SFL’s 1QFY21 revenue declined 59% (adjusting for Spanish acquisition) and is likely to remain under pressure in the near-term, as expected. That said, (newer) long-term opportunities are opening up which are DCF-accretive and importantly embellishes the narrative as well. Acquisition of the Spanish business (in Oct’19) is now turning out to be a masterstroke, as it (now) has the opportunity to grow exports (likely gaining from China+ strategy of buyers in US, Europe). Opportunity in furniture cushioning and manufacturing (SleepX brands launches bedroom furniture) is also a positive (furniture sector recognized as a key sector for making India a manufacturing hub). India business recovery will likely get accelerated by (1) consumers realizing the importance of good quality mattresses in work from home situation, (2) competitive advantage through EBO network (establish a safe environment for consumer walk-ins, sell directly at home) and (3) expansion of the online business (SleepX brand). We gain confidence of long-term growth delivery. ADD.
– Underlying revenue declined 59% in 1Q: Consolidated revenue / EBITDA / PAT declined by 48% / 55% / 70%. Adjusting for Spain acquisition, revenue / EBITDA / PAT declined by 59% / 73% / 88%. Performance was very similar across segments in India, branded mattresses (revenue declined 66%, volume declined 67%), furniture cushioning (-75%), foam core (-70%), technical foam (-80%) and home comfort (-72%). However, Australia business revenue grew by 4%. Revenue from recently acquired Spain business was Rs 600mn.
– Reduced scale of operations led to margin decline despite input cost tailwinds: Comparable gross margin declined by 150 bps to 46.7% due to reduced scale of operations, increased cost at ports and GST benefits getting over despite input cost tailwinds as TDI at Rs 124 / kg declined 19% YoY. EBITDA margin declined was higher at 180bps YoY to 10.4% despite significant cost control – employee costs (+500 bps, -26% YoY) and other expenses (-475bps, -58% YoY). Underlying EBIITDA margin (excluding Spain business) declined even further by 400bps to 8.1% as Spain business has higher (than rest of the business) EBITDA margin at c.18%. Gross margins are expected to be under pressure due to inflationary input cost.
– Valuation and risks: We cut earnings FY20-22E estimates by 4-6%; modelling revenue / EBITDA / PAT CAGR of 17% / 15% / 13% over FY20-22E. Maintain ADD with a DCF-based revised target price of Rs1,500 (was 1,600). At our target price, the stock will trade at 28x P/E multiple Mar-22E. Key downside risks are (1) adverse movement in prices of key inputs – TDI and polyol together contribute c.73% to total input costs and (2) increase in competitive intensity from global players or Indian e-commerce.
Shares of Sheela Foam Ltd was last trading in BSE at Rs.1367.9 as compared to the previous close of Rs. 1401.1. The total number of shares traded during the day was 3836 in over 544 trades.
The stock hit an intraday high of Rs. 1442 and intraday low of 1361. The net turnover during the day was Rs. 5314724.
