Sheela Foam - Fast recovery, strong long-term growth tailwinds - ICICI Securities

SFL's 2Q LFL revenue grew 6%, a significant beat. We like (1) recovery in branded mattress (+8%), furniture cushioning (+10%) and foam cores (+15%) in India, (2) Australia subsidiary grew 20%, the higher since IPO (likely driven by Indigenization, in our view), (3) long-term growth opportunities which are DCF-accretive and importantly embellish the narrative as well - (a) grow exports from Spain (likely gaining from China+ strategy of buyers in US, Europe), (b) opportunity in furniture cushioning and manufacturing (under SleepX brand), (c) India business growth acceleration (competitive edge through EBO network) and consumers realizing importance of good quality mattress. Price hikes in branded mattress and effective cost controls are likely to mitigate pressure from rising input costs. 34% underperformance versus Nifty in past 6 months makes risk- reward favourable; upgrade to BUY (from ADD).

- Comparable revenue grew 6%: Consolidated revenue / EBITDA / PAT grew by 22% / 51% / 19%. Adjusting for Spain acquisition, revenue / EBITDA grew by 6% / 23% while PAT declined by 3% (due to impact of lower tax rate in the base). This performance was driven by branded mattresses (revenue grew 8%, volume grew 13%), furniture cushioning (+10%), foam core (+15%). However, technical foam and home comfort declined 8% and 41%. Australia business revenue grew by 20%. Revenue from recently acquired Spain business was Rs 820mn (+37% sequentially).

- Margin expansion despite input cost inflation: Comparable gross margin declined 120bps to 48.9% due to input cost headwinds (TDI at Rs 140 / kg was up 5% YoY). However, EBITDA margin expanded 330bps YoY to 17.5% helped by lower employee costs (-40 bps) and other expenses (-420bps). Comparable EBITDA margin (excluding Spain business) expanded 220bps to 16.4% (Spain business is at 24% EBITDA margin). Gross margins are expected to be under pressure due to inflationary input cost trends with TDI and Polyol at Rs230/kg currently as compared to Rs140/kg and Rs119/kg of Q2FY21.

- Valuation and risks: We increase our FY22E estimates by 13%; modelling revenue / EBITDA / PAT CAGR of 18% / 20% / 20% over FY20-22E. Upgrade to BUY (from Add) with a DCF-based revised target price of Rs1,700 (was 1,500). At our target price, the stock will trade at 25x P/E multiple Sep-22E. Key downside risks are (1) adverse movement in prices of key inputs - TDI and polyol together contribute c.73% to total input costs and (2) increase in competitive intensity from global players or Indian e-commerce.

Shares of Sheela Foam Ltd was last trading in BSE at Rs.1302.8 as compared to the previous close of Rs. 1310. The total number of shares traded during the day was 3617 in over 573 trades.

The stock hit an intraday high of Rs. 1377.7 and intraday low of 1281.25. The net turnover during the day was Rs. 4812710.

Source : Equity Bulls

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