Sheela Foam Sees Mattress Demand Returning If…
Employees prepare to load a bed and mattress set for a customer. Photographer: Patrick Fallon/Bloomberg

Sheela Foam Sees Mattress Demand Returning If…

Sheela Foam Ltd.’s earnings missed estimates in the quarter ended March with its mainstay mattress business remaining flat. The company, however, expects growth to return to normal if India doesn’t encounter a strong third wave of the pandemic.

Q4 Highlights

  • India business grew 37% over a year earlier.

  • Mattress business, adjusted for the sales in the bast quarter because of the national lockdown, clocked a flat performance.

  • Growth was driven by non-mattress segment, with demand for technical foam from the auto segment.

  • Operations in Australia and Spain grew 75% YoY, sustaining the momentum since Q2FY21.

  • Q4 gross margins dropped by more than 1100 basis points due to the uptick in the prices of toluene diisocyanate, a raw material for making foam.

Rahul Gautam, managing director at Sheela Foam, expects the growth in the affordable segment is remain strong in ongoing fiscal 2021-22. The organised market contributes 30% and so the runway for growth is long, Gautam told BloombergQuint’s Niraj Shah in an interview.

He also sees global operations doing well, with business in Spain gaining share from the existing 1% and possible serving the North America.

Margin Pressure

The cost of raw materials has “shot through the roof” and suppliers have not necessarily acted in the best long-term interests by ramping up prices very steeply, Gautam said. He, however, expects gross and operating margins coming back to normalcy by the third or the fourth quarter.

Growth Outlook

While the long-term is impossible to predict, Gautam is hopeful of a 15-20% growth in the medium term.

Brokerage View

ICICI Securities

  • Maintained ‘Buy’, but cut FY22 earnings estimates by 5%.

  • Estimates revenue, Ebitda, and net profit to grow at an annualised rate of 21%, 23% and 32%, respectively, over FY21-23E.

  • Direct cash flow-based target price of Rs 2,500—valuing it at 29 times the estimated earnings for FY23.

  • Key downside risks adverse movement in prices of key inputs and increase in competition from global players and India online retailers.

Edelweiss Securities

  • Maintained ‘Hold’; retained valuation multiple, which implies a target price of Rs 1,947—the stock closed at Rs 2,258 apiece on Friday.

  • Factoring the impact of second wave in India, cut the FY22 EPS estimate by 4% (unchanged for FY23.

  • Strong mattress business growth is a potential rerating upgrade trigger.

  • Key variable ahead will be the margin outlook given volatile raw material prices.

Watch the full interview here:

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