| Sheela Foam Limited | ||||||
| Long-term rating upgraded to ‘CRISIL AA-/Stable’; short-term rating reaffirmed | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its rating on the long-term bank facilities of Sheela Foam Limited (SFL; part of the SFL group) to ‘CRISIL AA-/Stable’ from ‘CRISIL A+/Positive’ and reaffirmed the ‘CRISIL A1+’ rating on the short-term bank facility.
The upgrade reflects the improvement in the business risk profile of SFL with increasing market share and healthy operating efficiency. The financial risk profile remains robust.
The consolidated revenue increased 12% on-year in fiscal 2021 despite the impact of Covid-19 during most of the year. The operating margin remained strong at 15%, despite raw material price upticks, supported by cost cutting measures and ability to pass on the input price increases. Reputed brand and a shift in the market from the unorganised to the organised sector have helped SFL increase its share in the domestic market over the past few years. Healthy geographical diversification supports the business with the company performing well internationally in fiscal 2021. Demand and business risk profile should remain robust over the medium term backed by gradual improvement in economic activity and customer sentiment.
The financial risk profile is strong supported by negligible debt, ample liquidity and healthy cash accrual. The company plans capital expenditure (capex) of Rs 350 crore over the next two years to expand production capacity across geographies. The capex will be funded through external borrowings and cash accrual. However, the financial risk profile is expected to remain robust.
The ratings continue to reflect the SFL group’s established market position, healthy revenue diversity and strong financial risk profile. These strengths are partially offset by susceptibility to volatile input prices and intense competition across product categories. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of SFL and its subsidiaries as all the entities, collectively referred to as the SFL group, are in the same business and SFL has managerial control over all the entities.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
SFL is the largest producer of flexible slab stock PU foam and mattresses in India, with share of 25-30% in the organised market. Its brand, Sleepwell, is well established. Its wide range of products include mattresses, pillows, cushioning material and foams. A pan-India distribution network helps cater to both retail and business customers. Presence in the economy segment through the Feather Foam and Starlite brands helps consolidate the market position. SFL’s market share has improved in recent years as a result of a shift in the market from the unorganised to the organised sector, supported by increasing consumer awareness about the health benefits of good quality mattresses.
Although mattresses continue to contribute substantially to revenue, the SFL group has a significant presence in retail and industrial foam products as well. Furthermore, presence in Australia through Joyce Foam Pty Ltd (JFPL; the largest foam player in Australia) and across the European Union through Interplasp SL (Interplasp) diversifies the group’s geographical presence. The Australian and Spanish businesses accounted for 31% of revenue and 26% of net profit in fiscal 2021. Healthy geographical diversity will continue to benefit the operations and protect from regional disruptions.
The financial risk profile is underpinned by strong debt protection metrics and healthy capital structure. Sustained profitability has ensured healthy gearing of 0.26 time as on September 30, 2021. Prudent funding of capex and acquisition kept gearing below 1 time in the six fiscals through 2015. The financial metrics should remain strong over the medium term, supported by sustained accrual and limited debt. Any large, debt-funded capex or acquisition, which may adversely affect the capital structure and debt protection metrics, will be key rating sensitivity factors.
Weaknesses:
Raw material cost forms a significant portion of the total manufacturing cost (about 70%). Polyol and toluene diisocyanate (TDI), the major raw materials, are manufactured from by-products of crude oil and their prices are linked to the price of crude oil as well as to demand-supply conditions. There has been significant volatility in the prices of both polyol and TDI in the past few years. Despite the sharp upswing in raw material prices since September 2020, SFL has maintained a healthy operating margin supported by cost-cutting initiatives and timely price hikes. Raw material prices started decreasing from the second quarter of fiscal 2022, and hence profitability is expected to improve over the medium term.
While the group was able to pass on raw material price increases to consumers in the past because of the premium position of its brand, continued ability to do so and maintain healthy profitability will be key monitorables.
The SFL group faces intense competition from domestic players such as Kurlon Enterprises Ltd, Duroflex Pvt Ltd and Peps Industries Pvt Ltd, as well as from unorganised players, which form 60-65% of the market in India. Ability to maintain market share across a range of products in an intensely competitive market will remain a rating sensitivity factor. |
Liquidity: Strong Liquidity is supported by cash balance and liquid investment of around Rs 125 crore as on September 30, 2021. Bank limit of Rs 132 crore was largely unutilised over the 12 months through September 30, 2021. Annual cash accrual of Rs 300-400 crore over the medium term should amply cover capex, incremental working capital requirement and debt obligation. |
Outlook: Stable CRISIL Ratings believes the SFL group's business risk profile will remain supported by its established market position, geographical diversification and healthy operating efficiency. The financial risk profile will likely remain strong in the absence of any large, debt-funded capex or investment. |
Rating Sensitivity factors Upward factors:
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About the Company SFL, promoted by the late Ms Sheela Gautam, commenced commercial production of PU foam in 1971 at its factory in Sahibabad, Uttar Pradesh. It has 10 PU foam-manufacturing units, with combined capacity of 123,000 tonne per annum (TPA) across India. The company sells foam, coir and spring mattresses under the Sleepwell brand and non-mattress foam products under the Feather Foam brand.
JFPL, acquired by SFL in 2005, is the largest player in the PU foam business in Australia. It manufactures polyester, and reticulated, viscoelastic and memory foam, which it sells to furniture and automobile seat manufacturers, and to the bedding industry.
In December 2016, SFL completed its initial public offering (IPO) wherein promoters diluted 14.32% stake in the company. The shares on sale were offloaded by Polyflex Marketing Ltd, a company held by the promoters. The promoters now hold 73%.
In October 2019, SFL acquired Interplasp. Established in 1987, Interplasp specialises in the manufacture of flexible PU foams and mainly supplies to mattress and furniture manufacturers in Spain. It also markets to mattress manufacturers in Portugal and foam convertors in Morocco. It has a single facility with a capacity of 22,000 TPA.
For the six months ended September 30, 2021, SFL had a net profit of Rs 102 crore and operating income of Rs 1,337 crore against a net profit of Rs 82 crore and revenue of Rs 877 crore for the corresponding period of the previous fiscal. |
Key Financial Indicators (Consolidated; CRISIL Ratings-adjusted figures)
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Fully fungible with non-fund-based facilities |
Annexure - List of Entities Consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||
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Criteria Details
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