This Small Cap Stock Gave 100% Returns In 3 Yrs, Trading Near 52 Week Low, Buy For 26% Gains

Stock Outlook & Returns

The share price of Sheela Foam on NSE is trading at Rs 2,631.25 per share, 0.48% down from its previous close. It is trading 3.88% away from its 52-week low level, which the stock recorded on 30 November 2022 at Rs 2,535.95. Its 52-week high level is Rs 4,055 recorded on 13 April 2022.

The shares in the past 1 week, fell 1.55% and in 1 month, it 9.19%, and in 3 months fell by 18.86%, respectively. In the past 1 year, it has given 21.02% negative returns. In the past 3 and 5 years, the stock has given 100.86% multibagger returns and 49.8% positive returns, respectively.

 Its Return on Equity (ROE) is 15.60%. TTM PE ratio is 60.74. The P/B ratio is 9.17. TTM EPS is Rs 43.32. The Debt to equity ratio is 0.24. It has a market capitalization of Rs 12,835.98 crore.

Soft Q3, demand recovery delays to Q4

Sheela Foam (SFL) in its Analyst meet (on 1st Dec'22) informed that 1) Demand recovery has remained slow in India and Spain post Q2, owing to high inflation and geopolitical unrest 2) Further correction in its key raw material prices by ~10% as on date (from Q2) will support EBITDA margin recovery 3) The Rs 350 crore capex plans to ramp up its production capacity over FY23E-24E is on track.

In India, Home care segment (80% of revenue) remains impacted owing to demand postponement amid high inflation. However, the technical products segment (~20% of revenue) continues its performance led by strong demand from the automotive industry. In the overseas subsidiaries, Australian subsidiary witnessed improved demand followed by new product launches, the Spain business remains impacted (with ~75-80% demand recovery) due to geo-political unrest. The management expects demand recovery across regions to start from Q4 onwards supported by easing inflationary pressure and strong housing demand. We cut our earnings estimate by ~6%, 2% for FY23E, FY24E respectively factoring in slow offtake in India and Spain. Overall we like SFL for its strong brand and leadership position in the domestic mattresses industry and its robust balance sheet condition.

Valuation

The brokerage said, "We maintain our BUY rating on the stock. We value the stock at 50x FY24E EPS with revised target price of Rs 3300/share." 

Analyst meet highlights

• SFL is currently facing demand related challenges in the domestic market as there is lower footfall in the retail outlets and consumers are postponing their discretionary spend amid rising inflation. The company is ramping up its distribution network to reach more consumers.
• SFL is also facing a demand slowdown in its Spain business due to geopolitical conditions in Europe. The current demand in Spain has come down to 75% of the normal demand. However the management expects demand for exports to pick up from Q4 onwards.
• The company has improved its product offering in Australia and the Australian market remains to be stable with strong demand. SFL has maintained its 40% market share in Australia  Prices of SFL's key raw materials, TDI and Polyol have softened significantly.
• TDI prices have declined by ~10% to Rs 225/kg from an average of Rs 248/kg in Q2FY23. Polyol prices are at an all time low of Rs 120/kg. This is expected to aid the margins of the company. The management expects gross margin to be at ~45% or a little higher in the coming quarters.
• SFL has maintained its Capex guidance of Rs 350 crore over the next two years to increase its manufacturing capacity by 23% in India & overseas.

Disclaimer

The stock has been picked from the brokerage report of ICICI Direct. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.