Sheela Foam Ltd — Comfortable Sleep ?

Impressive Promoter with a possible future monopoly in the Sleep Market !

Why I’m Looking at Sheela Foam

I’ve spent the last few months sleeping (literally) on this idea – pun intended. Sheela Foam’s “Sleepwell” mattress has been part of my household for years, so I started digging into the business behind that familiar red logo. What I found is a company that dominates India’s organised mattress market but has temporarily lost valuation from ~20K Cr mcap of its peak to ~6.5K Cr. Today (25th April), the shares sit at ₹ 663 – because margins have sagged during a flurry of acquisitions. Can it be a peaceful bet at the current price with the tailwinds of Premiumisations and Urbanisation? Post Kurlon and Furlenco acquisitions, can SLF become a monopoly in the organised premium mattresses and furniture?

Let us find out.

Business Overview

Industry Overview

The mattress market in India in 2024 is of USD 2.13 Bn, slated to grow by 8-9% to become 3-3.5 Bn by 2030. 30% of this market is Modern Mattresses (Coir/Foam) and 70% is Cotton. out of the 30% of the modern market, 20% is unorganised and 10% organised, where SleepWell, Kurlon, Duroflex and others play. So 10% of USD 2.13 Bn, which is ~20K Cr may be the full playground for SFL topline in the future.

As you can see, a large-scale brand like SleepWell or Kurlon can thrive on Premiumisation and the Unorganised to Organised shift (Coir/Cotton to Foam). Raw material is a commodity; consumers now prefer branded mattresses when they move into new cities/homes (Urbanisation) - SleepWell, an established brand over the last 2+ decades, can scale, especially after buying out biggest and oldest competitor - Kurlon.

Btw, what does it take to make and sell a mattress?

• Customer risk is low (<1 % revenue from any single dealer);

• Supplier risk is moderate (TDI is a commodity chemical, but diversified sourcing).

What do consumers think about SleepWell? - “All is well and peaceful”

Source:- Social Media Sample 5,000 reviews – Amazon, Flipkart, Twitter, Reddit. Credits - ChatGPT O3

Before we return to business, one final check on “whether being a branded mattress player is a profitable franchise or not ?”

For SleepWell brands -

• Taran and Aaram figures are not as per management; they are tentative*.

• An important thing to notice is that they have captured all the price points

  For Other Players

SFL has an advantage of scale and profitable business with ~30% of organised market share (with Duroflex behind with 16-17%); the rest of the brands are D2C/ E-Commerce only and will take time or may not reach SFL's heights.

Sources for Peers Financials = Duroflex. Wakefit. Sleep Company

Let us come back to SFL again..

Before moving to financials, I would run the forensic screen, and not get lured!

Everything looks great to me with a potential watch on Debt addition in future.

Consolidated Financials

The financials are consistent, minus the EBIDTA% drop in the last two years, on account of the acquisition of Kurlon, its relatively lower gross margin yielding brand, and the higher advertising and promotions costs. The margin and revenue growth variability is also linked to their B2B (Technical Foam) and B2C (Branded Mattress) businesses. Let us understand how it stacks up in the consolidation in FY24-

Looking at the above two tables, we can build 200 Cr of NOPAT with a maintenance capex of ~80 Cr, which gives us 120 Cr of Normalised Earnings. At a ~6500 Cr Mcap, SFL is trading at 50+ times of normalised earnings. If we use Gordon`s growth formula for valuation

for ~120 Cr FCF, which will grow at 10%, the implied mcap would be ~6600 Cr at a 12% discount rate. So Mr. Market is valuing it right!

Since the upside is valued properly by Mr. Market, let us see if we have any margin of safety on the downside through “Replacement Cost” analysis

So what would it take for a new player to establish a business like SFL ? ~3300 Cr!

SFL is trading at ~2X the Replacement Cost, so no margin of safety here as well.

To conclude, by using my WHY framework

All the boxes are ticked except the valuations. Putting this on Wait and Watch as of now! I am going to be a bit conservative to also see how the next 2-3 quarters play out with Kurlon and Furlenco synergy, and then take a call. If there are any early signs of better earning power/ monopolistic behaviour playing out in the niche segment of premium buyer, then it will be a possible long-term compounder!

P.S.: As of today, SFL has gone up by ~14% from the day I started writing this post. Mostly because the Q4FY25 results showed some green shoots on the Kurlon acquisition synergy, coming in of ~120 Cr of annual savings. Also, Furlenco turned profitable for the first time.

Best part was that management guided for 100-150 Cr of CFO and 75 Cr of maintenance capex in Q4FY25 concall, which was also my assumption in the thesis that I started writing before this concall. Validation mil gaya :)

DISCLAIMER: I AM NOT A SEBI-REGISTERED ADVISOR OR A FINANCIAL ADVISER. ALL THE VIEWS ARE FOR EDUCATIONAL PURPOSES. I MAY OR MAY NOT HAVE INVESTED IN THESE STOCKS. PLEASE DO YOUR DUE DILIGENCE YOURSELF. THIS IS NOT A STOCK RECOMMENDATION.