Sheela Foam IPO - Should you subscribe?

Sheela Foam which came into existence in 1971 makes the iconic Sleepwell brand of mattresses. It commands about 6% of the mattress market but about 20-23% of the organized segment of the market. PU Foam (the type of mattress that Sheela Foam specializes in) currently makes up about 50% of the total mattress market but this is expected to increase going forward especially due to its heat retention properties. Residential demand accounts for about 64% of Sheela Foam’s sales with the rest going to sectors such as automobiles, garments, shoes and sound absorption systems. This makes the potential housing slowdown post demonetisation a major worry. There are reasons aplenty to be optimistic. A young, urbanizing country with a growing population is fertile ground for a mattress maker. Rising income levels will also induce Indians to pick branded foam mattresses (made by Sheela Foam and its peers) over more traditional ones. The market is currently dominated by the unorganised sector which commands a 70% share. The GST and demonetisation are likely to push business towards organised players from their unorganised competitors. Internet sales, currently at a low 3% of the market, are likely to move significantly up. On the other hand, the company is heavily dependent on unpredictable raw material prices with raw materials taking up about half of revenue. Its capacity utilization levels are also strikingly low at about 33%. It is offered to you at a steep earnings multiple of about 33 and the money raised will go to the promoters rather than the company (since it is a part exit). The numbers are impressive but also leave plenty of room for doubt. Its revenues grew at about 10% over the past four years while profits grew at a blistering 92%. However much of the growth occured in 2015-16 and can be attributed to inherently unpredictable raw material costs rather a rapidly growing topline or a controlled fal