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Another weak print (and underlying)

4QFY22: A disappointing revenue performance (+4% YoY) was further exacerbated by continued weak gross margin print of 37.4% (lower by ~12 ppts from pre-Covid levels). India branded volumes declined 6% YoY but were up 4% on a three-year CAGR basis. While raw material inflation does not appear to be an incremental worry, the disappointment in EBITDA margin was led by higher opex. Growth in B2B business was relatively better. Australia business reported an uptick (+4% YoY) while Spain business continued to be weak (-6% YoY).

Our positive stance on Sheela Foam is based on the long-term opportunities which also embellish the narrative – (a) benefit from China+ strategy of buyers in the US, Europe, (b) opportunity in furniture cushioning and manufacturing (under SleepX brand), (c) sustained acceleration in India business growth (competitive edge through 5,000+ EBO network), (d) consumers realizing importance of good quality mattress and (e) focus on growing e-commerce channel. Maintain BUY.

* Weakness across particularly in India branded business: Consolidated revenue was up 4% YoY to Rs7.6bn, below our estimate. Branded mattresses segment rose by 4% YoY (volume down 6% YoY); on a 3-year CAGR basis, volume was up 4%. Performance of B2B segments in India was mixed: Foam core (-6% YoY), technical foam (+16% YoY), furniture foam (+3% YoY) and home comforts (+17% YoY). Australia business revenue was up 4% YoY, while Spain business was weak (down 6% YoY). For FY22, revenue was up 22% with 3% volume growth in the branded mattress business, while EBITDA and PAT were down 13% and 9%, respectively.

* Margins continue to be weak but base was also impacted: Gross margin was flat YoY at 37.4% but down 172bps QoQ. We note that the gross margin print is down ~12 ppts from the pre-Covid level. We note that current inflationary trends in the two RMs is mixed – TDI at Rs227/kg was up 23% YoY and 7% QoQ; Polyol at Rs178/kg was down 12-14% both on YoY and QoQ basis. EBITDA margin contracted 208bps YoY to 9.4% due to a sharp 20% increase in other expenditure (similar increase as per the previous quarter).

* Valuation and risks: We cut our earnings estimate by 26-19% for FY23-24E; modelling revenue / EBITDA / PAT CAGR of 15% / 35% / 36% over FY22-24E. Maintain BUY with a DCF-based revised target price of Rs3,900 (Rs4,000 earlier). Key downside risks are (1) adverse movement in prices of key inputs and (2) increase in competition from global players/Indian e-commerce.

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