Sheela Foam IPO – Should you invest or not?
New Delhi based, Sheela Foam IPO would open for subscription on 29th November, 2016. Sheela Foam Ltd is a leading manufacturer of mattresses and other foam based home comfort products in India. Its revenues grown at 10.5% CAGR in last 5 years. It earned 6.7% profits in FY16. Should you invest in a Sheela Foam IPO? What are the hidden factors an investor should consider if they want to invest in a Sheela Foam Limited IPO? Currently stock markets are taking steep correction. One should buy IPO’s in this scenario?
About Sheela Foam Limited
They are a leading manufacturer of mattresses in India marketed under the company flagship brand “Sleep well”. In addition, they manufacture other foam-based home comfort products targeted primarily at Indian retail consumers, as well as technical grades of polyurethane foam (PU Foam) for end use in a wide range of industries. As part of company international footprint, they manufacture PU Foam in Australia through company wholly owned subsidiary, Joyce Foam Pty Ltd. According to CRISIL, based on revenues, Sleepwell branded mattresses constituted a share of around 20-23% of the organised Indian mattress market as of 2015-2016. Furthermore, they are among the leading manufacturers of flexible PU Foam in India.
Issue details of Sheela Foam IPO
IPO opens: 29-Nov-2016
IPO closes: 1-Dec-2016
Face Value: Rs 5 per share
Issue price band: Rs 680 to 730 per share
Issue size: Rs 510 Crores
Market lot: minimum of 20 shares
Minimum investment: Rs 13,600 on lower price band
Leading Managers: Edelweiss Capital and ICICI Securities
Listing: BSE / NSE
Objects of the Sheela Foam Limited IPO issue
1. Achieve the benefits of listing the Equity Shares on the Stock Exchanges
2. Enhance visibility and brand name and provide liquidity to the existing shareholders.
Company Financials (reinstated-consolidated)
The company generated revenue of Rs 1050.8 Crores for the year ended Mar-12 and Rs 1,566.8 Crores for the year ended Mar-16.
The company posted a profit of Rs 7.7 Crores for the year ended Mar-12 and profit of Rs 104.7 Crores for the year ended Mar-16.
Its restated EPS for FY ending Mar-16 is Rs 21.48 and last 3 years average EPS Rs 14.61.
Reasons to invest Sheela Foam IPO
Revenue grew at 10.5% CAGR in last 5 years.
Good profits of 6.7% for the year ended Mar-2016. However, it earned below 3% margins in 4 out of last 5 years.
Reasons not to invest in a Sheela Foam Limited IPO
Company business and results of operations are significantly dependent on the continued recall of its “Sleepwell” brand, under which we manufacture an extensive range of home comfort products, and any impairment, dilution or damage to company brands in any manner may adversely affect the company's business reputation, growth, financial condition and cash flows.
They manufacture company products in eleven facilities in India and five facilities in Australia, and any slowdown or shutdown in company manufacturing operations, or the under-utilization of company manufacturing facilities could have an adverse effect on company business, results of operations and financial condition.
They sell company home comfort products through an extensive network of distributors and dealers, and technical PU Foam directly to other manufacturers, and any inability to expand or effectively manage company growing distribution and sales network may have an adverse effect on company business, results of operations and financial condition.
If they are unable to anticipate or respond to changing consumer preferences and trends pertaining to the home comfort products and technical PU Foam industry in a timely and effective manner, the demand for company products may decline, which may have an adverse effect on company business, results of operations and financial condition
The company's inability to effectively manage company growth or to successfully implement the company business plan and growth strategy could have an adverse effect on company business, results of operations and financial condition
The home comfort products and foam manufacturing industry are competitive and the company's inability to compete effectively may adversely affect company business, results of operations, financial condition and cash flows.
Other risk factors (Internal and external) can be viewed in the draft prospectus from Page no. 17 onwards.
Recommendation / Investment strategy – Sheela Foam IPO
On the upper price band of Rs 730 and on FY16 EPS of Rs 21.48, P/E ratio works out to 34x. Similarly, on last 3 years EPS of Rs 14.61, P/E Ratio works out to 50x. Means company is asking the upper band of issue price of Rs 730 for a P/E ratio between 34x to 50x. There are no listed peers to compare issue price. However, considering the high P/E ratio, we can assume that the issue is over priced.
Company revenues grew at 10.5% CAGR in last 5 years. It generated higher profits of 6.7% in FY16. However, in the last 4 out of 5 years, it generated 0.7% to 3% profits. One needs to see consistently higher profits for few years. Sheela Foam Share price is highly priced. Currently denominitisation of high denomination currency is creating turbulences in stock markets. Green Bio Pharma has withdrawn its IPO for poor response. Considering all these factors, I would advise investors to stay away from such high risk IPO’s.
Disclaimer: I do not have an interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy. Please consult your investment advisor before you invest in such high risk investment options.
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Sheela Foam IPO – Should you invest or not