Sheela foam - Undisputed leader in the Indian mattresses industry

Undisputed leader in the Indian mattresses industry

Sheela Foam (SFL) is the market leader in the domestic mattress industry with a value market share of ~25% in the organized segment. The company’s “Sleepwell” is one of the leading brands in the domestic mattress industry. It has a pan-India presence through ~6000 MBOs and ~5500 EBOs, respectively. Apart from India (which contributes ~70% to the topline), the company also manufactures Polyutherene (PU)/technical foams in Australia and Spain with revenue contributions of 15% each.

The modern mattress industry is pegged at ~ ₹17,500 crores and is likely to grow at 12% CAGR in FY22-26E. The organized industry is expected to gain market share through new product launches and strong balance sheet conditions from unorganized players, which command 60% of the total pie.

Business Overview:

Sheela Foam was incorporated in 1971 in Sahibabad, Uttar Pradesh by Sheela Gautam. In 1994, the company launched its flagship brand, ‘Sleepwell’, which went on to become one of the strong brands in the domestic market. SFL is the market leader and the largest manufacturer of Polyurethane Foam (PU) in India with a dominant market share of 25%. The company has 11 manufacturing plants in India. Sheela foam’s key raw materials include Polyol and TDI (Toluene Di-Isocyanate). The company sources a significant portion (~90%) of its raw material requirements domestically while the rest is outsourced through overseas suppliers.

SFL’s business can be divided into two broad segments – home comfort and technical foam. The home comfort segment comprises mattresses, furniture cushions, pillows, bedsheets, comforters, blankets, mattress protectors, and sofa-cum-beds. Under the technical foam segment, the company produces automotive foams, reticulated foam, ultraviolet stable foam, and Silentech foam.

The home comfort segment contributes 79% to the overall revenues of the company while technical foam contributes 21% to the company’s topline. To capture market share from the unorganized segment, SFL has set up a new subsidiary named International Comfort Technologies. Under this subsidiary, the company has set up two manufacturing units in Gujarat and Madhya Pradesh. These units are set up to focus on exports, e-commerce, and economy segment products for Tier III & IV cities in India.

Apart from its India operations, the company also has a footprint in Australia and Europe. In 2005, the company acquired Joyce Foam, Australia, which is the largest producer of foam in Australia. The company has five manufacturing plants in Australia and commands ~40% market share in the total PU foam business in the same region. It supplies mattresses and foams to furnishing companies. Joyce Foam contributes 15% to the overall revenues of the company. To gain a footprint in Europe, SFL acquired Interplasp SL in Spain in 2019 for a consideration of €40 million. Interplasp contributes 15% to the overall revenue of the company. It has a 1% market share in Europe.

**Revenue segmentation across segments**

**Revenue segmentation across locations**

Investment Rationale

Indian mattresses industry: Huge untapped opportunity

The Indian mattress industry is classified into two categories 1) cotton-based mattresses and 2) modern mattresses. The overall industry is pegged at ~ INR 50,000 crores with significant dominance of the unorganized cotton-based mattresses industry. The cotton-based mattresses command ~65% of the industry requirement, which is pegged at ~INR 32,500 crores. Cotton-based products are the preferred choice in rural and semi-urban regions mainly due to their low price point and easy transportation. However, modern mattresses (~35% of the overall industry) started getting traction due to their various health benefits over cotton-based products such as better comfort, temperature regulations, and greater longevity (sag free).

**Indian mattresses industry is largely dominated by cotton-based mattresses and unorganized players**

The modern mattresses industry is pegged at ~INR17,500 crores and grew at a CAGR of ~7% in the last five years amid Covid-led supply disruption. The industry is dominated by regional and unorganized players with ~60% market share.

The significant regional play in the modern mattress industry exists due to its bulky nature and high transportation cost. Organized players contribute ~40% of the total industry and are growing (at 9% CAGR) faster than overall industry growth.

The organized players have expanded their product portfolio and distribution network aggressively in the last five years, which helped them gain market share by ~5 percentage points over FY16-22.

The modern mattress industry is pegged at ~ INR 17,500 crores and is likely to grow at a CAGR of 12% over FY22-26E to ~INR 27,600 crores, supported by rising awareness of sleep-related products (to avoid health issues), increasing income level, urbanization and rising aspiration of the middle class.

The modern mattresses industry is classified into three categories:

Polyurethane (PU) foam, spring mattresses, and rubberized coir.

PU foam mattresses cater to ~50% of the total demand in India due to their better quality (over cotton & rubberized coir mattresses) and higher replacement cycle.

