#ChoiceBroking #IPO Update : #SheelaFoamLtd

1. IPO Update
IPO UPDATE
Sound business, but over priced
Salient features of the IPO:
• Sheela Foam Ltd. (SFL) is a leading manufacturer of mattresses in
India, marketing its product under the “Sleepwell” brand. As of FY16,
it has a market share of 20-23% in the organized mattress market.
• The issue is an offer for sale. SFL will not receive any proceeds from
the IPO.
Key competitive strengths:
• Well recognized and established brand
• Extensive and well developed pan-India sales & distribution network
• Integrated operations and economies of scale
Risk and concerns:
• Competition
• Consumer preferences and market trend
• Volatility in the raw material expenses
Valuation & recommendation:
There is no listed peer in the domestic market. At the higher price band
of Rs. 730, SFL’s share is valued at a P/E multiple of 34x its FY16
earnings. Moreover, on P/BVPS and EV/EBITDA front, the company is
available at 10.5x and 19.6x.
Below are few key observations of the issue:
• Of the Rs. 90bn market size of the Indian mattress market, share of
unorganized players is around Rs. 60bn. Rest Rs. 30bn is shared by
20-25 players in the organized segment. Sleepwell and Kurlon brand
mattress occupy a dominant position in the organized segment.
• SFL has an extensive distribution network across India, which acts as
a natural entry barrier and thus isolates it from the competition.
• SFL’s business isn't a seasonal business. However, Q3 (i.e. Oct-Dec) is
a better period as it generates 30% of the annual revenue. Normally
wedding seasons are seen as a demand driver for SFL’s products.
• Over FY12-16, SFL has posted a healthy financial performance, with
top-line, EBITDA and PAT increasing by 10.4%, 33.4% and 91.8%
CAGR, respectively. FY16 was exceptionally better as compared to
previous years, mainly due to lower raw material prices.
• Given the low density levels of foam based products and large size,
the company bears high transportation expenses. Going forward
with the implementation of the GST, SFL will benefit from better
logistic management and lower freight expenses.
• As the company generates around 60% of the sales in cash, its
business might get affected due to the ongoing demonetization
process in Q3FY17. The government is planning to move towards a
cashless economy and is targeting to change the consumer
behavior from cash payment to digital payment. We are of the
strong opinion that this transformation will be gradual and thus the
business sentiment will be affected in the near term, but will be
positive in the long run. The demanded P/E multiple of 34x, seems
to be on higher side.
• Being in the organized segment, we feel that SFL will benefit from
lower competition arising post GST and demonetization.
Considering the above observations and the current scenario, we feel
that there will be bleak prospects of listing gains. For investors with a
long term horizon, we recommend a “Subscribe with Caution” rating
for the public issue
1
Recommendation Subscribe with Caution
Price Band (Rs.) Rs. 680 - Rs. 730
Face Value (Rs.) Rs. 5
Shares for Fresh Issue (mn) NA
Shares for OFS (mn) 7 - 7.5mn
Fresh Issue Size (Rs. mn) NA
OFS Issue Size (Rs. mn) Rs. 5,100mn
Total Issue Size (Rs. mn) Rs. 5,100mn
Bidding Date 29th Nov. – 01st Dec. 2016
Book Running Lead Manager
Edelweiss Financial
Services Ltd. and ICICI
Securities Ltd.
Registrar Link Intime India Pvt. Ltd.
Sector/Industry
Promoters
Ms. Sheela Gautam, Mr.
Rahul Gautam and
Polyflex Marketing Pvt.
Ltd.
Pre - Issue Shareholding Pattern
Promoters and Promoter Group 100%
Public 0%
Total 100%
Retail Application Money at Higher Cut-Off Price per Lot
Number of Shares per Lot 20
Application Money Rs. 14,600
Analyst
Rajnath Yadav
Research Analyst (022 - 6707 9999; Ext: 912)
Email: rajnath.yadav@choiceindia.com
Nov. 26, 2016
Sheela Foam Ltd.
Consolidated Financial Snapshot (Rs. mn) FY12 FY13 FY14 FY15 FY16 H1 FY17
Net Revenue from Operations 10,449.0 11,490.2 12,711.0 14,176.7 15,499.9 7,955.0
EBITDA 555.6 817.6 847.4 910.8 1,761.5 1,058.0
Reported PAT 77.4 308.5 278.4 426.7 1,047.9 659.5
EBIDTA Margin (%) 5.3% 7.1% 6.7% 6.4% 11.4% 13.3%
Reported PAT Margin (%) 0.7% 2.7% 2.2% 3.0% 6.8% 8.3%
RoE (%) 5.6% 18.2% 14.2% 17.4% 31.0% 16.3%
RoCE (%) 7.6% 12.5% 13.7% 15.3% 29.5% 17.0%

