In today’s Finshots, we explain why Sheela Foam is making some big acquisitions.

Also, last week, many people asked us to write a more elaborate story on Reliance Retail and the confusion surrounding unlisted shares. So we decided to do a quick video explainer on the same. Please do check it out.

The Story

Sleep deprived?

You are not alone. Indians are the second-most sleep-deprived people in the world. After the Japanese. And this poor quality of sleep can have a ripple effect — it can affect productivity at work, it increases stress, and diseases can creep up without you even knowing.

But there’s one company that has been trying to help us sleep better — Sheela Foam.

Okay, if you’re thinking that we’re talking about some fancy startup that tracks your sleep cycles, you’d be wrong. It’s actually a 50-year-old company that began operations in Uttar Pradesh way back in the 1970s. You might not have heard of it, but, if we mention the brand Sleepwell, that should ring a bell. The company’s made quite a name for itself by selling things where we spend around 8 hours a day— mattresses!

It has a 25% market share by value in the organised space. And it’s increasingly trying to make inroads in the unorganised market as well.

How, you ask?

Well, the thing is, mattresses made of out polyurethane (PU) foam, springs, and coir don’t come cheap. They can cost a pretty penny. Meanwhile, the unorganised sector mainly uses cotton fillers for their mattresses to make them affordable. So while you might see data saying that the unorganised segment has a 60% market share, remember, that’s market share by value. But if you calculate the market share by volume or by how many mattresses are sold, the numbers will be skewed heavily in favour of the unorganised sector.

So if the organised sector wants a bigger share of this pie, they can’t wait for disposable income to rise. They need to make cheap mattresses.

And that’s what Sheela Foam has been trying to do. They launched the M5 brand of mattresses in the hope that it could be priced below ₹3,000. And they even set up a subsidiary called International Comfort Technologies to facilitate this. It would focus on mass production and mass distribution. Reach the tehsils and taluks across India as its MD put it and create mattresses for every Indian.

But wait…that’s not all Sheela Foam does. It isn’t just a mattress company. In fact, you could argue that it isn’t a Business-to-Consumer (B2C) company at all.

It’s a Business-to-Business (B2B) company!

Yup, 60% of Sheela Foam’s business actually comes from selling foam. All types of it. It sells Comfort foam that other manufacturers can use in pillows. It sells rechnical foam that’s engineered to the specifications of various industries — such as soundproofing studios, ships, and cars. You wouldn’t believe it but it actually has a 70% market share for the foam used in the automotive industry. And then it sells Furniture foam for use in sofa and chair cushions.

Oh, and guess what…all that cushioning in train seats and berths?

Well, Sheela Foam’s quite prominent there too. It’s making quite a bit of money as India expands and improves its railways. We’ve got new trains and old ones that all need foam seating.

And this week, everyone’s been talking about Sheela Foam. Because out of nowhere, these folks have decided to splash over ₹2,o00 crores to buy a 95% stake in rival mattress maker Kurlon. And another ₹300 crores for a 35% stake in the furniture rental startup Furlenco.

It’s all part of Sheela Foam’s ambitious expansion plan — it is targeting the unorganised market as we mentioned. It already has a presence in Australia and Europe and wants to tap the US, and it now wants furniture as well. Investors seemed pretty happy too and the shares initially jumped by 15% on the news.

But let’s break this down, shall we?

Because if you consider the acquisition of Kurlon, it seems to be a perfect fit. It makes up for what Sheela Foam lacks.

For starters, a significant presence in South India. Kurlon dominates the region with a 40% revenue share. Sheela Foam’s forte is the north and west of the country. But the combined might means that Sheela Foam will now control nearly 40% of the branded mattress market.

Not to forget the differences in how their mattresses are distributed. Kurlon’s perfected the art of getting displayed in Multi-Brand Outlets (MBOs). They’re not afraid of being out there along with competition. And that’s a segment Sheela Foam has increasingly been eyeing. Kurlon's experience here could help it make faster inroads.

And if you set aside the difference in cultures between the two companies, their financial profiles are almost similar too. They have similar EBITDA margins, net profit margins, and ROE.

Also, if you take into account the fact that they are likely to combine manufacturing and logistics, it could very well bring down costs for the overall company too.

So there’s a lot to like about the deal.

But Furlenco?

Well, analysts don’t seem to be too sure about this. It’s a head-scratcher.

See, when Furlenco began operations in 2011, the big bet was that young millennials wanted flexibility. They didn’t want to own stuff. They’d move cities often when young. So the easiest thing to do was to push the rental mindset. Furlenco offered furniture and appliance rentals. But somewhere along the way, the company lost the plot. They ventured into selling brand-new furniture. Their customer service experience turned shoddy. They seemed to be running out of cash. And competitors like Rentomojo swooped in.

Furlenco looked like it was struggling.

Now sure, a company that isn’t at a peak and is struggling to find takers sounds like a perfect buy for Sheela Foam. It could’ve been a cheap way to get access to the furniture market. But that’s not what’s happening. Sheela Foam is paying quite heavily for this purchase. It’s nearly 6 times the sales according to estimates by ICICI Securities.

Basically, Sheela Foam is giving the startup a price to sales (P/S) multiple higher than itself. It’s a little confusing.

Also, some analysts believe the assumption that someone who’s buying a mattress will also buy a bed frame or a nightstand or maybe a sofa is wrong.

But that may not entirely be true. If you look at the new-age direct-to-consumer brand Wakefit, it started with mattresses. Then it branched into furniture. And even set up physical stores. And today, furniture contributes to 20% of the brand’s revenue. So maybe that’s what Sheela Foam’s hoping for. A bit of diversification in business prospects as Indians upgrade the quality of furniture in their homes.

Also, only 3% of Sheela Foam’s sales can be attributed to the online channel at the moment. Meanwhile, Furlenco is a digital-first brand. Maybe that digital expertise can nudge Sheela Foam’s online presence and sales higher now.

Will it all work out for Sheela Foam?

We don’t know. Especially since it actually doesn’t have so much spare change just lying around to finance the deals. It only has ₹750 crores in cash. It’ll either have to sell some shares and raise money. Or it has to tap the banks for a loan.

And in a market where the management has already sounded an alarm on people postponing the purchase of expensive mattresses, it’ll be quite interesting to see how Sheela Foam plays this.

Until then…

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