On Tuesday, Investec (LON:INVP) has updated its price target for Sheela Foam Ltd (SFL:IN), raising it from INR930.00 to INR1,030.00, while keeping a Hold rating on the stock. The revision reflects the company's healthy volume growth, which is noted to be on a lower base, and benefits from the discontinuation of certain brands.
Investec's analysis indicates that Sheela Foam's management is concentrating on volume growth and efforts to de-commoditize its business. The company's low-price point brands Tarang/Aaram, along with its e-commerce sales, have been delivering the desired results. However, these factors have also been contributing to a downward pressure on the company's EBITDA margin (EBITDAm).
The company has expanded its exclusive brand outlets (EBO) footprint, which now stands at 6,700. Despite this growth, the EBITDA/Gross Margin differential has not sufficiently demonstrated the synergy gains that were anticipated. This raises questions about the effectiveness of the company's strategy and the actual benefits realized from its expansion efforts.
Furthermore, Investec has pointed out that the incremental economics of the company's partnership with Furlenco, a furniture rental service, should be closely monitored. This partnership poses potential risks to Sheela Foam's balance sheet. As Investec incorporates the third quarter results into its analysis, it has adjusted the price target to INR1,030.00, taking into account the company's outlook for the fiscal year 2027.
Investec advises investors to watch for the company's execution on volume growth, how it balances incentives and loyalties for its sales channels, the risk of cannibalization, and the economics of its association with Furlenco. These factors could influence Sheela Foam's performance and stock valuation in the future.
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