2. IPO Update
IPO UPDATE 2
About the issue:
• SFL is coming up with an initial public offering (IPO) with 7 – 7.5mn shares (fresh issue: Nil; OFS shares: 7 – 7.5mn) in
offering. Total IPO size is estimated at around Rs. 5,100mn.
• The issue will open on 29th Nov. 2016 and close on 1st Dec. 2016.
• Not more than 50% of the issue will be allocated to qualified institutional buyers. Further, at most 15% of the issue will be
available for non-institutional bidders and the remaining 35% for retail investors.
• The issue is an offer for sale. The company will not receive any proceeds from the IPO.
• Pre-issue promoter group stake in SFL stands at 100%. Post IPO, promoter group stake will decline to 85.7%, provided the
issue is priced at higher price band of Rs. 730 per share.
Source: Company RHP
Pre and Post Issue Shareholding Pattern (%)
Pre Issue Post Issue (at higher price band)
Promoter & Promoter Group (%) 100% 85.7%
Public 0% 14.3%

3. IPO Update
IPO UPDATE 3
Indian Mattress Industry Overview:
The Indian mattress industry has transitioned over the last few decades from a largely unorganized one dominated by local
outfits specializing in hand-made mattresses (where raw materials such as cotton, foam, coir and combinations thereof were
quilted in terms of individual customer specifications) to one in which the organized market has developed significantly, with
domestic and global manufacturers incorporating advanced technologies and offering superior quality products across a
wide range of price points. The mattress industry in India comprising rubberized coir, polyurethane foam (PU Foam) and
spring mattresses is estimated at Rs. 85-90bn as of FY16. The industry has grown at a CAGR of 8-10% over the past five years,
primarily on account of rising urbanization, increase in disposable income, increase in health related issues of the Indian
population and increasing awareness about sleep products.
The organized market (comprising large, mid-sized and smaller branded manufacturers) is estimated to constitute around
33-35% of the total market, the rest being unorganized. In the organized segment, there are around 20-25 players spread
across geographies with Sleepwell (Sheela Foam Ltd., SFL) and Kurlon occupying a dominant share of the industry’s revenue.
Based on revenues, Sleepwell is estimated to account for around 20-23% of the organized segment as of FY16. Provided
below is a snapshot of the overall Indian mattress market.
Source: Company RHP
Indian Mattress Market
Types of mattresses: The Indian mattress industry is primarily comprised of rubberized coir, PU Foam and spring mattresses.
PU Foam mattresses account for the highest (49-51%) of the organized Indian mattress market. Provided below is a snapshot
of the break-up of the Indian mattress industry by product type:
Source: Company RHP
Product-wise Break-up of Indian Mattress Industry

4. IPO Update
IPO UPDATE 4
Indian Mattress Industry Overview (Contd…):
The dominant market share of PU Foam mattresses can be attributed to the following.
• Inherent quality, durability and comparable pricing of PU Foam mattresses
• The demand for rubberized coir mattresses having fallen in the last five to six years, primarily on account of:
 Advent of PU Foam mattresses and varied applications
 Increase in the price of rubber over the last few years, leading rubber manufacturers to divert end-use from
mattresses to higher margin industries such as automobile tyres, footwear and other industrial applications.
 The increase in prices of rubber has led to manufacturers reducing the share of rubber as a raw material from
around 30-35% to less than 20%. While this has allowed rubberized coir mattresses to remain competitive with PU
Foam mattresses in respect of pricing, it has had a fallout effect on the rubber mattress’ inherent quality, leading to
premature sagging.
• While the demand for spring mattresses have increased significantly over the last few years, they are more popular in
urban India, given their high pricing.
Market classification in terms of usage: The organized Indian mattress market caters to the residential and institutional
segments.
• Residential: The residential segments accounts for around 80-85% of the organized Indian mattress market as of FY16.
Given that the demand for a mattress is largely a function of price and availability, urban households account for a higher
share of total mattress sales as compared with rural households on account of low penetration of mattresses in the rural
India in general, and in particular, lower penetration of coir, foam or spring mattresses. Growing increase in population,
urbanization and rise in disposable incomes, as well as increased purchase of second and larger houses have led to the
residential segment accounting for a higher share of the Indian mattress market over the last few years.
• Institutional: The institutional segment (comprising of hotels, hospitals and educational institutions, including hostels)
accounts for around 15-20% of the organized Indian mattress market as of FY16. Luxury hotel chains (international or
domestic) typically prefer spring mattresses and internationally acclaimed brands, while budget – three star hotels prefer
PU Foam mattresses. Rexine covered rubberized coir or PU Foam mattresses are preferred by hospitals. Growth in the
institutional segment over the last few years has been driven primarily by growth in the healthcare and hospitality
sectors.
Market classification based on distribution channels: Provided below is a snapshot of the organized Indian mattress market
classified on sales and delivery mechanism:
Source: Company RHP
Sales and Delivery Mechanism

