Detailed Rationale

Crisil Ratings has revised its outlook on the long-term bank facilities of Sheela Foam Ltd (SFL) to ‘Stable’ from ‘Positive’ while reaffirming the rating at ‘Crisil AA-’. The short-term rating has been reaffirmed at ‘Crisil A1+’.

 

The revision in outlook reflects deferment in achieving certain synergy benefits expected from the acquisition of Kurlon Enterprise Ltd (KEL) resulting in lower-than-expected revenue scale up. While the gross margin has improved significantly by 400bps in the first six months of fiscal 2025 demonstrating synergy benefits, the operating margins (EBITDA) remain subdued owing to fixed costs absorption of KEL and increased marketing cost due to management’s focus on brand building for both Sleepwell & Kurlon brands. With scale of revenues picking up and synergy benefits flowing in gradually over the next 12-18 months, operating margins are also expected to improve materially from current levels.

 

Revenue has grown to Rs 1,622 crore in the first half of fiscal 2025, compared to Rs 1,270 crore in the first half of fiscal 2024, driven by consolidation of KEL’s revenue and overall volume growth. However, the ramp-up in the first half of fiscal 2025 was subdued than expected, owing to fall in realizations and realignment of distribution channels leading to a temporary lag of sales.

 

Operating margin reduced to 10.3% in fiscal 2024 (from 11.1% in fiscal 2023) and further to 8.0% in the first half of fiscal 2025, as lower-margin business of KEL was consolidated post October 2023. While the gross margin has improved significantly by around 400 bps in the first six months of fiscal 2025 demonstrating synergy benefits, fixed cost absorption has been sub-optimal owing to lower-than-expected sales and fixed costs absorption of KEL. With integration of both entities, revenue and operating margin are likely to improve over the next 12-18 months. A faster than expected improvement in revenue and margin shall be key rating driver.

 

The financial risk profile should remain comfortable marked by a strong capital structure and healthy liquidity. Although, debt protection metrics could moderate temporarily due to high level of debt servicing requirement and lower-than-expected cash accrual, same is expected to improve post fiscal 2026, with reduction in debt and full realisation of synergy benefits, thereby improving profitability.

 

The ratings continue to be driven by the established market position of SFL and its diversified geographic presence and revenue profile and the strong financial risk profile of the SFL group. The strengths are partially offset by susceptibility to volatility in input prices, competition from the unorganised segment and unexpected challenges in integration of KEL.

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:

• Established market position in the modern mattress business: SFL is the largest producer of flexible slab stock polyutherane (PU) foam and mattresses in India. Post-acquisition of KEL, the second-largest player in the mattress segment, SFL has a combined share of 29% in the modern mattress market, along with its well-established brands, Sleepwell and Kurlon. The product range includes mattresses, pillows, cushioning material, and foams. A pan-India distribution network facilitates access to retail and industrial customers. Gradual shift from the unorganised to organised sector, backed by growing consumer awareness about health benefits of using quality mattresses, has helped the company gain market share.

 

• Healthy revenue diversity: The revenue profile is diversified in terms of product segments and geographical reach. Though mattresses continue to be a dominant revenue contributor, the SFL group also has significant presence in retail and industrial foam products. Apart from furniture cushioning, the group sells flexible slab stock PU foam to manufacturers of automotive seats, footwear and clothing. SFL has also made a strategic investment of 45.5% in the House of Keiraya – Furlenco in the last two years, which primarily rents and also sells furniture; an allied business to SFL.

 

Furthermore, the group is present in Australia, through Joyce Foam Pty Ltd (JFPL), the largest local player (40% market share) in the foam business, and the European Union through Interplasp, which operates from Spain.

 

The Australian and Spanish businesses accounted for 25% of revenue and around 5% of net profit in fiscal 2024. Healthy geographical diversity in revenue shall benefit operations over the medium term and protect the company from any regional disruptions.

 

SFL has a strong presence in northern and western India, whereas KEL has major presence in eastern and southern India. Acquisition of KEL will thus, help SFL widen its overall geographic reach.

