Sheela Foam’s Acquisition of Kurlon Strengthens Market Position and Boosts Growth Prospects

Key Points:

• Sheela Foam’s acquisition of Kurlon Enterprises is expected to significantly improve its market share in South and East India, augmenting its overall position in the mattress segment from 20-25% to 35-40%.
• The business economics of Kurlon are attractive, with a pre-COVID net margin of 7.2%, making the acquisition largely EPS accretive to Sheela Foam assuming normalized margins.
• The acquisition provides opportunities for Kurlon to regain market share in South India, where it had previously lost ground to competitors, through efficient execution, distribution expansion, and increased support for brand promotion.
• Sheela Foam’s acquisition of House of Kieraya (Furlenco), a digital-first brand in the branded furniture category, is expected to drive footfalls to its exclusive brand outlets by introducing a complementary product portfolio and expanding its offerings.

Sheela Foam, a leading mattress manufacturer, has made a significant move to enhance its market share and expand its presence in the mattress segment with the acquisition of Kurlon Enterprises, according to a research report by ICICI Securities. The report highlights the positive impact of the acquisition on the stakeholders of Sheela Foam.

One of the key benefits of the acquisition is the potential for Sheela Foam to improve its market share in South and East India. Currently, the company enjoys a substantial market share in North and West India but has room for growth in other regions. Kurlon, being the second-largest player in South India with a revenue share of around 40%, is expected to augment Sheela Foam’s overall market share in the mattress segment from the current 20-25% to 35-40%.

The business economics of Kurlon are also seen as attractive, with a pre-COVID net margin of 7.2%, comparable to Sheela Foam’s margin of 7.5%. Assuming normalized margins, the acquisition is expected to be largely EPS accretive to Sheela Foam. Furthermore, the renewed focus on Kurlon’s operations is anticipated to help the company regain market share lost to competitors in South India, driven by efficient execution, distribution expansion, and increased support towards brand promotion.

The synergies resulting from the acquisition are expected to include a robust distribution network, as Sheela Foam has a higher presence in exclusive brand outlets (EBOs), while Kurlon has a stronger presence in multi-brand outlets (MBOs). Additionally, production efficiencies, better customer service, and cost savings in terms of reduced costs and manufacturing expenses are anticipated.

In a strategic move to diversify its product portfolio, Sheela Foam has also acquired House of Kieraya (Furlenco), a digital-first brand in the fast-growing branded furniture category. This acquisition is expected to drive footfalls to Sheela Foam’s exclusive brand outlets by introducing a complementary product line of branded furniture.

Based on these developments, ICICI Securities maintains a positive outlook on Sheela Foam and has recommended a buy rating on the stock with a revised target price of Rs 1,400, up from Rs 1,300 earlier. The research report cites long-term opportunities such as the benefits from the China+ strategy of international buyers, the potential in furniture cushioning and manufacturing, sustained acceleration in the Indian business, increasing consumer awareness of the importance of good quality mattresses, and the focus on growing the e-commerce channel as factors supporting their bullish stance.

However, the report also highlights potential downside risks, including adverse movements in the prices of key inputs and increased competition from global players and Indian e-commerce platforms.

With the acquisition of Kurlon and the expansion into the branded furniture segment through Furlenco, Sheela Foam is strategically positioning itself for growth, aiming to strengthen its market position and deliver value to its stakeholders.