5. IPO Update
IPO UPDATE 5
Indian Mattress Industry Overview (Contd…):
Distributor/ dealer networks of organized manufacturers carry out a significant majority (around 87-89%) of sales in the
organized Indian mattresses market, with direct sales from owned and franchised outlets accounting for around 9-11%, and
online retail accounts for below 3% of sales as of FY16. While there has been significant growth of online retail commerce
over the last few years, the same pace has not translated in case of the mattress industry. Further, the inherent personal
nature of mattress purchase (having a touch and feel aspect, which cannot be achieved on online platforms), discounts and
negotiations over maximum retail price offered at distributor/ stores as well as reluctance by mattress manufacturers to
antagonize long-standing and loyal distribution networks have prevailed in ensuring the low proportion of mattress sales
through online retail platforms.
Market classification based on price segments: In terms of product price-range, the organized Indian mattress market can
be classified into the economy segment (priced up to Rs. 8,000), mid-segment (priced between Rs. 8,000-30,000), premium
segment (priced between Rs. 30,000-75,000) and luxury (priced above Rs. 75,000) segments. Provided below is a snapshot of
the organized Indian mattress market classified on the basis of product price-range.
Product Price-range
Source: Company RHP
While economy and mid-segment mattresses currently comprise nearly 75% of mattress sales, premium and luxury
mattresses have also gained market share in the last five years. While purchase of mattresses is inherently a function of
individual preferences and budget, Indian consumers, and in particular, urban consumers are increasingly willing to invest
larger sums in mattresses, which was hitherto, was characterized by low consumer involvement.
Factors affecting the growth of the Indian mattress industry:
• Demand drivers of the Indian mattress market primarily include increase in population and the rise in nuclear families.
• Increased urbanization, income levels, disposable incomes, product awareness and health-related issues in the Indian
population is envisaged to drive penetration of mattresses in the Indian market.
• The growth in the end-user industry such as housing, hospitality and healthcare segments is envisaged to significantly
drive growth in the mattress industry.

6. IPO Update
IPO UPDATE 6
Indian Mattress Industry Overview (Contd…):
Outlook of the Indian mattress market: Provided below is a summary of the future outlook of the Indian mattress market.
• According to CRISIL Research, organized mattress industry to drive an 8-10% growth in overall mattress industry in the
next five years to reach a total market size of Rs. 130-140bn by FY21. The organized market, by itself, is expected to grow
at a CAGR of 11-13% to reach a market size of Rs. 50-55bn by FY21, while the unorganized market is expected to grow at
a CAGR of 6-8% annually to reach a market size of Rs. 80-85bn over the same period.
Anticipated Market Size Over FY16-21
Source: Company RHP
• PU Foam mattresses will maintain its share in the organized market in the next five years, while the share of rubberized
coir mattresses will decline from the current 29-31% to 20-22% by FY21, driven primarily by declining demand and
popularity. The share of spring mattresses is expected to increase from the current 19-21% to around 28-30%, over the
same period.
• The residential segment will continue to garner a dominant share of 80-85% in the organized Indian mattress market,
primarily on account of population growth, nuclearisation of families and growth in the housing segment in India.
Institutional sales are also expected to grow at a steady pace backed by growth in tourism and healthcare sectors.
• The premium and luxury segments are expected to grow at a faster pace as compared with the economy and mid-range
segments. This is expected to be particularly evident in urban markets, driven by increasing disposable income and the
change in perception of a mattress being a health investment rather than in any regular commodity.

7. IPO Update
IPO UPDATE 7
Overview of the Indian PU Foam industry:
Flexible PU Foam: Polyurethane was initially developed in the 1930s and used as a replacement for rubber and as a coating
to protect wood and metal. Flexible PU Foam was developed a few years later and was first used for cushions in the furniture
industry and for automobile seating. The use of PU Foam became more widespread over the years and manufacturing
processes have been improved since then. Provided below is a snap-shot of the end industries and products where PU Foam
is utilized.
Application of PU Foam
Source: Company RHP
Flexible PU Foam is manufactured as flexible slabstock foam, flexible moulded foam, or integral skin foam. Flexible PU Foam
produced for captive use is then sent to end-use production units such as automotive component manufacturers and
furnishing (mattresses and cushions) makers.
Flexible PU Foam for industrial use is sold to their end-user industry players directly or through distributors. Flexible
moulded foam is typically sold to auto component manufacturers who then pass it on to original equipment manufacturers
as a part of a product (car seats) while flexible slabstock foam can be sold to furniture and mattress manufacturers and other
end-user industries like garment and footwear manufacturers.
Market size and assessment: The Indian flexible PU Foam industry is significantly unorganized, with around 70% of the
market dominated by small and medium scale manufacturers in every region as of FY16, mainly owing to transporting issues.
Given that PU Foam is inherent flammable in nature, it is required to be stored in temperature controlled warehouses with
appropriate fire-safety equipment. Further, PU Foam is also voluminous in nature, thereby costing around Rs. 10-15 per
kilogram for local transport, and Rs. 35-45 per kilogram for distances in excess of 400 kilometers. The difficulties and costs
involved in transporting flexible polyurethane foam limit the number of national-level manufacturers.

