ValuePickr Forum

Sheela Foams - An exciting branded play

I have applied with full force in the recently closed IPO of Sheela Foam the makers of Sleepwell brand of mattresses and industrail foams due to following reasons

  1. Highly Ethical promoters enjoying stellar reputation.All their vendors get payment through RTGS on the promised date without any follow up.

  2. V well educated promoters from IIT ,RPI & Purdue University(2nd Gen) with superb execution track record over last 40-45 years.

  3. Huge opp size .Its Indias leading brand in a sector where unorganized sector still has 70% market share implying huge opp for organized players thanks to Demonetization & proposed GST.Organized players are already growing at the rate of 11-13% vs vs 6-8% and taking market share away from unorgnized players

  4. Negative working capital

  5. Reasonable PE of 25-27 for FY 17 for almost zero debt(DE-0.2) branded FMCG play

  6. Asset turnover of 5.2 & Receivable days of 28 days

  7. Invested capital has shrunk by 33% in 4 years while sales have gone up by 50%

  8. Ronw has improved form 14.6% to 31 & EPS to 22 from 5.7 in last 3-4 years

  9. IPO came at approx 3500 Cr mktcap vs proposed 4000 Cr Mkt thanks to DeMo fears

  10. Australian subsidiary Joyce foams give sits tech edge in making better quality mattresses

  11. Co has started taking more frequent price hikes & discounts to channels gradually being reduced.Mix also improving every year.

  12. Existing block can sustain 30% higher sales every year

  13. Also operates in B2B business where again opp size is huge like in sectors like Auto seats,Bra cups,Insulation etc

  14. High quality anchor investors like GS,MS,Premji Investment,Fidelity,Kuwait Govt and a host of MFs like HDFC Icici Sundaram,Kotak,IDFC

  15. QIB portion oversubscribed 16 times & firm allotment in retail category

  16. Main competitors Kurlon performing poorly & is on block as per grapewine

  17. Risks remain delay in GST implementation,impact of Demonetization in short term,RM volatality.

Enclosed Angel broking &HDFC sec report covers main point about Sheela Foams nicely.

http://www.hdfcsec.com/Share-Market-Research/Research-Details/IPOReports/3020283

http://www.angelbroking.com/research/sheela-foam-limited-research-report-25-11-2016-78659

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Donā€™r know much about the company, but a mattress is definitely not a ā€˜fast moving consumer goodā€™. See Wikipediaā€™s definition of FMCG. So you might want to correct the topic name and your post.

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Looks interestingā€¦valuations also look decentā€¦one question ā€¦which one is betterā€¦foam based mattress or cotton based mattressā€¦?? Which gives more comfort and which one is in more demand??

Good Company with ethical management and market leader in there segment but due to demonetization there will be less sales in coming 2Quaters so we can buy later from the market instead of subscribing it now. With less No. of organized players goods returns can be generated in long term.

The EBITDA margins have consistently increased from 6 odd % to 13% in H1,17. There are two reasons for this improvement. One is the change in product mix and the other is lower crude prices - its main raw material. Hence, these are not sustainable margins. Taking sustainable margins to be around 8%, company would have made 67 cr (approx) and not 105 cr. Based on that, 4.8 cr (no. of shares) would yield a sustainable EPS of 14rs. The stock is offered at a PE of 52 (FY 16 earnings)!!:scream:

Even if one considers that the sustainable margins at EBITDA level are 10%, one gets 18.28 as FY 16 EPS. The stock is offered at a PE of 40 (FY 16 earnings).

Giving a PE of 40+ for a business which is partly B2C and partly B2B?? 65% of its total sales comes from B2C channel.

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I think, you being a senior member of the forum, need to put up this investment thesis well before the end of the IPO. By putting up this thread after the IPO does not auger well with the Valuepickr ethos.

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@manish962 Donā€™t we suggest that people use 30/5 rule for being on the right side of SEBI regulations? If one has to follow that, then putting up a post for an IPO when one is applying for it becomes tricky. maybe something worth mulling over.

Very valid point. Please put up a thread on the SEBI regulations and how it impacts the posting on public forum so that all the members can comply with.