 

• Comfortable financial risk profile: The financial risk profile is marked by a healthy capital structure and adequate liquidity. Company has a networth of Rs.2760 crore as on March 31, 2024 as against total debt of Rs. 1,281 crore resulting in a healthy gearing of 0.5 times. Further, company had unencumbered cash and cash equivalents of Rs.579 crore as on March 31, 2024 resulting in a strong liquidity profile. Working capital limits of Rs. 350 crore remained utilized at an average of ~35% over the past 12 months providing additional cushion. The debt protection metrics are expected to moderate temporarily owing to dip in operational performance. Interest overage which stood at ~5.6 times in fiscal 2024 is expected to moderate to ~3-3.5 times in fiscal 2025 but improve to over 5.5 times by fiscal 2026. Similarly Net cash accruals to total debt (NCATD) which stood at 19.8% in fiscal 2024 is expected to moderate to ~15% in fiscal 2025 but improve sharply to over ~30% by fiscal 2026 owing to improvement in operational performance and progressive debt repayment. Scheduled repayments of Rs. 119 crores in fiscal 2025 and ~Rs. 450 crore per annum thereafter at consolidated level is expected to be funded from internal accruals and strong liquidity available.

 

Weaknesses:

• Susceptibility to volatility in input prices: Raw material cost forms a significant portion of overall manufacturing cost (60-65%). The key raw materials, polyol and toluene diisocyanate (TDI), are manufactured from by-products of crude oil, and their prices are linked to crude oil prices and prevailing demand-supply conditions. Prices have fluctuated sharply in the past few years. However, the company managed to achieve higher gross margin through bulk discounts on purchases, improvement in yields, material substitution and use of innovative technologies such as variable pressure foam (VPF), and other input material rationalisation. Sustenance of the same would lead to greater profitability.

 

Ability to pass on any increase in raw material prices to consumers and maintain a healthy margin remains a key monitorable.

 

Operating margin was impacted as the lower-margin business of KEL was consolidated with SFL in the second half of fiscal 2024.

 

• Exposure to intense competition from unorganized players and new age players and threat of substitutes: SFL faces intense competition from unorganized players, which forms more than 50% of the mattress market in India. Furthermore, new-age players on e-commerce platforms add strong competition. The ability to maintain the market share across a range of products amid intense competition will remain a rating sensitivity factor. Further, growing environmental awareness and available sustainable solution is paving way for bio-based foam alternatives to PU foams such as soy-based sustainable foams, polyolefin foams, and latex etc.

Liquidity: Strong

Apart from adequate cash accrual, liquidity will be also aided by cash balance and liquid investment of over Rs 579 crore as on March 31, 2024. Bank limit of Rs 350 crore was utilised at an average of 35% over the six months ended November 30, 2024.

Outlook: Stable

Crisil Ratings believes SFL will continue to benefit from its strong market position and likely advantages from consolidation of both entities. The financial risk profile will remain comfortable.

Rating sensitivity factors

Upward factors

• Improvement in business risk profile with operating profitability improving to over 12-13% on a sustained basis
• Sustenance of robust financial risk profile with ample liquidity

 
Downward factors

• Significant decline in operating margin to less than 8-9% on a sustained basis
• Weakening of the capital structure because of incremental debt, stretched working capital cycle, or pressure on liquidity

About the Company

SFL, promoted by the late Ms Sheela Gautam, commenced commercial production of PU foam at its factory in Sahibabad, Uttar Pradesh in 1971. It has 11 manufacturing units, which includes 5 units for PU-foam facilities, with combined capacity of 1,49,000 tonne per annum (TPA), across India including 20,000 TPA for Jabalpur plant, which got commenced in December 2023. The company sells foam, coir and spring mattresses under the Sleepwell brand and non-mattress foam products under the Feather Foam brand. The promoters hold ~65.69% shareholding in the SFL.

 

JFPL, acquired by SFL in 2005, is the largest player in the PU foam business in Australia. It manufactures polyester, reticulated, viscoelastic and memory foam, while using VPF technology. It caters to furniture and automobile seat manufacturers and the bedding industry. Currently, it has foaming capacity of 14,000 TPA.

 

In December 2016, SFL completed its initial public offering, wherein the promoters diluted 14.32% of their stake. Shares on sale were offloaded by Polyflex Marketing Pvt Ltd, a company held by the promoters.

 

In October 2019, SFL acquired Interplasp. Established in 1987, Interplasp specialises in manufacturing flexible PU foams using VPF technology 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 capacity of 22,000 TPA.

 

In October 2023, the company also acquired 35% stake in House of Kieraya (HOK) – Furlenco which was further increased to 45.5% in October 2024. Furlenco was founded in 2012 by Mr Ajith Mohan Karimpana. It is one of the fastest-growing furniture companies in India and is a tech-driven business. The company operates under the brand name Furlenco.

 

SFL has an incremental voting right in Furlenco of up to 50.01% even when the company acquired 35% stake in the company. The incremental voting right remains unchanged even though the company has acquired an additional stake of around 10.5% in Furlenco. The incremental stake of 50.01% will remain till the time SFL acquires up to 50.01% stake in Furlenco.

Any other information: Not Applicable