8. IPO Update
IPO UPDATE 8
Overview of the Indian PU Foam industry:
Within the PU Foam industry, flexible PU Foam comprised around 63-68% of production in FY16. Provided below is a
snapshot setting out the break-up of Indian PU Foam production in FY16.
Production Break-up of PU Foam
Source: Company RHP
The overall market for flexible PU Foam is estimated to have grown at a CAGR of 7-8% from Rs. 35-45bn in the FY12 to Rs.
50-60bn in FY16. Of this, flexible slabstock PU Foam constituted around 65-70% of flexible PU Foam production in such
period and moulded PU Foam constituted for the remaining 30-35%.
Principal end-user industries for flexible PU Foam: The mattress and furnishing industries accounted for more than two
thirds of the flexible slabstock PU Foam market in FY16 and more than 45% of the entire flexible PU Foam market. Going
forward, it is estimated that the improving penetration of mattresses (foam, coir and spring) will drive demand for flexible
slabstock PU Foam. Moulded PU Foam is predominantly consumed by the automobile industry, commanding nearly 85% of
the moulded PU Foam market, and more than 30% of the entire flexible PU Foam market. CRISIL Research believes that
increasing automobile production will drive demand for moulded PU Foam. Provided below is a snapshot of the break-up of
the end-user industries for flexible PU Foam.
End-user Industries for Flexible PU Foam
Source: Company RHP Source: Company RHP
Industry estimates and drivers: CRISIL Research estimates that the Indian flexible PU Foam market will grow at a CAGR of
11-12% between FY16-21, primarily based on increasing demand from end-user industries.

9. IPO Update
IPO UPDATE 9
Company introduction:
Sheela Foam Ltd. (SFL) is a leading manufacturer of mattresses in India, marketing its product under the “Sleepwell” brand.
In addition, it manufactures other foam-based home comfort products targeted primarily at Indian retail consumers, as well
as technical grades of PU Foam for end use in a wide range of industries. According to CRISIL, based on revenues, Sleepwell
branded mattresses constituted a share of around 20-23% of the organized Indian mattress market in FY16. Furthermore,
the company is among the leading manufacturers of flexible PU Foam in India. As part of its international footprint, SFL has a
PU Foam manufacturing facility in Australia through its wholly owned subsidiary, Joyce Foam Pty Ltd. (Joyce). Its home
comfort products under Sleepwell brand consists of: mattresses, furniture cushioning materials, pillows, bolsters cushions,
sofa-cum beds etc.
Manufacturing Facilities: SFL operates 11 manufacturing facilities in India with a total installed production capacity of
0.123mn tonnes per annum of foam. These are located strategically across all four zones in the country, in the states of Uttar
Pradesh, Punjab, Himachal Pradesh, Telangana, Tamil Nadu, Gujarat, West Bengal, Sikkim and the union territory of Dadra
and Nagar Haveli. The following map sets out the location of its manufacturing facilities in India.
Source: Company RHP
In addition to the domestic facilities, Joyce operates five manufacturing facilities in Australia that exclusively manufacture PU
Foam and has a total installed production capacity of 0.01mn tonnes per annum.
Sales, marketing and distribution: SFL have built a geographically dispersed and robust sales and distribution network over
four decades of operational experience. The company sells its home comfort products through an extensive distribution
network that consists of over 100 exclusive distributors, over 2,000 exclusive retail dealers and over 2,500 multi-branded
outlets (data as on September 30, 2016). SFL engages with exclusive distributors, who typically operate in strategic proximity
to its manufacturing and finishing facilities to resell its products at pre-determined margins to retail dealers who either
operate exclusive Sleepwell branded outlets on a franchisee basis or in multi-branded retail outlets. As at September 30,
2016, exclusive Sleepwell branded outlets comprised of 239 Sleepwell Worlds, 433 Sleepwell Galleries and 930 Sleepwell
Shoppes.

