Rating Rationale
May 31, 2018 | Mumbai
Sheela Foam Limited
Rating outlook revised to 'Positive'; Short-term rating upgraded to 'CRISIL A1+'
Rating Action
Total Bank Loan Facilities Rated Rs.163.27 Crore
Long Term Rating CRISIL A+/Positive (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1+ (Upgraded from 'CRISIL A1')
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its rating outlook on the long-term bank facilities of Sheela Foam Ltd (SFL; part of the SFL group) to 'Positive' from 'Stable', while reaffirming the rating at 'CRISIL A+'; the rating on the short-term facilities has been upgraded to 'CRISIL A1+' from 'CRISIL A1'.
The rating action factors in expectation that stable operating margin and healthy revenue growth may help strengthen SFL's business risk profile further over the near term. Currently, almost 65% of the domestic mattress industry is unorganised, signifying large growth potential for SFL. To increase its market share, the company has entered the economy segment through launch of mattresses under the Feather Foam and Starlite brands. Also, the Goods and Services Tax (GST) regime is expected to help organised players gain a larger market share. Ability to sustain operating margins at above 11%, despite volatile raw material prices will remain a key monitorable.
The rating upgrade on the short-term facilities reflects the group's healthy liquidity supported by cash balance of around Rs 250 crore and largely unutilised bank lines of Rs 100 crore as on March 31, 2018. Annual cash accrual of over Rs 150 crore is expected to amply cover the funds required for capital expenditure, additional working capital and debt repayments.
The ratings continue to reflect SFL's established market position, healthy revenue diversity and strong financial risk profile. These strengths are partially offset by susceptibility to volatile input prices and intense competition across product categories.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of SFL and its subsidiaries including Joyce Foam Pty Ltd (JFPL). That is because these entities, collectively, referred to as the SFL group, are in the same line of business and SFL has managerial control over all these entities.

Key Rating Drivers & Detailed Description
* Established market position in the polyurethane (PU) foam market
SFL is the largest producer in the flexible slab stock PU foam and mattress segment in India, with an estimated market share of 23% in the organised market. Its brand, Sleepwell is well established. The wide range of products includes mattresses, pillows, cushioning material and foams. A pan-India distribution network helps cater to both retail and business customers. Plans to target the economy segment through Feather Foam and Starlite brands should further consolidate market position.
* Healthy revenue diversity
Though the mattresses continue to contribute substantially to revenue, SFL has a significant presence in retail and industrial foam products as well. Furthermore, presence in Australia through JFPL, which is the largest player in the foam business in Australia, further diversifies geographical presence.
* Strong financial risk profile
Networth is healthy, while gearing is low, and debt protection metrics are strong. The networth was around Rs 600 crore as on March 31, 2018. The gearing improved to 0.1 time as on March 31, 2018, from 0.6 time as on March 31, 2015. The interest coverage and net cash accrual to total debt ratios increased to over 40 times and 3 times, respectively, from 6.6 times and 0.5 time, respectively, over the same period. Healthy cash accrual is expected to amply cover capital expenditure and working capital need over the medium term. Any large, debt-funded capital expenditure or acquisition will remain a key rating sensitivity factor.
* Susceptibility to volatile input prices
Raw material cost forms a significant portion of the total manufacturing cost (about 70%). Polyol and toluene di-isocyanate (TDI), the major raw materials, are manufactured from by-products of crude oil. Along with the price of crude oil, their prices are also linked to the demand-supply conditions prevailing in the market. While the price of polyol has been benign since the second half of fiscal 2015, there was a significant upswing in the price of TDI due to a shortage of supply in the market during fiscals 2017 and 2018. However, the group has been able to sustain it operating margin at over 11% in the three fiscals through fiscal 2018, despite the TDI price more than doubling over this period. While the group has a proven capability of passing on raw material price increase to consumers due to premium position of its brand; however, profitability will remain vulnerable to volatility in input prices.
* Intense competition across product categories
There is intense competition from domestic players such as Kurlon Enterprises Ltd, Duroflex Pvt Ltd, and Peps Industries Pvt Ltd. Moreover, unorganised players, which form around 65% of the market in India, provide further competition. Ability to maintain market share across a range of products in an intensely competitive market will remain a rating sensitivity factor.
Outlook: Positive

CRISIL believes the SFL group's business risk profile may improve over the near term supported by healthy revenue growth and stable operating profitability. Financial risk profile will, likely remain strong as well.
Upside Scenario
* Healthy revenue growth while operating profitability sustains
Downside scenario
* Significantly lower-than-expected operating profitability and revenue growth
* Weakening of capital structure due to any large, debt-funded capital expenditure or acquisition

About the Group

SFL, promoted by Ms Sheela Gautam, commenced commercial production of PU foam in 1971 at its factory in Sahibabad, Uttar Pradesh. It currently has 10 PU foam-manufacturing units across India. The company sells foam, coir, and spring mattresses under the Sleepwell brand and other non-mattress foam products under the Feather Foam brand.
JFPL, acquired by SFL in 2005, is the largest player in the PU foam business in Australia; it manufactures polyester, and reticulated, viscoelastic, and memory foam, which it sells to furniture and automobile seat manufacturers, and to the bedding industry.
In December 2016, SFL successfully completed its IPO wherein promoters diluted 14.32% stake in the company. The shares on sale were offloaded by Polyflex Marketing Ltd, a promoter held company. Post the IPO, the promoter holding reduced from 100% to 85.68%.

Key Financial Indicators
Particulars Unit 2018* 2017
Revenue Rs crore 1975 1776
Profit after tax Rs crore 134 126
PAT margin % 6.8 7.1
Adjusted debt/Adjusted networth Times 0.1 0.1
Interest coverage Times 41 25

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of Instrument Date of Allotment Coupon Rate Maturity Date Issue Size
(Rs Crore)
Rating Assigned
with Outlook
NA Buyer's Credit Limit NA NA NA 52 CRISIL A+/Positive
NA Cash Credit NA NA NA 48 CRISIL A+/Positive
NA Bank Guarantee NA NA NA 5 CRISIL A1+
NA Letter of Credit NA NA NA 20 CRISIL A1+
NA Proposed Long-Term
Bank Loan Facility
NA NA NA 38.27 CRISIL A+/Positive
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund-based Bank Facilities  LT/ST  138.27  CRISIL A+/Positive      23-02-17  CRISIL A+/Stable  15-03-16  CRISIL A/Positive  21-01-15  CRISIL A-/Positive  CRISIL A-/Stable 
Non Fund-based Bank Facilities  LT/ST  25.00  CRISIL A1+      23-02-17  CRISIL A1  15-03-16  CRISIL A1  21-01-15  CRISIL A2+  CRISIL A2+ 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Bank Guarantee 5 CRISIL A1+ Bank Guarantee 5 CRISIL A1
Buyer`s Credit 52 CRISIL A+/Positive Buyer`s Credit 52 CRISIL A+/Stable
Cash Credit 48 CRISIL A+/Positive Cash Credit 48 CRISIL A+/Stable
Letter of Credit 20 CRISIL A1+ Letter of Credit 20 CRISIL A1
Proposed Long Term Bank Loan Facility 38.27 CRISIL A+/Positive Proposed Long Term Bank Loan Facility 38.27 CRISIL A+/Stable
Total 163.27 -- Total 163.27 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for rating short term debt

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