SHEELA FOAM LIMITED

India's largest maker of flexible PU foam and the largest branded mattress company. It owns Sleepwell, historically strong in the North and West, and Kurlon, dominant in the South and East, bought in late 2023. Together they hold close to 30% of the organised mattress market. The rest of the group is foam, furniture cushioning, two overseas units (Joyce in Australia, Interplasp in Spain), and two small pieces of optionality, Furlenco and an IT arm.

The edge is that Sheela makes its own foam from polyol and TDI rather than buying it finished. Foam is bulky and cheap per cubic foot, so it does not import well, which protects domestic manufacturers structurally. Contribution margin runs above 30%, so incremental volume lands in EBITDA at a high rate. Around 85% of the Indian mattress market is still unbranded, and Sheela is the leader pulling that market toward organised product. That runway is why the stock gets valued as a consumption story rather than the foam cyclical it also is.

FY26 was the first clean year after the Kurlon deal, and the recovery showed up across the board. Kurlon was bought at an enterprise value of about ₹2,150 cr with a mid-single-digit EBITDA margin against Sheela's own 9%. The combined business ran core EBITDA of 11.5% in the March quarter and 10.7% for the year, with about ₹190 cr of the targeted ₹250 cr synergy already in the run-rate. Mattress volume grew 12% and foam 18%, taking consolidated revenue up 11% to ₹3,821 cr. Gross debt fell from ₹1,462 cr to ₹908 cr, finance cost from ₹121 cr to ₹95 cr, and the company paid its first dividend since listing. Operating profit of ₹393 cr and core EBITDA above ₹400 cr were both record highs.

During FY26 the company moved depreciation from written-down-value to straight-line and stretched the useful life of its foaming machines from 20 years to 40. Consolidated depreciation is guided to ₹140 to ₹145 cr in FY27 against a ₹180 to ₹190 cr old run-rate, so roughly ₹40 to ₹50 cr of profit now appears without the business generating a rupee more cash. The change is IND AS-compliant and has a defensible rationale, since a 22-year-old foaming machine still runs. It is also aggressive, and it arrived exactly when the recovery needed showing.

Consolidated, FY24 to FY26 numbers are reported, FY27E is built only on management's stated guidance (revenue "15% plus," core EBITDA 11 to 12%, depreciation ₹140 to 145 cr, finance cost about ₹50 cr); the PAT that falls out is my arithmetic on those inputs, not company guidance.

FY26 EPS of ₹14.62 is still below the ₹22 to ₹24 the company earned in FY21 to FY23. Profit has bounced off the FY25 bottom but has not got back to its old peak. Reported EPS also understates the cash the business earns, because a big part of the charge against profit is depreciation, which is a book entry, not money going out. So I value the company on its cash, not its reported profit.

The company converts profit to cash well, running operating cash at about 1.36 times reported profit over the last decade, and it is de-leveraging quickly. It is not net cash, though: about ₹540 cr of net debt remains, on a path to zero by roughly FY28 on management's own repayment timeline.

On the free cash flow yield, the trailing number overstates the case. FY26 free cash flow of ₹371 cr came in a capex-trough year of about ₹40 cr, with the post-acquisition build finished and the FY27 growth spend not yet started. Management guides FY27 capex to ₹125 to ₹150 cr, which pulls normalised free cash flow down to ₹270 to ₹290 cr:

Interest falling from ₹95 cr toward ₹50 cr and depreciation from ₹179 cr toward ₹143 cr both lift PAT and free cash flow with no operating heroics, which shrinks the forward multiple on its own over FY27 and FY28.

The near-term earnings lift is mostly mechanical: interest roughly halving as the ₹300 cr India debt is repaid inside 18 months and the ₹350 cr overseas debt self-liquidates; depreciation stepping down per the accounting change; and the last ₹40 cr of Kurlon synergy from a delayed fibre machine due around mid-FY27. Beyond that, TDI running near ₹275 against a historical ₹120 should carry FY27 value growth ahead of volume as prices pass through, and the unorganised-to-organised and e-commerce channels are small enough to keep growing fast. Furlenco, profitable in FY26 on about ₹370 cr of revenue, could list in one to two years and put a visible price on Sheela's 45.5% stake.

Other income is treasury-driven and volatile, collapsing from ₹159 cr to ₹62 cr in FY26 on forex and bond marks, which swings the reported bottom line. And the Kurlon deal parked about ₹1,600 cr of goodwill and brand intangibles on the balance sheet, carrying impairment risk if the brand disappoints.

The input is genuinely volatile. With 10 to 15 days of inventory, higher-priced foam maps to higher selling prices while prices rise steadily, but a spike into softening demand breaks the pass-through and a crash brings inventory losses. TDI supply leans heavily on GNFC, which has had shutdowns. Well-funded online players are competing hardest in the one channel where Sheela has not yet raised prices.

The reported P/E of 52 anchors on profit carrying a heavy post-acquisition depreciation charge, so it flatters the expensiveness the wrong way. Add back the ₹179 cr of non-cash depreciation and cash profit is about ₹340 cr, putting the stock near 25 times cash earnings; operating cash flow of ₹409 cr says much the same. On the guidance-anchored FY27 profit of ₹270 to ₹310 cr, it is roughly 27 to 31 times forward, so the market already pays a high-20s multiple on the recovered year.

Constructive: core EBITDA holding above 12% through a raw-material up-cycle; the two new channels sustaining 40%-plus growth for another two to three years; and ROCE climbing toward the mid-teens as EBIT rises against the goodwill base, which is the single number that would earn the compounder label.

Negative: a Kurlon intangible impairment, a margin relapse below 10% on an input shock, or a sharp deceleration in U2O and e-commerce, any of which would strand the high-20s forward multiple on a cyclical business.

A high-quality operational turnaround that is now fairly-to-fully priced. Kurlon is integrated, margins are structurally higher, the balance sheet is healing and cash conversion is real. But at the highs, on roughly 28 times recovered FY27 earnings and a normalised FCF yield closer to 3.5%, the recovery is in the price, with an accounting tailwind quietly padding reported profit. The interesting feature is not the current yield; it is the mechanical lift to PAT and cash flow as interest and depreciation fall, which compresses the forward multiple by itself.

TenetFour Research. Educational analysis only. Not investment advice or a recommendation to buy, sell, or hold any security. Author may hold a position. Readers are responsible for their own decisions.