10. IPO Update
IPO UPDATE 10
Company introduction:
Competition: The mattresses, home-comfort products and foam industries in India are competitive and fragmented, and
dominated by a large presence of unorganized players. While its Sleepwell branded mattresses commands a dominant share
in the organized Indian mattress market, SFL face competition in its home comfort products business from other organized
manufacturers and brands such as Kurlon, Duroflex, Centaury Fibre Plates and Peps Industries, as well as various
unorganized brands running smaller scale operations in the markets.
Competitive Strengths:
• Well recognized and established brand: SFL’s “Sleepwell” brand is a well-recognized brand in India. According to CRISIL,
based on revenues, Sleepwell branded mattresses constituted a share of around 20-23% of the organized Indian mattress
market in FY16.
• Extensive and well developed pan-India sales and distribution network: SFL sells its home-comfort products through a
pan-India network of exclusive distributors and retail dealers, as well as through multi-brand outlets. These well-
developed sales and distribution network acts as a natural entry barrier and thus isolates it from the competition.
• Quality manufacturing capabilities and technological innovation: SFL operates 11 manufacturing facilities in India that
are located in proximity to key distributors and markets. Its manufacturing facilities are geographically dispersed across
India, with some facilities in close proximity to the major Indian ports, which helps in facilitating cost-effective import of
raw materials as well export of technical foam to overseas manufacturers.
The company’s relationship with Joyce also enables it to leverage its production expertise to adopt manufacturing
technologies in its domestic operations. For instance, SFL have adopted Joyce’s compression technology in domestic
operations, whereby foam is compressed prior to being transported in a manner that it regains its original shape after
being unpacked at its destination. Such technology enables it to transport higher volumes of foam in the same shipment,
leading to significant reduction in the freight costs.
• Integrated operations and economies of scale: SFL benefits from the synergized business operations through the
manufacture of home comfort products as well as the underlying foam that constitutes their principal component. As a
result of this, it does not source PU Foam from external suppliers. The company achieved manufacturing synergies, given
that five of its domestic manufacturing units are capable of producing both PU Foam and finished home comfort
products. Additionally, its integrated operations also enable it to exploit reverse logistics benefits. For instance, SFL
utilizes logistics infrastructure hired by it for supply of raw materials to its manufacturing facilities, for onward supply of
finished products and foams to its distributors. Such business synergies effect reduction in the company’s operating
expenses and enables it to upscale its operations in an efficient and seamless manner.
• Healthy Financial Performance: On the back of increased demand of mattresses and other home comfort products, SFL
reported a 10.4% CAGR rise in the consolidated total operating revenue to Rs. 15,499.9mn over FY12-16. Over the same
period, total operating expenditure increased at a slower pace as compared to top-line, thereby leading to a 33.4% rise in
the consolidated EBITDA to Rs. 1,761.5mn. Consequently, EBITDA margin expanded from 5.3% in FY12 to 11.4% in FY16.
Over FY12-15, EBITDA margin remained in the range of 5-7%, but due to significant fall in the raw material expenses,
EBITDA margin zoomed to 11.4% in FY16. Finance cost declined by 16.7% due the repayment of the debts over the
period. As a result, reported consolidated PAT increased by 91.8% CAGR over FY12-16 to Rs. 1,047.9mn. PAT margin
remained in the range of 1-3% over FY12-15, but due to lower raw material charge, it zoomed to 6.8% in FY16.
The company consistently reported a positive cash flow from operations and free cash flow, which increased by 31.1%
and 320.7% CAGR, respectively, over FY12-16. Liquidity position also improved as the current ratio and debt equity ratio
improved during the period.

11. IPO Update
IPO UPDATE 11
Competitive Strengths (Contd…):
Financial Performance over FY12-16 Operating Performance over FY12-16
Source: Company RHP Source: Company RHP
0%
2%
4%
6%
8%
10%
12%
14%
7,000
10,000
13,000
16,000
FY12 FY13 FY14 FY15 FY16 H1 FY17
Net Revenue from Operations (Rs. mn)
EBITDA Margin (%)
PAT Margin (%)
0%
5%
10%
15%
20%
25%
30%
35%
0.0
0.6
1.2
1.8
FY12 FY13 FY14 FY15 FY16 H1 FY17
Debt Equity Ratio (x) RoE (%)
RoA (%) RoCE (%)
Business Strategy:
• Continued development of its brand: SFL foresees a significant opportunity to leverage its “Sleepwell” brand to further
improve its market share. The company’s strategy is to continue building brand leadership in core home comfort
products as well as higher-grade technical PU Foam, which offers a significant opportunity for future growth. Additionally,
it also seeks to market and consolidate customer recall of its various customized product sub-brands under “Sleepwell”.
SFL intends to accomplish this by offering quality products at attractive prices under these sub-brands and promoting
them through different forms of marketing and advertising, increasing its retail presence through expansion of exclusive
Sleepwell outlets and capitalizing on the strength of its distribution and dealer network.
• Continued focus on development of personalized products: According to CRISIL, the demand for higher value comfort
products based on memory foams is expected to witness significant growth in the medium term. Further, with rising
disposable incomes and the evolving perception of mattresses as health investments, the demand for premium and
luxury segment mattresses in India is expected to grow at a faster pace than those in the economy and mid-range
segment. Anticipating this change in the consumer behaviour, it is planning to manufacture higher volumes of
customized products, as well as develop newer lines of personalized home-comfort products, which will cumulatively
help in improving the company’s operating margins.
• Product portfolio expansion: SFL aims to leverage its existing suite of products, knowhow and manufacturing capabilities
to produce niche and higher-margin products. In particular, it intends to commence production of more sophisticated
grades of technical PU Foam that does not have a significant manufacturing presence in India, and are currently imported
by Indian manufacturers from overseas suppliers.
In the long run, SFL also intends to enter into new product lines at lower price points that are specifically aimed at rural
retail customers. In order to get access to new market, the company plans to market its products through third party
online commerce marketplaces in India and abroad.

