by Suhani Adilabadkar

Sheela Foam, makers of the popular ‘Sleepwell’ brand, made a stellar stock market debut, listing at 18% premium in December 2016. One of the major players in the mattress and foam products industry, Sheela Foam has experience of five decades, strong brand recall, a wide product portfolio and presence in India and Australia. The company exports to 25 countries with its manufacturing prowess spread across 11 manufacturing units in India and 5 in Australia. It has a wide distribution network of more than 110 exclusive distributors, more than 4,900 multi brand outlets and more than 4,193 exclusive retail dealers. Though its stock has fallen from 1,700 levels in 2017, Sheela Foam is among the top three players in India, and peerless in the listed universe, gaining 32% since its inception on Indian stock markets.

Quick Takes:

• Sheela Foam was incorporated in 1971 and launched its premium brand, ‘Sleepwell’ brand in 1994.

• The company reported a 7% deceleration in revenues owing to auto slowdown and lower demand for discretionary products.

• Sheela Foam has acquired spanish company Interplast for 42 mn euros, to bring the concept of ‘bed in a box’ delivery across India

• The company has converted its Multi-Brand Outlets to Exclusive Brand Outlets taking the total EBO strength to more than 3,000.  

A smaller revenue cushion in the September Quarter

Sheela Foam reported a 7% deceleration in revenues owing to auto slowdown and lower demand for discretionary products. Revenues for the quarter stood at Rs. 497 crore against Rs. 535 crore in Q2FY19. Speaking in this regard, Mr Rahul Gautam, MD, Sheela Foam Ltd said, “I know that most of our final products are discretionary in nature and therefore under pressure not to be purchased on the first instance, more so with the liquidity crunch which everybody is experiencing in the market”.

The company reported a strong profit performance aided by lower cost of raw materials (down 18% YoY), leading to operating profit rising 1.7 times YoY at Rs. 70.5 crore compared to Rs. 42.4 crore corresponding quarter, the previous year. Operating profit margin also moved north from 7.9% in Q2FY19 to 14.2% in the September quarter FY20 rising 626 bps YoY. Net Profit or PAT was supported by a lower taxation rate and was reported at Rs. 58.7 crore in September quarter FY20 compared to Rs. 24.4 crore same period previous year. 

Growth springs intact, management says

The Indian mattress industry is roughly Rs. 100 bn constituting three main variations, polyurethane (PU) foam, rubberized coir and spring mattresses. Though rising income levels, expanding urbanization and high awareness levels of health consciousness is leading to strong shift in favour of organized players, the unorganized segment still rules with 60% share of Indian mattress industry. PU foam mattresses constitute 50% of the total mattress industry followed by coir and spring mattresses constituting 30% and 20% share respectively. The dominant PU foam segment is bifurcated into slab stock foam (70% of PU foam segment) utilized in mattress and furniture and moulded foam (30%) mostly used in automotive industry. Sheela Foam, leading manufacturer of mattresses and PU Foam in India was incorporated in 1971 and introduced the ‘Feather foam’ brand in 1972, with operations in Sahibabad, UP. 

Then came the launch of its premium brand, ‘Sleepwell’ brand in 1994, marking its journey as a major player in the sleep solutions industry in India. 

Sheela Foam’s product basket is broadly segmented into home comfort products and technical foam products. Home comfort products constitutes mattresses, furniture cushioning material, pillows, bolsters and cushions etc. while technical foam caters to auto sector with end use in seat covers, sound absorption systems, sun visors, headliners, door trims, lamination systems and with also wide and varied applications in sportswear, innerwear, swimwear, comfort accessories, theatres, auditoriums, indoor stadiums, broadcasting rooms and recording studios. Mattresses account for about 42% of total revenues, followed by technical foam which caters primarily to the auto sector with about 22% share, foam core and furniture foam for  16% and 15% respectively in September quarter FY20.  

Sheela Foam has been reporting flattish revenue growth in the March and June quarters and entered negative territory this quarter by reporting a 7% decline in sales. The volumes are holding up, with for instance, mattresses sales volume increasing by 22,000, and reported at 4.5 lakhs against 4.3 lakhs corresponding quarter the previous year. However the operating revenues have not been moving north for the past three quarters. The reason for such ambiguity lies in its product portfolio which might be reporting high growth in periods of boom but is currently struggling on a flat pitch. Thus, with low raw material prices, especially TDI prices which have corrected drastically over past 12 months from Rs. 300 levels to the current Rs. 133 per kg, operating profit and PAT are on a roll, but revenues are growing at a lower range.

About 60% of Sheela Foam’s product portfolio is non mattress business and is thus impacted by the general slowdown and the auto sector not being able to kick start its growth engine. In addition to that, the non-mattress segment has been passing on lower raw material cost benefits to its B2B customers impacting realizations. In the B2C segment, mainly mattress business, ‘Sleepwell’ brand has been facing intense competition from online players and the organized sector due to low product differentiation and thus major thrust to growth is provided mainly by economy brands such as ‘Featherfoam’ and ‘Starlite’ which are priced at a lower range, targeting semi urban and rural areas. Thus, even with higher volumes reported by the company, average selling price has reduced leading to lower revenues.  

Despite high competitive intensity, management has not bowed down and reduced prices. In this regard, Mr Rahul Gautam said, “We took a price increase in October, 1st of October 7%, that was last year and this year we have taken another price increase of 3% in the month of August”. The management is pretty optimistic in the near future and is expecting better performance in the upcoming H2FY20 mainly driven by festive season growth. Sheela Foam is also implementing its EBO (exclusive brand outlets) conversion strategy for ‘Sleepwell’ products, where the company has converted its MBOs (multi-brand outlets) to EBOs taking the total EBO strength to more than 3,000, which will enhance brand salience, better product display and sales and promotion. 

Lastly, to augment growth, apart from being market leader in India and boasting market share of 36-37% in the highly penetrated Australian market, Sheela Foam has acquired a spanish company, Interplast. Interplast has just 1% market share indicating strong growth opportunity to expand in Europe, the largest foam market in the world. Commenting on the Spanish acquisition, Mr Gautam said, “The bed in the box, which they do extremely well for supplies to the entire Europe is something that we would be picking up straight away and bringing it to India to supply to distant places, which are difficult to reach otherwise”. 

Sheela Foam is definitely losing sleep over intense competition from the unorganized sector and internet startups such as Wakefit, Sleepy Head, Sleep Cat offering high warranty and free trial periods. We’ll get to see if a regular corporation can overcome these fast-moving upstarts.