Sheela Foam - An exciting branded play

StockEdge, very good app to find the deals on the portfolio stocks, easy to monitor and get glance at one go

1 Like

Promoters are continuously buying since one month. Amount is more than 17 cr. Presuming good upcoming quarters.

Dis. Invested after promoter’s actions.

6 Likes

Promotors are continuously buying since 40 days, total buying is more than 20 Cr.
Expecting good upcoming result and turnaround.

3 Likes

Hi,

Is there any guidance regarding tax because tax rate is very dynamic?

Disc : Not Invested

Which DIIs have invested? Unable to verify

Considering promotor has bough shares during Q3, I did speak to a mattress distributor to understand if there is any significant change in Sheela foam business.
Brief notes from the same:
Q3 does not look good in terms of sales.
Facing a lot of competition from wake-fit and other online brands. Online players are well funded and not worried about profitability at the moment.
Impact of online players is more in southern markets compared to other regions.
Retail market is bad through out India. commercial sales to hotels etc… doing well.
Raw materials prices were stable/low during the quarter.
Some of the company policies with distributors/adding kurl-on also affected the sales. These policies may be successful in the long run but not at present.
Discl: tracking. The above opinions may be biased.

20 Likes

Investors’ presentation Q3FY25 result -
https://www.bseindia.com/xml-data/corpfiling/AttachLive/73a7c18a-7195-4722-80f0-e93b38dfc3ee.pdf

CRISIL rating - Crisil Ratings has revised its outlook on the long-term bank facilities of Sheela Foam Ltd (SFL) to ‘Stable’ from ‘Positive’ while reaffirming the rating at ‘Crisil AA-’. The short-term rating has been reaffirmed at ‘Crisil A1+’
https://www.crisil.com/mnt/winshare/Ratings/RatingList/RatingDocs/SheelaFoamLimited_January%2028_%202025_RR_361162.html

2 Likes

What are your views on the results and the volume growth? 53% volume growth in this quarter is impressive. What’s market not liking about it?

2 Likes

Volume gain indicates Sheela Foam is getting higher market share and pushing more products to market /consumers. However, bottom line is still stressed due to lowest historical NPM. Presently NPM is less than 2% compared to historical 6-9% margin. Once cost rationalization done due to recent merger/acquisition, NPM margin will improve and that will have higher growth in bottom line also!

4 Likes

Excuse me if I sound cocky, but this thesis is kind of known to the market since management has already told the trajectory in the concalls. That’s the reason it’s all the more intriguing - the trajectory is known, the growth is visible for core business but the way stock has corrected is kind of puzzling. I am an active investor believing market discount any change very quickly and I play it. But in case of SFL, the price action is not favourable despite execution. Am I missing something? 24% growth in B2C channel is superb in this market yet no movement. Disc - Not invested, tracking to understand the change.

7 Likes

It is overvalued stock across all parameters …

People expected that with consolidation margins will improve and management had guided for the same …

Now that seems difficult as local mattress & Unlisted players are competing hard … and expensive acquisition is draining co on interest ( 4X) and depreciation ( 2X) with no significant increase in T/O

Further shift in strategy to sell more on e-commerce channel inspite of lower profits & higher returns is not doing any good …

Sheela foam is buy only below < Rs 600 assuming it will grow by 15% for next 2 years on lower base and margins increase from 9% to 14% by FY 27 …

If it grows below this or margin does not increase for 9% to 14% … It should trade lower

8 Likes

I agree that this is an overvalued stock. It no longer enjoys the brand premium as it used to before the newer players in the market that has caused too much competition. There are so many better bets in the market.

3 Likes

Local competition was always there.
Basic and mid level Mattresses manufacturing doesn’t require very high investment.
One can start business in little tin shed of hardly 2000 sqft and with single machine. Most of the local manufacturers source readily available PU foam and just add multiple layers of cushioning on top of it and stich entire thing and sell it as good product. This has similarities with Readymade shirts brand sourcing fabrics and stitching them together.

But this is where moat is.

There are more than 100k readymade apparel manufacturers in India and they have more than 80% market share. But that doesn’t restrict brands like Allen Solly or Peter England to sell premium shirts.
There are thousands of MBO but that hasn’t stopped Zara or HandM.
In case of sheela foam, they manufacture PU foam. So that’s added advantage compared to local market.
So they control from bottom to top of mattresses manufacturing process.
I would compare them with Uniqlo which is more successful as they innovate a lot of their products and thus are highly successful despite selling commodity products.
To summaries, competition from local market will always be there as initial setup cost is not much.

