Sheela Foam Looks To Raise Rs 510 Crore Via IPO In Subdued Market
This will be the first IPO to get listed since the government’s demonetisation drive.
Mattress maker Sheela Foam Ltd., which sells its products under the Sleepwell brand is set to hit the primary market on Tuesday with a Rs 510 crore initial public offering. The IPO price band has been fixed at Rs 680-730 per equity share of face value of Rs 10. The issue closes on December 1.
This will be the first IPO to get listed since the government’s demonetisation drive. GreenSignal Bio, had to put its listing plans on hold earlier this month, after it failed to attract qualified institutional investors, despite extending its issue period twice and cutting the price band.
Sheela Foam’s promoter, Polyfex Marketing, is looking to pare around 50 percent stake in the company by offering 7.5 million shares at the lower end of the price band of Rs 680 per share or 6.9 million shares at the upper end of the price band of Rs 730 per share. It seeks a market valuation of as much as Rs 3,500 crore through the IPO.
The company on Monday allotted about 20.96 lakh equity shares at Rs 730 a share aggregating to Rs 153 crore to 14 anchor investors. The company saw spectacular response from anchor investors, who had bid for more than 10-times the number of shares from the anchor book, it said in a stock exchange filing. The anchor investors include leading international and domestic investors such as Fidelity, Goldman Sachs, East Spring, HDFC Mutual Fund, SBI Mutual Fund, ICICI Prudential AMC, Premji Invest, IDFC Mutual Fund and Sundaram Mutual Fund.
Sheela Foam has been selling mattresses under the brand name of Sleepwell for over two decades now. The company manufactures and sells a wide range of home comfort products, including mattresses, furniture-cushioning material, pillows, cushions, sofa-cum-beds and comfort accessory products.
The Ghaziabad-headquartered company, has 16 manufacturing facilities, eleven of which are located in India and five in Australia.
It also has a network of over 100 exclusive distributors and over 2,000 exclusive retail dealers, and over 2,500 multi-branded outlets. The company also exports technical foam to other manufacturers in other countries across the Middle East, South Asia and Europe. Sheela Foam is also present in Australia, United States, Brazil and Argentina.
The company has an installed capacity of 1,23,000 tonnes per annum (TPA) for foam production in India, while its capacity in Australia is 10,500 TPA. Joyce Foam Pty, a subsidiary of Sheela Foam, operates the five manufacturing facilities in Australia. Around 80 percent of the company’s revenue are attributable to Indian operations while the remaining 20 percent to Australian operations.
It has 1,928 employees and 1,500 contract labourers as on September 30, 2016.
The consolidated net worth of the company as on September 30, 2016 was Rs 404.6 crore.
At the upper end of the price band, that is, Rs 730, the earnings per share (EPS) and price-earnings ratio (P/E) for FY16 stands at Rs 21.5 and 33.99 times, respectively. At the lower end of the price band, i.e., Rs 680, the P/E multiple stands at 31.66 times, according to BloombergQuint’s calculations.
The mattress industry in India is estimated at Rs 8,500-9,000 crore as of 2016. The industry has grown at a compounded annual growth rate (CAGR) of 8-10 percent over the past five years. Sheela Foam’s growth has been in-line with the industry growth. Company’s revenue for financial year 2015-16 stood at Rs 1,550 crore, rising at a compounded annual growth rate of 10.3 percent over the last 5 years.
Net profit for the same period stood at Rs 104.8 crore, growing at a CAGR of 92 percent over the last 5 years. In the first half of financial year 2016-17, the company’s revenue stood at Rs 795.5 crore and net profit stood at Rs 66 crore.
According to BloombergQuint’s calculations, Sheela Foam’s forward EPS could be around Rs 27 per share for the financial year 2017 and the stock could trade at forward P/E multiple of 26 times.
The organised market in the mattress industry accounts for 30-33 percent of the total market, while the rest is dominated by unorganised players. Sheela Foam is the largest player in the organised market with around 7 percent of the total market share, according to a CRISIL report mentioned in the red herring prospectus (RHP) filed with SEBI.
Sheela Foam’s only listed peer is a Gujarat-based company named Tirupati Foam, which claims to be the first company to produce highly durable foam in the country. Tirupati Foam sells its products under the ‘Sweet Dream’ brand name. Tirupati Foam’s market capitalisation is as low as Rs 18 crore, and the stock currently trades at around Rs 46.45 apiece on the Bombay Stock Exchange.
According to BloombergQuint’s calculations, Tirupati Foam currently trades at a P/E of 13.3 times considering the EPS of Rs 3.5 per share for the financial year 2016. The company’s revenue and net profit for the financial year 2016 stood at Rs 77.4 crore and Rs 1.5 crore respectively.
In the unlisted space, Sheela Foam’s closest competitor is Kurlon which has 126 products and over 7,000 dealers with 70 branches. Kurlon also has 9 manufacturing facilities across Karnataka, Orissa, Madhya Pradesh, Uttaranchal and Gujarat. Last year, Motilal Oswal Private Equity Advisors, the private equity arm of Motilal Oswal, invested Rs 90 crore in Kurlon. The funds were used by the company to increase capacity, and deepen its distribution network, according to a report put out by the Press Trust Of India.
The existing promoter Polyfex Marketing, will divest 51.6 percent of its holding at upper band and 55.4 percent at lower band. Post-IPO, public shareholding will be around 14 to 15 percent.
Key Data Points
Over the years Sheela Foam has seen its book value grow to Rs 83 per share as on September 30, 2016 from Rs 28.2 per share in financial year 2012.
It has also managed to lower its total debt to equity ratio to 0.3 times.
Advertisement forms a major part of the company’s expense, and according to the RHP filed by the company, it has recently ramped up its advertisement campaign across print and electronic media. Advertisement expenses as percentage of total expenses has expanded by 220 basis points over the last five years to 4.8 percent in 2016.
The company has contingent liability and commitments of Rs 133.4 crore, i.e., one-third of its net worth. These contingents include bank guarantees, disputed liabilities of sales tax, income tax, excise duty and entry tax.
The implementation of GST is likely to accelerate further shift of the industry from unorganized to organised, the company said in its red herring prospectus. The GST regime is expected to benefit the industry through tax savings in terms of phasing out of sales tax of 2 percent and dropping logistics costs to the level of 1-1.5 percent.
Angel Broking expects Sheela Foam to deliver gains in the medium to long term.
On its estimated financial year 2016-17 profit after tax of Rs 121 crore, the issue on its upper band is priced at price to earnings ratio of 27 times, which is at par with consumer durable peers which have strong brand and higher business to consumer sales. Considering the market conditions we would not suggest this IPO for listing gains but rather we recommend ‘subscribe’ on this issue for medium to long term perspective.Angel Broking’s IPO Note