Manish,
Could you pls elaborate why is it against the VP ethos? Will help understand better.
Thanks
RR

The VP forum ethos are sharing knowledge, educating others, bring them on the same page, putting up collaborative efforts to research stocks. Here creating thread after the closure of IPO does not leave room for others to apply for it. It just simply looks like a publicity.

Point taken.

But quality IPOs have given excellent returns in last few years even bought on listing.

Some recent examples being Advance Enzymes,Dr Lal,Alkem,Thyrocare,Manapasand Beverages,PNC Infratech,Mahanagar Gas,Ujjivan,Equitas,Infibeam,NH,SH Kelkar,Syngene,Shri Pushkar ,List is quite long.

Shemaroo our current favorite was an almost firm allotment & was available much below 170 the IPO price on listing & subsequent days.HDFC MF remained a v big buyer during this period, They had bought another huge multibagger Solar Industries in a similar manner around IPO price of 140 on listing few years back. The price of Solar ind touched 4000 and is now aprrox 3700-3800 taking split into accounts.Motilal Oswal has been buying Alkem NH Dr Lal Thyrocare on listing.

Imp point is sharing the investment thesis IMHO and a separate thread being initiated for above quality cos well in time irrespective of date of IPO closure.Further due to new SEBI allotment norms now only single lot applicants are first given preference in allotment so not many people are interested in having a Rs 15000/- allotment. Important point again is to buy as per your appetite on listing.Allocation too is equally important like stock picking

SFL might very well list at a small premium or at par in views of prevailing sentiments.Infact QIB response on last day was v surprising otherwise most of research reports & analyst were quite negative on it due to perceived fears of DeMo,Crude hardening

Laurus labs is another IPO worth watching which is closing on 8 Dec 2016.

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Vivek,
You have put up a valid argument in your favour. But you could have put up the thread well before the closure of the IPO to bring everyone on the same page that would have been a much responsible step.

Lot of people still have apprehension on IPOs statsing that It means Its Probabaly Overpriced and seller having more info then buyer etc etc.

Further piffling allotment of 15 K further reduces the interest.

Due to mixed reviews I generally decide on applying in IPOs after 4 PM on closing day after seeing the response of QIB & HNI response using physical forms.

This has been my RamBaan which has made IPO investing a rewarding experience for me.

Most important point is to initiate the thread IMHO and we have been missing so many good opp as not many quality threads are being initiated nowadays of quality cos due to too many objections.

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Just by coincidence, I happen to have a foam mattress, a spring mattress and a cotton mattress and I have been using all these for years so here is my take on these mattresses

  1. Cotton Mattress - Traditional natural mattress that was the only choice until a few years ago. Low initial cost but high maintenance cost as the mattress will lose its softness over time and the cotton needs to spun again to regain softness. There will be some loss of cotton during the spinning process so additional cotton will be added every time. A thick cotton mattress will also get compacted unevenly thinning right at the center where one would sleep on and thus over time you will feel like sleeping in a pothole.
    Cotton mattress breaths and absorbs sweat and keeps the skin dry thus sleeping on a cotton mattress will more comfortable even with a cotton sleepwear and thick cotton sheets. However, If your bodily fluids gets absorbed in the mattress, it becomes unhygienic over time.

  2. Foam mattress - Made from a mixture of petrochemical based foams and natural latex foams. Key specification is the density of the foam. Two mattresses with same thickness can have vastly different weights depending on density of the foam. Mattress foam needs to be of a certain minimum density to be comfortable with denser mattress to be more comfortable. This is a general observation and personal choice. Denser mattresses are heavy and expensive.
    Dense mattresses last much longer than cotton mattresses and does not lose their softness or form. Periodically rotating and flipping helps with even wear. I have a couple that are 10 year old and still feels like new. My preference is for dense and heavy mattress. I have to vacuum these mattresses periodically to suck dust that might gets absorbed in it. Not sure if it is really needed or helps but I do it anyway.

  3. Memory Foam - A special kind of form that softens and conforms to the sleeper in response to body temperature and body weight. This kind of foam molds to the body creating a depression the sleeper must roll out of when changing sleep positions. For some sleepers this is uncomfortable while for others this molding action relives joint pains. Memory foam prices have been dropping since then but still quite expensive compared to regular foam or spring mattress. In developed world most of the foam mattresses are being replaced by memory foam mattresses.

