Sheela Foam Q1 FY26: Why Low Profit Hides a Profit Surge & How Kurlon Changed Everything

Sheela Foam Limited has recently unveiled its Q1 FY26 results, and while a glance at the headline Profit After Tax (PAT) might raise an eyebrow, a deeper dive into the numbers reveals a robust operational story, largely orchestrated by a successful strategic integration. As an expert financial analyst, my aim is to cut through the noise and illuminate what these results truly mean for the company’s trajectory and, more importantly, its future earnings potential.

Understanding Sheela Foam’s Growth Dynamics

Unlike project-based B2B companies, Sheela Foam, a leading comfort products manufacturer, doesn’t typically operate on a system of “orders” or “backlogs” in the traditional sense. Instead, its performance is driven by volume sales and market penetration. Therefore, our focus here will be on understanding the underlying sales and volume trends, which act as the primary indicators of future revenue generation.

The company reported an impressive 10% Year-on-Year (YoY) growth in overall mattress volumes in Q1 FY26. What’s particularly noteworthy is the divergence within this: Sleepwell volumes surged by a remarkable 22% YoY, while Kurlon volumes grew by 6% YoY. This indicates Sleepwell’s continued strength and Kurlon’s return to growth post-integration. Management’s focus on market share gain, irrespective of overall market growth, suggests an aggressive stance. Monthly growth acceleration (July better than June, June better than April) further signals positive momentum building up.

Sales Performance: More Than Meets the Eye

At first glance, Sheela Foam’s consolidated revenue from operations for Q1 FY26 stood at INR 821 crore, reflecting a modest 1.4% YoY growth. However, this seemingly subdued top-line figure masks a significant underlying improvement, particularly when dissecting the factors driving it.

The India business, encompassing Sleepwell, Kurlon, and Staqo, was the key engine, reporting a 5% YoY revenue growth to INR 644 crore. The slight decline in international business revenue (4% YoY to INR 178 crore) was largely offset by domestic strength.

A critical point to understand the “modest” overall revenue growth in the context of healthy volume gains: raw material prices for key inputs like TDI and polyol dropped. Sheela Foam strategically chose to pass on these benefits directly to consumers. This meant that while volumes increased, the per-unit price realization was lower, leading to subdued value growth in foam segments. Had raw material prices remained constant, the top-line for these categories would have shown an approximate 8-9% increase, painting a clearer picture of the underlying volume momentum. This strategy is indicative of management’s focus on competitiveness and market share.

Sales Channel Dynamics:

• E-commerce continues to be a standout performer, witnessing a robust 66% YoY value growth. Having achieved INR 200 crore in FY25, management projects a 50% value growth for FY26 through this channel, demonstrating strong digital penetration.
• The ‘Tarang & Aaram’ mattress range, targeting the sub-INR 10,000 segment (an estimated INR 12,500 crore market), showed an impressive ~60% YoY volume growth. Now present across 7,000+ dealers in 4,500 towns, this initiative achieved an annual run rate of INR 80 crore in Q1 FY26 (Q1 sales: INR 17-18 crore). Management is confident of achieving INR 100 crore+ from this initiative in the current fiscal year, highlighting its potential to tap into India’s vast mass market. These brands also enjoy healthy EBITDA margins, indicating a sustainable growth model.
• The expansion of retail footprint is aggressive, with ~400 new showrooms signed in Q1 FY26, bringing total Exclusive Brand Outlets (EBOs) to ~6,000 and Multiple Brand Outlets (MBOs) to ~16,000. This sustained network expansion is a direct lever for future sales growth, especially in Tier 1 and Tier 2 cities.

Key Business Metrics: The Kurlon Turnaround Story

The true narrative of Q1 FY26 lies in the performance of Sheela Foam’s core business metrics, particularly the transformative impact of the Kurlon integration.

Kurlon Integration: A Resounding Success The acquisition and 18-month integration of Kurlon have been “very satisfying,” turning a declining company into a growing one. The realized annual savings of INR 190 crore from the acquisition date till Q1 FY26 are a testament to management’s execution capability. An additional INR 60 crore in savings are expected by FY26 end. These savings stem from:

• Channel Optimization: Leveraging combined networks.
• Operational Facilities: Reduction from 21 to 12.
• Input Material Efficiencies: Dominant purchasing power.
• Logistics Costs: Reduction by over 1% of sales through network redesign and truck upsizing.
• Overhead Costs: Managed by a single, harmonized team.

This integration has significantly boosted profitability, leading to Kurlon achieving 10%+ EBITDA margins and contributing to the combined Core EBITDA margin of SFL + KEL rising to 11.1% in Q1 FY26 (from KEL’s 6.7% and SFL’s 9.2% in FY23). This is a strong indicator of management’s ability to deliver on their synergy guidance.

