Rs) 5 5 5 5 EV / EBITDA 30.4 21.3 33.4 16.0
Reserves & Surplus* 7,057 9,032 10,024 12,597 EV / Sales 3.0 2.9 3.2 2.1
Net Worth 7,301 9,276 10,268 12,841
Total Liabilities 7,648 12,362 13,054 15,328 Operating Ratios
Source: Company data, I-Sec research Raw Material / Sales (%) 56.3 50.8 52.0 51.6
Employee cost / Sales (%) 8.3 10.1 12.2 8.9
Table 5: Quarterly trends SG&A / Sales (%) 25.6 25.2 26.1 26.2
Other Income / PBT (%) 14.5 14.9 25.5 14.3
(Rs mn, year ending March 31) Effective Tax Rate (%) 29.4 23.1 25.2 25.2
Sep 19 Dec 19 Mar 20 Jun 20 Working Capital (days) 2.5 14.1 1.5 1.1
Net Revenues 4,973 6,580 5,041 2,690 Inventory Turnover (days) 31.9 38.1 32.0 32.0
% growth (YoY) (7.1) 15.6 (5.7) (47.7) Receivables (days) 25.9 36.2 30.0 30.0
EBITDA 705 939 739 278 Payables (days) 24.4 25.8 25.0 25.0
Margin (%) 14.2 14.3 14.7 10.4 Net D/E Ratio (x) (0.4) (0.1) (0.2) (0.4)
Other income 114 72 122 108
Extraordinaries (Net) - - (120) - Profitability Ratio (%)
Adjusted Net profit 587 647 442 118 Net Income Margins 6.2 9.5 5.0 8.8
Source: Company data, I-Sec research RoACE 24.5 24.1 9.2 22.2
RoAE 20.2 24.9 10.1 22.8
Dividend Payout - - 5.9 4.5
Dividend Yield - - 0.1 0.1
EBITDA Margins 9.9 13.8 9.7 13.3
Source: Company data, I-Sec research

5
 Sheela Foam, August 22, 2020 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise)
BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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