But now I am not comparing fashion (which needs replacement every year or so) to a product that has 10 year replacement window.

My point here is despite local competition, we need to understand how sheela foam is using its vertical integration network (manufacturing to brand building) and can use it to generate better margin.

Expansive acquisition

Agreed, it look like sheela foam might have paid far more than fair value.
But I think, we need to think from their glasses as well.

Imagine, you are number 1 player in your industry and this industry, for last 20 years is mostly dominated by 3 big players (Sleepwell, kurlon, century).
You are competing with them neck to neck for a long peroid and suddenly, one fine day, you have chande to acquire number 2 playes in the market. Also this players market stregenth (Kurlon dominant in east and south) complimentary to your market (north and west).
Will you pass it because asking price is too high?
No. I don’t think so.
I will always think, that let me get this player, I will merge two business and dominate Indian market. Also I can save a lot in long run as both of the players territory is complimentary. So, I might pay more now but in long run, I will have upper hand.
Thats the role of business leader. They don’t need to think quarter to quarter. They have to take a multi year view to do what’s right for the business.
Being a small businessman, I would have done the same.

Disclaimer - I am a small business owner who is selling Sleepwell mattress for last 12 years.

14 Likes

I never disagreed with business decision to consolidate with Kurlon or basic business model of Sheela Foam ..

My point was stock was overvalued and I highlight why of it - primarly market expectation from consolidation has not worked as per plan ..

Will it change Yes quite possible .. if management executes FY 27 plan as discussed in concall .

1 Like

I agree 100% with you Sir.

My reply to you is never to contradict you or to oppose you.
You are right in your assessment.
I think, they are right in their estimate of year 2027, when integration results may start to show results.
We need to wait and see for confirmation.
But, from pure business point of view (without considering share price), business looks solid in long run.

I am just putting another view of the sam story.
I too agree that stock seems to be overvalued as NPM is very low and growth is not visible.

Disclaimer - Sheela foam has been top 3 of my holding and I am holding it for more than 5 years. My purchase price is around 30% more that CMP.
So my views may be biased :wink:

6 Likes

CEO Nilesh Mazumdar resigns on Mar 31st. Tushaar Gautam to take lead.

God knows what will happen in the FY result.

Any take on Q4 n FY25 results?
Looks like the merger has been a bad move. Synergies being push out every quarter. Merging the business itself has taken toll on management.. and investors also.

2 Likes

I’ve been writing on the Sheela Foam thread for a very long time, and the price for the stock has gone down a lot recently. A couple of members from this forum have personally messaged me and asked me about my opinion. I will share it—what I thought.

Disclaimer: A long thread.

To be or not to be.

It’s a question that has been there for a very long time. It is very difficult to please all the people all the time. Now, why am I stating this here? Because I find something similar happening right now in the Indian stock market.

Two of my biggest holdings are Avenue Supermart and Sheela Foam. Now, I will speak a little bit about Avenue Supermart and then about the Sheela Foam trade. Why am I giving the example of DMART here? You will get the context after reading this paragraph.

Right now, I have read the DMART thread, and a lot of people are asking: Why is DMART not going into quick commerce? Or why is DMART not going into online business?

Well, I think the answer is simple. It is because DMART doesn’t have the competency in that line of business, and there is a lot of potential ahead in the business that DMART is operating in right now.

DMART is operating in offline stores, and it is doing very well. It has done what was not possible for earlier players like Spencer Retail or Big Bazaar, and still, other well-funded retailers like Reliance and Star are not able to match DMART’s KPIs. But still, I believe—at least from what I read on the ValuePickr forum—many of the shareholders are still not satisfied with DMART, and they keep asking why DMART is not entering the online business or quick commerce business.

Well, to me—to me personally—I think it is like asking why VRL, which is in the transport business (which also has a passenger business), is not going into airlines. Or vice versa, why Indigo, which is operating as an airline, is not entering into domestic passenger bus services.

Now one might think, how come VRL and Indigo have anything in common? And why am I suggesting something like this? Well, why not? I mean, both need a system that can be used to book tickets. Both have a dedicated customer support or service team that will take bookings and address any complaints about booking, payments, and anything else. Both directly touch the customer. Both need commercial transportation vehicles / aeroplanes to operate. So why not? What is the problem?