  4. Spring mattress - Consists of interconnected springs between layers upholstery. Steel springs support the body weight while upholstery provide comfort. IMO, these mattresses are comfortable and durable. I have one that is 12 years old and still feels like a new. This mattress needs vacuuming and periodic rotating and flipping. This kind of mattress distributes body weight evenly and feels more comfortable than a foam or a cotton mattress where you can experience more pressure points. But it also transfers motion. If two people are sleeping together, one will feel when other is getting on or getting off the mattress. This may be disturbing for some.

Foam and spring mattress can be difficult to clean if your bodily fluids gets absorbed in them. A good layer of thick cotton sheets is needed to prevent that and also make sleeping more comfortable if you sleeping in hot and humid conditions without and AC.

both form and spring mattress need to be supported on a wooden box or a set or slats. Designed properly, you can support your mattress correctly and still use the space under the bed for storage. An incorrectly supported mattress will not last long. In west, manufacturers offer 25 year to lifelong warranty on spring mattresses because these are extremely durable when used properly.

Overall, my preference

  1. Spring Mattress
  2. Foam Mattress
  3. Cotton Mattress.

I prefer spring and foam over cotton mainly because of durability, comfort and maintenance costs. However, they do cost more than cotton upfront but on a total cost of ownership basis, they will cost less.

I think foam and spring mattresses are comfortable in a climate controlled room and cotton is more comfortable in natural conditions mainly because it can keep your skin dry. May be this is just my observation since I live in a hot humid city like Mumbai. For this one reason, I think foam and spring mattresses will not become mass product for few more years as cost of running AC may be too much for the masses. Affluent middle class will switch to foam.

Another reason is only dense foam mattresses are comfortable but foam is commodity so Sleepwell may have trouble selling expensive dense mattresses in a market flooded with cheap light mattresses. This is similar to Greenply selling quality plywood in a market flooded with cheap plywood.

Yet another reason is that foam and sprint mattresses need to supported properly to be durable and comfortable. With Indians using underbed area for storage, I think mattress will be supported on a hard platform. While this will help with durability, it will be less comfortable.

foam and spring mattresses are comfortable when they are thick. A comfortable foam mattress is twice as thick as cotton and a comfortable spring mattress is four times thicker than cotton. In space starved Indian rooms thatā€™s a disadvantage as you cannot stack these mattresses on top of each other like cotton mattresses (unless you want a bed like the one in Princess and the Pea).

Overall, I think foam and spring mattresses will have slow and steady start in India.

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Sheela listing tomorrow.Only buyers in gmp @40 rs.Lets see how it lists

Superb listing of Sheela Foam. Just now crossed 1000 mark!! (+37% over issue price)

I am at least not aware of a situation where there have been no Sellers on Listing date; it happened today with Sheela Foam - was frozen at 1032/- after 10.30 am with only buyers and no sellers (there is no UC on listing date). Looks like short sellers have been trapped with no opportunity to cover up. Next week will be interesting for this stock. Discl: Not invested!

Seems SBI MF alone has bought 11 lacs shares at average rate of 980 today. The total issue size was only 510 Cr including anchor investors.The delivery % age was also very high at 40% of total volumes . Seems Some more smart investor have bought it today when some qty was available in morning.

I intend to hold it for medium to long term as its a steady 20-25% compounding story Herron IMHO.

What do you think are the triggers for 20-25% compounding?

Had a look at the financials of last 4 years. The expansion in earnings is more due to improvement in gross margins and not due to a substantial growth in revenue. FY 16 revenues of Rs 1,550 crore and EPS of Rs 32 v/s FY 15 revenues Rs 1,416 crore and EPS of Rs 13. A 10% increase in revenue and a 146% increase in net profit.

Even at these levels the operating profit margin is ~13% and RoE is ~16%, decent but not very impressive.

More importantly - are these margins sustainable? Can the top line grow at more than 20% YoY?

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Reasons already given . My formula of ethical promoter good opp size n high ROCE working beautifully here n expected to sustain IMHO