12. IPO Update
IPO UPDATE 12
Business Strategy (Contd…):
• Expanding distribution network and export sales: SFL intends to continue developing and nurturing existing distributor
relationships, and create new distribution channels in under and non-penetrated geographies. Additionally, it further
aims to develop its domestic sales networks in primarily two types of territories: the first being those that are
characterized by lower transportation costs, and the second, being those which have a significant demand of its products.
For its international export business, the company intends to upscale its export operations by selling technical foam
grades to manufacturers located in SAARC nations.
SFL also aims to expand its domestic retail presence by increasing partnerships with exclusive dealers and increasing its
exclusive Sleepwell branded outlets. Furthermore, it plans to launch Sleepwell branded “Ultra-Premium” showrooms
targeting its affluent consumer base.
• Strengthen the distributed manufacturing initiative: SFL has recently launched its distributed manufacturing initiative,
whereby it has outsourced the production of lower density commercial PU foam cores to independent manufacturers. As
a result of this, it has increased the production of higher density premium foams at its existing units and lower the
operating expenses. As at September 30, 2016, the company has entered into an arrangement with some independent
manufacturers to produce lower density PU foam. Going forward, SFL intends to progressively increase the scale of such
distributed manufacturing.
Risk and Concerns:
• Competition: The prices at which SFL sells its products are revised keeping in mind various considerations, including
changes in the cost of raw materials, manufacturing expenses, market trends etc. The company faces competition from
organized brands such as Kurlon, Duroflex etc. and as well as from unorganized entities running smaller scale operations
who constitute, around 65-67% of the Indian mattress industry. Thus inability of the company to remain competitive, will
adversely affect the business.
• Consumer preferences and market trend: Changes in market trends and consumer preferences influence SFL’s sales
revenues from home comfort products. The success of the home comfort products business depends on the company’s
ability to anticipate and identify changes in consumer preferences and offer products that appeal to consumers on a
continuing basis. SFL constantly emphasizes on product innovation to distinguish itself from its competitors, and
introduce niche products and different variants based on consumer preferences and demand. Inability of the company to
capture the consumer preference and market trends could adversely affect its operations and profitability.
• Slowdown in the end user industries if PU Foam: SFL’s manufactured PU Foams are utilized in the manufacturing
processes of a wide range of end industries such as automobiles, furniture, garments etc. Any slowdown in such
industries, as well as economic downturns in the export markets may significantly affect its revenues from sale of
technical PU Foam.
• Volatility in the raw material expenses: Over FY12-16, expenditure on materials consumed constituted in the range of
50-60% to the total revenues. SFL procures all the major raw materials from a limited number of third party suppliers on
a spot basis from India and also imports certain quantities of raw materials from overseas suppliers. The company usually
does not enter into long term supply contracts with any of its raw material suppliers and the absence of long term
contracts at fixed prices exposes it to volatility in the prices of raw materials. While it aims to pass on all raw material
price increase to customers, however, in the event of high competition, it may not be in a position to pass on the
increased cost to end-consumers, thereby impacting the operations and cash flows.