Rubberized coir is continuously losing market share due to poor quality and a lower replacement cycle.

The mattress industry mainly caters to housing and institutional segments (including hotels, hospitals, etc). Luxury hotel chains (international or domestic branded) typically prefer spring mattresses, while budget – three-star hotels prefer PU Foam mattresses.

A revival of the tourism industry and the addition of new hospitals in tier II, and III cities will drive the future demand for modern mattresses in India.

The residential segment accounts for ~80% of the modern mattresses demand in India. The institutional segment (comprising hotels, and hospitals) accounts for ~20%.

“Sleepwell”: Leading brand in the domestic market

Home care segment: Sheela Foam’s ‘Sleepwell’ is one of the most popular mattress brands in India with a value market share of ~25% in the organized industry. The company has launched various new products under the home care segments (like furniture cushions, pillows, sofa-cum-bed, etc) by leveraging its Sleepwell brand. Home care products contribute 79% to the total topline led by the mattress segment. Despite rising competition, the company has maintained its leadership position mainly due to the launching of new products and the expansion of its dealer networks.

Technical Foam: The company’s technical foam is largely a B2B business and contributes ~19% to its overall sales. The technical foam product includes automotive foams, reticulated foam, ultraviolet stable foam, and Slientech foam and caters to automotive, garments, innerwear, footwear, sound absorption, and filtration industries. The automotive industry contributes the largest share (~65%) in the sales of technical foams.

Eyeing semi-urban markets through ‘Mattresses for every Indian’ products

SFL plans to increase its presence in Tier III and IV cities (contribute ~40% of its sales) by launching new products under its ‘Mattresses for every Indian’ strategy. Mattresses will be made using a patented technology named ‘Variable Pressure Foaming’ (VPF) to manufacture various grades of foam at affordable price points in order to capture the market share of cotton-based mattresses.

Pan India reach through a strong distribution network:

Considering the nature of the product and the increasing trend of customized products, a strong dealer network is critical for long-term growth. In the organized mattresses industry, significant business (~80% of sales) is contributed through offline dealer networks followed by 14% and 6% through online and owned franchises respectively.

Continued focus on strengthening distribution

Over the years, Sheela Foam has developed a strong pan-India distribution network of MBOs and EBOs. The company has a total of ~8000 multi-brand outlets (MBOs) and ~5500 exclusive brand outlets (EBOs) by the end of FY22.

SFL’s e-commerce mattress brand ‘SleepX’ sales have witnessed strong growth over the years at a CAGR of 64% to INR85 crore in FY22 (~3% of consolidated sales). The company plans to add more products in the near future after the success of its online brand ‘SleepX’

**Ecommerce sales growth trend over FY20-22**

Key Business Risks

Interruptions in supply, and fluctuations in prices of raw materials: Despite the cooling of crude oil prices, TDI prices (one of the key raw materials) have witnessed an upward movement owing to a shutdown of key manufacturing plants in Europe. Such rises in raw material prices could have an adverse impact on its financials if the company is unable to pass on the price increases promptly. Also, SFL’s raw materials, which are imported (constitute ~10% of raw materials) are subject to currency and exchange rate fluctuations. This would impact the margins and profitability of the company.

Rising competition: Due to attractive growth opportunities, the industry is seeing a rise in the number of organized players in the mattress market. In the organized segment, around 20-25 players are spread across geographies with Sleepwell and Kurlon occupying a dominant share of the industry’s revenue. The company also faces competition from unorganized players as they incur fewer operating expenses, given the size and scale of their operations, and sometimes have a deeper retail reach in the territories that they operate in. If the company fails to produce high-quality, innovative products and does not keep up with the competition, it may lead to a loss of market share

Counterfeit products: The product portfolio of SFL, and, especially its home comfort products, are susceptible to counterfeiting and imitation by third-party vendors and players in unorganized markets, who may manufacture and sell products in the mass market at relatively lower prices. Any sale of counterfeit or imitation goods could harm the reputation of SFL’s brands and their sales.

Investment Outlook:

Sheela Foam is a play on changing lifestyles, urbanization, and the rising per capita income of Indian households. SFL is a strong brand in the domestic mattresses industry (value market share 25% in the organized industry) and has a pan India reach (through 7899 MBOs and 5424 EBOs), and it focuses on launching new products to capture market share from unorganized industry (~60% of total industry). The company’s plan to expand its domestic and overseas capacity and launch low-price products will help gain market share from the unorganized market in the years to come.

Reference:

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