Sheela Foam's Acquisition Of Kurlon, Furlenco Positive For Stakeholders, Says ICICI Securities

ICICI Securities Report

Sheela Foam Ltd. has acquired 94.66% and 35% of Kurlon Enterprises and House of Kieraya (Furlenco) at Rs 20.4 billion (implied normalised FY23 price-to-sales multiple of 1.5 times versus four times P/S of Sheela) and Rs 3 billion (implied FY23 P/S multiple of 5.6 times), respectively.

This acquisition is positive for the stakeholders of Sheela Foam:

1. Sheela Foam’s market share in South and East India has room for improvement (versus North and West India where it enjoys ~40% market share). Given, Kurlon is number two player in South India with ~40% revenue share, this deal is likely to augment Sheela’s overall market share in mattress segment from current 20-25% to 35- 40%.

2. Business economics of Kurlon are attractive (at 7.2% pre-Covid net margin versus 7.5% for Sheela,

3. and shall be largely earnings per share accretive to Sheela Foam (assuming normalised margins).

4. Renewed focus shall help Kurlon to claw-back market share loss (to Duroflex) in South India led by efficient execution, distribution expansion and higher support towards brand promotion.

5. Robust distribution network (Sheela has higher presence in exclusive brand outlets while Kurlon has higher presence in multi brand outlets) and production efficiencies (better servicing of customers) and cost savings (reduced cost to serve and manufacturing cost) are the synergies expected by the management.

6. Acquisition of Furlenco (digital first brand in fast growing branded furniture category) is likely to drive footfalls to EBOs through introducing complementary product portfolio (branded furniture) in their EBOs, in our view.

We await further clarity on rationale and synergies of these acquisitions.

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