Well, if you see more deeply, then you will easily find the problem—what problem DMART has in operating online or in shifting so quickly to quick commerce or e-commerce business. Because DMART is a traditional retail chain that has done exceedingly well in the offline space, which has not yet expanded in all the states or all the major cities. And it has tremendous potential to do so.

So, if I am a CEO or I am the owner of a company—let’s say I am the owner of DMART—and I have the option to take a 10% or 20% share of Indian offline retail space (which might be in the range of ₹84 lakh crore), or to cover 20% market share in quick commerce space (which has a potential of ₹10,82,875 crore), I will always take the first one.

I found both figure (size of offline retail market and size of online retail market) from Google search.
And I believe that’s what DMART’s ownership or the management is trying to do. It’s not like they are not at all exploring other options or have shut their eyes to other opportunities. They are open to other options, and they are trying with formats like DMART Ready. But then again, they are centered around offline retail stores.

Now, let’s get back to Sheela Foam. Why have I given the example of DMART? It is because I believe something similar is happening with Sheela Foam.

Sheela Foam is in the business of manufacturing mattresses and specialty foams. They have expanded into adjoining segments like bedsheets, pillows, blankets, comforters, and right now, into furniture—right?

And so, as a business owner of a company like Sheela Foam, what should be my next plan of action? If I am doing great where I am right now, I will try to get more market share. So, what is the easiest step to get more market share? It is to buy your next big competitor.

So, Sheela Foam decided to buy their second biggest competitor, which is Kurlon. And now, they are trying to integrate Kurlon into the business. But now, since the profit margin has gone down, everyone is saying the strategy was wrong. The strategy was incorrect. They should not have gone into acquiring Kurlon.

Also, they are now trying to offload international business, which they had tried earlier. Now, if you ask me—if I am doing well in India—my next step would be to expand internationally. Why not? Why wouldn’t I try my hand at something that I am good at domestically?

Okay, so they tried, but they had little success, and now they are going to offload their business.

Regarding acquiring Furlenco and entering into the online furniture space, and now deciding to explore offline furnishings—yeah, I think that’s the next logical step. The furniture market is far bigger compared to the mattresses market, and if anyone can enter that space, then it should be the player who is in a related industry.

So, I believe Sheela Foam has a very good chance—as compared to players like Reliance, which has no expertise in the furniture space.

So yeah, I guess they are doing the right thing.

Now, let’s get back to our original statement—to be or not to be.
If I make an acquisition and try to grow my market share, shareholders are not happy.
If I try to expand internationally and it fails and I try to offload, shareholders are not happy.
If I am trying to enter something as an industry that is related to my business, but which has far more potential than my business, shareholders are not happy.

Then what should I do?

In that case, management has only one thing to do: be patient and show the result.

I am not saying shareholders are wrong. I am not saying they are wrong.
They have all the rights to be unhappy.
They have invested their savings—or maybe their hard-earned money—into the stocks, and if the stock prices go down, they definitely have all the rights to get angry.

But they need to understand the business doesn’t work like that. It’s never a one-dimensional play. There will be some hits. There will be some misses. Strategy will change over time. The company will make mistakes. There will be pain. There will be redundancy. And the company will grow again. It’s a part of the business.

As a stakeholder or shareholder, my call is whether companies are taking steps to grow their business. In the case of Sheela Foam—yes, they are taking steps to grow their business.

Are they successful in these steps?
Right now, it seems they are not very successful because net profit is down, expenses have gone up, and the integration strategy is not really working.

So, where does that leave me?
No—I will just sit tight. I will just step back and relax, because fundamentally, I think the business is right.

Valuation—I don’t understand the valuation much, but I think the business is right.
If it is available at a cheap valuation, then I will try to buy. Okay, it might happen that after buying the share, the price goes down again—but then it is totally out of my hands. So that is something that I should not be worried about.

I will be worried only when management is not doing anything—when management is sitting back, watching, and enjoying.
When management is corrupt or is having some issues with corporate governance—that’s a very red flag for me.

In the case of Sheela Foam, I don’t find anything like that.
So my decision will be: stay invested.

23 Likes

Understand duroflex is planning for IPO shortly. Once it is listed, atleast we will have one more to benchmark/compare the performance of sheela foam.

3 Likes

I don’t think if its even fair to compare Branded shirts and Branded mattresses. One is fashion statement, the other isn’t something you show off to your peers.

Can’t blame the move, but how it was funded. When every other promoter was doing QIP right, left and center, when equity was cheaper than debt and retail liquidity was hitting euphoria, they financed the acquisition using Debt.

5 Likes