13. IPO Update
IPO UPDATE 13
Peer comparison and our recommendation:
There is no listed peer in the domestic market. At the higher price band of Rs. 730, SFL’s share is valued at a P/E multiple of
34x its FY16 earnings. Moreover, on P/BVPS and EV/EBITDA front, the company is available at 10.5x and 19.6x.
Below are few key observations of the issue:
• SFL is a leading manufacturer of mattresses in India, marketing its product under the “Sleepwell” brand. It has a market
share of 20-23% in the organized Indian mattress market in FY16.
• Of the Rs. 90bn market size of the Indian mattress market, share of unorganized players is around Rs. 60bn. The
remaining Rs. 30bn is shared by 20-25 players in the organized segment. Sleepwell and Kurlon brand mattress occupy a
dominant position in the organized segment.
• The company generates around 20% of its business from the B2B segment, while the rest is from the B2C segment. B2B
sales mainly involved the sale of technical foam. Overall technical foam business form around 20% of the turnover in
FY16. Around 60% of the sales in the B2C segment are cash sales.
• SFL sells its home comfort products through an extensive distribution network that consists of over 100 exclusive
distributors, over 2,000 exclusive retail dealers and over 2,500 multi-branded outlets (data as on September 30, 2016).
These well-developed sales and distribution network acts as a natural entry barrier and thus isolates it from the
competition. The management has indicated that its exclusive dealership and distributor network is growing.
• With only 30% of the population consuming modern mattress, the business outlook of the mattress industry seems to be
bright. SFL also makes customized mattress and generates around 30% of the sales from this category.
• There is not much seasonality in the SFL’s business, however, Q3 (i.e. Oct-Dec) is a better period for business (SFL
generates 30% of the annual revenue during this period). Normally wedding seasons are seen as a demand drivers for the
company’s product.
• Over FY12-16, SFL has posted a healthy financial performance, with top-line, EBITDA and PAT increasing by 10.4%, 33.4%
and 91.8% CAGR, respectively. FY16 was exceptionally better as compared to previous years, where the company
reported expansion in the profitability margins, mainly due to lower expenses towards raw material.
• Its key raw material (i.e. polyol and TDI) prices were volatile in the past and prices increased 3x. However, the
management has indicated that the prices have started correcting recently.
• Given the low density levels of foam based products and large size, the company bears high transportation expenses.
Going forward with the implementation of the GST, SFL will benefit from better logistic management and lower freight
expenses.
• As the company generates around 60% of the sales in cash, its business might get affected due to the ongoing
demonetization process in Q3FY17. The government is planning to move towards a cashless economy and is targeting to
change the consumer behavior from cash payment to digital payment. We are of the strong opinion that this
transformation will be gradual and thus the business sentiment will be affected in the near term, but will be positive in
the long run. The demanded P/E multiple of 34x, seems to be on higher side.
• Being in the organized segment, we feel that SFL will benefit from lower competition arising post GST and
demonetization.
Considering the above observations and the current scenario, we feel that there will be bleak prospects of listing gains. For
investors with a long term horizon, we recommend a “Subscribe with Caution” rating for the public issue

14. IPO Update
IPO UPDATE 14
Financial Statements:
Source: Company RHP
Source: Company RHP
Consolidated Profit and Loss Statement (Rs. mn)
FY12 FY13 FY14 FY15 FY16 H1 FY17
Net Revenue from Operations 10,449.0 11,490.2 12,711.0 14,176.7 15,499.9 7,955.0
Cost of Materials Consumed (6,555.3) (6,962.3) (7,693.2) (8,550.1) (8,088.8) (4,147.8)
Purchase of Stock-in-Trade (66.5) (68.0) (94.6) (116.4) (143.2) (143.9)
Other Manufacturing Expenses (356.3) (384.9) (474.0) (630.3) (742.1) (390.3)
Changes in Inventories of Finished Goods, Work-in-Progress and Stock-in-
Trade
136.3 92.6 35.0 (44.7) (43.8) 271.0
Employee Benefits Expense (925.5) (1,031.6) (1,193.8) (1,284.9) (1,394.1) (786.4)
Other Expenses (2,126.2) (2,318.4) (2,443.0) (2,639.4) (3,326.5) (1,699.7)
EBITDA 555.6 817.6 847.4 910.8 1,761.5 1,058.0
Depreciation and Amortization Expense (252.0) (314.5) (300.0) (279.5) (292.7) (143.8)
EBIT 303.5 503.1 547.4 631.3 1,468.8 914.2
Finance Costs (242.7) (231.2) (191.6) (161.9) (116.7) (55.0)
Other Income 59.1 124.4 5.6 105.8 168.1 82.5
EBT 120.0 396.3 361.4 575.1 1,520.2 941.7
Tax Expenses (41.8) (87.8) (83.0) (148.4) (472.4) (282.2)
PAT 78.2 308.5 278.4 426.7 1,047.9 659.5
Loss of Subsidiary on Amalgamation (0.1)
Share of Profit Transferred to Minority Interest (0.7)
Reported PAT 77.4 308.5 278.4 426.7 1,047.9 659.5
Consolidated Balance Sheet (Rs. mn)
FY12 FY13 FY14 FY15 FY16 H1 FY17
Share Capital 162.0 162.6 162.6 162.6 162.6 243.9
Reserve & Surplus 1,215.6 1,532.6 1,803.0 2,287.8 3,221.7 3,802.5
Minority Interest 12.8
Long Term Borrowings 1,235.3 1,122.4 866.3 726.4 346.3 287.6
Deferred Tax Liabilities / Assets (Net) (24.3) (3.7) 6.1 23.9 19.4 (10.1)
Other Long Term Liabilities 113.7 174.1 217.9 274.9 342.1 361.7
Long Term Provisions 73.8 80.8 97.6 102.2 106.4 128.1
Short Term Borrowings 1,206.6 943.8 828.8 538.7 788.3 572.7
Trade Payables 802.2 810.2 988.5 1,139.6 1,126.2 1,207.8
Other Current Liabilities 523.5 752.7 1,190.1 1,394.0 1,463.5 1,250.6
Short Term Provisions 80.0 89.0 90.8 144.7 306.5 243.6
Total Liabilities 5,401.2 5,664.4 6,251.9 6,794.9 7,883.1 8,088.3
Tangible Assets 2,278.6 2,672.7 2,518.9 2,790.7 2,807.2 2,705.2
Goodwill 3.2 3.4 3.4 71.9 71.1 71.1
Capital Work in Progress 410.5 14.6 167.8 83.3 97.0 474.1
Non Current Investments 54.2 76.4 0.0 0.0 100.0 100.0
Long Term Loans and Advances 69.6 72.2 73.9 113.7 145.9 198.9
Other Non Current Assets 3.6 5.6 4.3 9.3 14.5 16.0
Inventories 917.4 1,161.9 1,241.2 1,181.6 1,046.1 1,318.2
Trade Receivable 1,153.6 1,044.4 1,200.8 1,145.0 1,170.7 1,338.5
Cash & Cash Equivalents 205.9 322.1 768.4 1,169.8 2,171.6 1,331.3
Short Term Loans and Advances 233.2 227.4 213.3 171.2 190.1 294.0
Other Current Assets 71.6 63.7 59.8 58.4 68.9 240.9
Total Assets 5,401.2 5,664.4 6,251.9 6,794.9 7,883.1 8,088.3

