Buy Sheela Foam Ltd For Target Rs.3410 - ICICI Direct
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Weak demand hurts topline growth…
About the stock: Sheela Foam (SFL) is the market leader in domestic mattresses industry with a value market share of ~25% in organised segment. The company’s “Sleepwell” is one of the leading brands in the domestic mattresses industry. Apart from India (contributes ~70% to topline), SFL also manufactures Polyutherene (PU)/technical foams in Australia and Spain with revenue contributions of 15% each.
* Revenue, earnings grew at CAGR of 11%, 13%, respectively, in FY18-22
* Cash surplus b/s with average three-years RoE, RoCE of 19%, 22% respectively
Q2FY23 Results: Revenue growth hurt by lower domestic demand.
* Q2 revenues were down 8% YoY to ~| 722 crore dragged by 17% drop in home care segment
* Gross margins up 471 bps YoY led by easing raw material costs. EBITDA margin declined 314 bps YoY to 10.8% dragged by higher advertisement expenditure and low operating leverage
* Lower sales and EBITDA margin pressure dragged PAT down by 30% in Q2
What should investors do? SFL’s share price has grown ~2x in the last five years (| 1557/share in November 2017 to | 2795/share in November 2022).
* We maintain our BUY rating on the stock
Target Price and Valuation: We value the stock at 50x FY24E EPS with revised target price of | 3410/share.
Key triggers for future price performance:
* Modern mattresses industry is pegged at ~| 17,500 crore. It is likely to grow at 12% CAGR in FY22-26E. Organised players are likely to gain market share through new product launches and strong balance sheet condition
* The company envisages a capex of | 350 crore over the next two years to increase its manufacturing capacity by 23% in India & overseas
* Under China +1 strategy of multinational companies, SFL is exploring various export opportunities to US markets through its domestic and Spanish subsidiary ‘Interplasp’
* SFL has received approval to supply foam to Indian Railways for Vande Bharat trains. This, coupled with a revival in the auto business, will help drive the company’s technical foam business, going forward
Alternate Stock Idea: We like Asian Paints (APL) in our coverage universe.
* APL is India’s largest decorative paint company. The company derives ~98% revenue from the paints business. Robust b/s with RoCE, RoE of 30%, 25%, respectively. We have BUY rating on stock with a TP of | 3685/share
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