From ₹905 to ₹1,267: This stock gains 40% in 4 months; did you miss the rally?

Shares of Sheela Foams, India's largest polyurethane (PU) foam manufacturer and the owner of Sleepwell mattress, continued gaining streak for the fourth straight session on Wednesday after the company announced two major acquisitions. In two simultaneous deals on July 17, Sheela Foams signed pacts to acquire a controlling stake in its rival Kurlon Enterprises and shares in Furlenco Furniture, an online furniture brand owned and operated by House of Kieraya.

Early today, Sheela Foams' shares opened 0.7% higher at ₹1,236.05 against the previous closing price of ₹1,236.05 on the BSE. Extending opening gains, the stock rose as much as 2.5% to hit a seven-month high level of ₹1,266.70, while the market capitalisation climbed to ₹12,118 crore. The midcap stock has been rising for the last four sessions and added 13% during the same period.

The share price of Sheela Foams has risen 40% in the last four months, from its 52-week low of ₹905.50 touched on March 29, 2023. The stock, however, is down 26% from its 52-week high of ₹1,710 hit on September 9, 2022. In the last one year, the stock has fallen 7%, while it dropped 1.5% in the six-month period. In the calendar year 2023, the counter has lost 3%, while it gained 4% in the past one month.

The Noida-headquartered company will acquire 94.66% shareholding in Kurl-On for ₹2,150 crore at an equity valuation of the company at ₹2,150 crore. Besides, it will pick up 35% shareholding in Furlenco for ₹300 crore at an enterprise valuation of ₹857.14 crore. The timeline for the completion of the acquisition of Kurl-On is November 30, 2023, and that of Furlenco furniture is August 30, 2023.

Post-deal, domestic brokerage ICICI Securities maintained a ‘Buy’ rating on Sheela Foams with a revised target price of ₹1,400 from ₹1,300 estimated earlier, saying that the acquisition is positive for its stakeholders. “We increase our earnings estimates by 5%/4% for FY24E/FY25E due to better gross margin expectations driven by correction in input cost; modelling revenue / EBITDA / PAT CAGR of 12% / 30% / 36% over FY23-25E,” it says in a report.

As per the report, Sheela’s market share in South and East India has room for improvement as compared to North and West India where it enjoys around 40% market share. Given, Kurl-On is the second-best player in South India with nearly 40% revenue share, this deal is likely to augment Sheela’s overall market share in the mattress segment from the current 20-25% to 35- 40%, the report notes.

The report further says that renewed focus will help Kurl-On to claw-back market share loss (to Duroflex) in South India led by efficient execution, distribution expansion and higher support towards brand promotion.

On the acquisition of Furlenco (digital first brand in fast growing branded furniture category), the brokerage says the deal is likely to drive footfalls to exclusive brand outlets (EBOs) through introducing complementary product portfolios (branded furniture) in their stores.

Meanwhile, Sheela Foams in the exchange filing said that the Kurl-On deal will give Sheela Foam an “undisputed” leadership position across major product categories, with its flagship brand Sleepwell’s strength in foam and Kurl-On’s strength in rubberised coir. Combining the market share of Sheela Foam (13%) and Kurl-On (8%) will help the company to emerge as a stronger player with a consolidated market share of over 20% of the modern mattress segment. The company said that mattresses as a category is a highly fragmented market segment with a strong need for consolidation. Overall market size is ₹25,000 crore in India.

As per the company, the Furlenco deal will help Sheela Foam to enter the fast-growing branded furniture and furniture rental market, and an opportunity to further diversify its presence in the furniture sales market and become a full portfolio company in the segment, the company said. “It will also help leverage the digital capabilities of Furlenco for Sheela Foam products and will also help leverage the strong distribution network of Sheela Foam for Furlenco products and services.”

The India furniture industry is estimated to be at a value of around $80 billion by 2025 with an expected CAGR of 13%, while the furniture rental industry is at a nascent stage and is estimated to grow to $13 billion by 2025 with an expected CAGR of 26%.

As per the company, the acquisition of Kurl-On would be through a cash consideration funded by a mix of internal accruals, debt and equity, while that of Furlenco via subscription of shares in House of Kieraya.

Post acquisition, Sheela Foam plans to retain its own management team and board of directors. “Following the potential acquisitions of Kurlon and Furlenco, it is expected that none of the founders of the target companies shall hold a directorial position in Sheela Foam’s board. The company will take about 12-24 months to realise the full synergies of the acquisition,” it said.

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