15. IPO Update
IPO UPDATE 15
Financial Statements (Contd…):
Source: Company RHP
Source: Company RHP
Consolidated Cash Flow Statement (Rs. mn)
Particulars (Rs. mn) FY12 FY13 FY14 FY15 FY16 H1 FY17
Cash Flow from Operating Activities 597.9 972.5 1,244.3 1,473.1 1,763.6 29.8
Cash Flow from Investing Activities (38.3) (298.2) (269.3) (486.3) (336.6) (529.1)
Cash Flow from Financing Activities (636.9) (558.1) (528.6) (585.4) (425.2) (340.9)
Net Cash Flow (77.4) 116.2 446.3 401.4 1,001.8 (840.3)
Cash and Cash Equivalent at the Beginning of the Year 283.2 205.9 322.1 768.4 1,169.8 2,171.6
Cash and Cash Equivalent at the End of the Year 205.9 322.1 768.4 1,169.8 2,171.6 1,331.3
Financial Ratios
Particulars (Rs. mn) FY12 FY13 FY14 FY15 FY16
Revenue Growth 10.0% 10.6% 11.5% 9.3%
EBIDTA Growth 47.2% 3.6% 7.5% 93.4%
EBIDTA Margin 5.3% 7.1% 6.7% 6.4% 11.4%
EBIT Growth 65.8% 8.8% 15.3% 132.7%
EBIT Margin 2.9% 4.4% 4.3% 4.5% 9.5%
Reported PAT Growth 298.7% -9.8% 53.3% 145.6%
Reported PAT Margin 0.7% 2.7% 2.2% 3.0% 6.8%
Liquidity Ratios
Current Ratio 1.0 1.1 1.1 1.2 1.3
Quick Ratio 0.6 0.6 0.7 0.8 1.0
Debt Equity Ratio 1.8 1.2 0.9 0.5 0.3
Turnover Ratios
Inventories Turnover Ratio (x) 11.1 10.6 11.7 13.9
Trade Receivable Turnover Ratio (x) 10.5 11.3 12.1 13.4
Accounts Payable Turnover Ratio (x) 14.3 14.1 13.3 13.7
Fixed Asset Turnover Ratio (x) 3.9 4.3 4.7 4.8 5.2
Total Asset Turnover Ratio (x) 1.9 2.0 2.0 2.1 2.0
Working Capital Turnover Ratio (x) 119.1 41.7 31.7 21.1
Return Ratios
RoE (%) 5.6% 18.2% 14.2% 17.4% 31.0%
RoA (%) 1.4% 5.4% 4.5% 6.3% 13.3%
RoCE (%) 7.6% 12.5% 13.7% 15.3% 29.5%
Per Share Data
Restated BVPS (Rs.) 28.5 34.7 40.3 50.2 69.4
Restated Diluted EPS (Rs.) 1.6 6.3 5.7 8.7 21.5
Restated Cash EPS (Rs.) 6.8 12.8 11.9 14.5 27.5
Restated Operating Cash Flow Per Share (Rs.) 12.3 19.9 25.5 30.2 36.2
Restated Free Cash Flow Per Share (Rs.) 0.1 10.5 15.5 14.2 27.1
Trade Payable Days 25.6 25.8 27.4 26.7
Inventories Days 33.0 34.5 31.2 26.2
Trade Receivables Days 34.9 32.2 30.2 27.3
Cash Conversion Cycle (Day) 42.3 40.9 34.0 26.8