Furlenco’s Ascendance Sheela Foam’s investment in Furlenco is also yielding strong results. Furlenco onboarded over 40,000 new customers (60% increase) and now operates in 29 cities. Critically, it registered a PAT of INR 4 crore in Q1 FY26, surpassing its full-year FY25 profitability, driven by operating leverage. This demonstrates the potential of their strategic investments. Furlenco aims for INR 370 crore revenue in FY26 and INR 500-550 crore by FY27. Sheela Foam supplies some foam to Furlenco, exploring a pilot for furniture sales through SFL showrooms, indicating potential future synergies.

Earnings Performance: Operational Strength Shines Through

The most crucial aspect of Sheela Foam’s Q1 FY26 results is its Core EBITDA performance. Consolidated Core EBITDA surged by a significant 43% YoY to INR 85 crore, with Core EBITDA margins improving by 300 basis points (bps) to 10.4%. The India business alone saw Core EBITDA grow by 47% YoY to INR 75 crore, with margins expanding to 11.7%. This demonstrates excellent operational efficiency and cost management, largely fueled by the Kurlon integration benefits.

Why the Low Reported PAT? While the Core EBITDA paints a glowing picture, the reported consolidated PAT of INR 7 crore looks concerning on the surface, especially compared to INR 47 crore in Q1 FY25. However, this is primarily an accounting anomaly. The normalized PAT, after adjusting for non-cash mark-to-market (MTM) losses of INR 12 crore on government bond investments (where surplus cash of INR 450 crore is parked) and INR 10 crore on forex cover, stands at a much healthier INR 30 crore. This distinction is vital: the reported PAT does not reflect the underlying operational strength.

The significant margin expansion, driven by cost optimization and raw material price benefits being passed on, indicates that expenses are growing at a slower rate than the underlying volume growth. This operational leverage is a hallmark of a well-managed business. Given the strong operational performance and ambitious growth targets, Sheela Foam can be classified as a Fast Grower. The company’s earnings growth is being driven by strong revenue growth (in volume terms) and robust cost management through integration.

Working Capital & Financing: Prudent Management

While detailed working capital figures like receivables or inventory days were not explicitly provided, the company highlights “consistent positive cash flow generation” in its profile. The strategy of passing on raw material price benefits to customers also aids in maintaining healthy working capital by supporting sales velocity.

On the financing front, Sheela Foam is proactively managing its debt. The group’s net debt is approximately INR 700-800 crore. Management has identified assets worth INR 200 crore for monetization, with INR 40 crore already realized from the sale of smaller facilities. The aim is to reduce net debt by INR 300-350 crore in the current fiscal year, targeting a net debt level of INR 300-400 crore. This debt reduction strategy, funded by internal accruals (expected PAT of INR 150-200 crore) and asset monetization, signals a commitment to strengthening the balance sheet and improving financial health.

Capital Expenditure: Strategic Pause for Optimization

Sheela Foam’s CapEx plans are insightful. No fresh CapEx is anticipated before FY29-30, beyond routine maintenance. This indicates that the company believes its current manufacturing footprint and capacity, strategically divided into five zones across India, are sufficient to support its near-to-medium term growth aspirations. This pause in large-scale CapEx means that existing capacities are being optimized for efficiency, and future growth will primarily come from leveraging installed capacity and operational efficiencies, rather than immediate greenfield expansion. This also reduces the need for external financing in the short term.

The Road Ahead: Profitable Growth in a Favorable Market

Sheela Foam’s Q1 FY26 performance aligns well with the broader Indian economic context, which favors domestic-growth themes like consumer discretionary and manufacturing. With strong domestic demand and improving consumer sentiment, Sheela Foam is well-positioned to capitalize on these tailwinds.

Management’s guidance is clear: a focus on “profitable growth” aiming for at least 15% annual growth over the next three years. They are confident in achieving an EBITDA margin of 14-15% within three years, up from the current 10.4%. This anticipated margin expansion, coupled with debt reduction, suggests a significant portion of top-line growth flowing to the bottom line, driving improved EPS. The fixed costs are expected to remain flat this year due to ongoing savings offsetting inflation, further bolstering profitability.

Key Takeaways for Investors:

• Strong Operational Performance: Don’t be misled by the reported PAT; the Core EBITDA and underlying operational metrics are robust.
• Kurlon Integration is a Game Changer: The realized and anticipated synergies from Kurlon are significantly improving margins and profitability.
• Strategic Growth Drivers: ‘Tarang & Aaram’ and E-commerce are tapping into high-growth, underserved market segments.
• Prudent Financial Management: Proactive debt reduction and a CapEx pause indicate a focus on optimizing existing assets and strengthening the balance sheet.
• Positive Outlook: Management’s aggressive yet achievable growth and margin targets position Sheela Foam as a compelling fast-growth story within the Indian domestic consumption theme.

The company is demonstrating its capability to not only grow but to do so profitably, proving that good sleep can indeed translate into good returns! 🚀

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