| Sheela Foam Limited | ||||||
| Long-term rating placed on ‘Watch Developing’; Short-term rating reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has placed its rating on the long term bank facilities of Sheela Foam Limited (SFL) on ‘Rating Watch with Developing Implications’. The short term rating has been reaffirmed at ‘CRISIL A1+’.
The rating action follows announcement for acquisition of 94.66% stake in Kurlon Enterprise Ltd (KEL) and 35% stake in House of Kieraya – Furlenco (Furlenco) by SFL.
Post completion of acquisition of KEL, the market position of the company is expected to improve with market share of 20-21% in the modern mattress business (including the un-organised sector). Currently, SFL and KEL command 12-13% and 8-9% market share respectively. Furthermore, the company is expected to benefit from synergies such as deeper distribution network and improved cost efficiencies.
The revenue of the SFL was Rs 2,931 crores in fiscal 2023, which was ~4% lower on-year and the operating profitability remained at ~11% over the last two years. On the other hand, the revenue of KEL is estimated to be ~Rs 850 crores for fiscal 2023 which has remained muted over the last few fiscals and the operating profitability of KEL has been under pressure. The scale of the combined entity is expected to be healthy, and the synergies will help the company improve the profitability going forward. The profitability improvement will remain a key monitorable.
The acquisition of stake in Furlenco will enable SFL an entry into the furniture market. Furlenco currently operates in furniture leasing with an AUM of ~Rs 300 crore. It is also present in furniture sale.
The acquisition will be funded by internal accruals and equity of ~Rs 1,700 crores and debt of ~Rs 600 crores. The financial risk profile is expected to moderate in the near term with addition of debt, however, the same is expected to remain comfortable.
The proposed acquisition is expected to be completed by November 30, 2023. CRISIL Ratings will remove the ratings from watch post consummation of the transaction.
The ratings are driven by established market position, healthy revenue diversity and strong financial risk profile of SFL group. The strengths are partially offset by susceptible volatility in input prices and competitive intensity from unorganised segment. |
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 PU foam and mattresses in India and has a share of 12-13% in the modern mattress market along with a well-established brand, ‘Sleepwell’. Its wide range of products includes mattresses, pillows, cushioning material, and foams. A pan-India distribution network helps cater to both retail and business customers. The market share of SFL has improved in recent years because of a gradual shift from the unorganised to organised sector, supported by increasing consumer awareness about the health benefits of quality mattresses.
Post the acquisition, the market position shall further improve due to higher market share and deeper distribution network, improvement of strong marketing network pan-India, broadening of brands having wide presence and strong re-collect.
Healthy revenue diversity The revenue profile is diversified in terms of product segments and geographical reach. Though mattresses continue to contribute substantially to revenue, the SFL group has a significant presence in retail and industrial foam products as well. Apart from furniture cushioning, the group sells flexible slab stock PU foam to manufacturers of automotive seats, footwear and clothing.
Furthermore, presence in Australia through JFPL, which is the largest player in the foam business in Australia, and across the European Union through Interplasp diversifies the geographical footprint.
The Australian and Spanish businesses accounted for 30% of revenue and ~20% of net profit in fiscal 2023. Healthy geographical diversity in revenue shall benefit the operations over the medium term and protect the company from any regional disruptions.
After acquisition of KEL, the company will improve geographical diversification in the domestic market as SFL has a strong presence in northern and western India whereas KEL has major presence in eastern and southern India.
Strong financial risk profile The financial risk profile is underpinned by strong debt protection metrics and healthy capital structure. The financial risk profile is expected to moderate with addition of debt. However, the same is expected to remain comfortable with limited impact on capital structure and with healthy cash accruals. The financial metrics should remain strong over the medium term, supported by steady cash accrual and limited debt.
Weakness: Susceptibility to volatility in input prices 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 crude oil prices 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. Raw material prices have started decreasing in the ongoing fiscal, and hence, profitability is expected to improve over the medium term.
Ability of the company to pass on increase in raw material prices to consumers and maintain healthy profitability will be key monitorables. |
Liquidity: Strong With health cash accruals, liquidity is expected to remain strong, cash balance and liquid investment is expected to be more than Rs 200 crore as on March 31, 2024. Bank limit of around Rs 150-200 crores were largely unutilised over the six months through June 30, 2022. |
Rating Sensitivity factors Upward Factors
Downward 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, 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, wherein the 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 manufacturing 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 capacity of 22,000 TPA. |
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: |
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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