The Integration Of Kurlon And Launch Of Tarang And Aaram Will Strengthen Future Market Presence

Key Takeaways

• The final stages of Kurlon integration and a B2C sales focus are expected to drive revenue growth and market leadership.
  
• E-commerce expansion and rural brand introductions are set to enhance market penetration and improve EBITDA margins.
  
• The integration of Kurlon and international business decline, coupled with supply chain issues, may reduce profitability and limit future revenue growth.

Catalysts

Engages in the manufacture and sale of polyurethane foams and mattresses in India and internationally.

• The Kurlon acquisition and its integration into Sheela Foam are in final stages, with completion expected within this financial year, which could lead to synergies and an increase in consolidated revenues.
  
• The strategic shift to focus on B2C sales within India, particularly mattresses, is showing significant growth, potentially boosting future revenue streams and maintaining leading market positions.
  
• The expansion of e-commerce channels and the introduction of new rural-focused mattress brands like Tarang and Aaram are anticipated to enhance distribution and market penetration, supporting revenue and margin growth.
  
• Cost efficiencies and inventory management improvements, particularly due to the ongoing optimization of the Kurlon assets and operations, are expected to improve EBITDA margins.
  
• Increasing margins through targeted price increases in key product segments and leveraging distribution strengths at strategic points in the fiscal year are expected to contribute positively to earnings.

Sheela Foam Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sheela Foam's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 8.3% in 3 years time.
• Analysts expect earnings to reach ₹3.9 billion (and earnings per share of ₹35.79) by about February 2028, up from ₹1.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 46.9x on those 2028 earnings, down from 66.5x today. This future PE is lower than the current PE for the IN Consumer Durables industry at 47.0x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.79%, as per the Simply Wall St company report.

Sheela Foam Future Earnings Per Share Growth

Risks

• The company's international business has experienced a decline, with the international segment as a percentage shrinking, possibly impacting future revenue growth and overall earnings.
  
• The integration and acquisition of Kurlon have led to depreciation and additional interest costs, which have significantly decreased net profit by around 40% year-on-year, impacting net margins.
  
• Increased focus on the B2C segment, especially in e-commerce and economy segments, could potentially yield lower gross margins compared to traditional segments, affecting profitability.
  
• The unexpected shutdown of a major TDI supplier led to increased costs due to emergency purchases from the open market, impacting gross margins.
  
• The Australia business operates in a mature market with limited growth potential, potentially restricting revenue growth and making it dependent on maintaining relatively high gross margins for profitability.

Valuation

• The analysts have a consensus price target of ₹1090.0 for Sheela Foam based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹46.7 billion, earnings will come to ₹3.9 billion, and it would be trading on a PE ratio of 46.9x, assuming you use a discount rate of 15.8%.
  
• Given the current share price of ₹851.2, the analyst price target of ₹1090.0 is 21.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.