After investing in manufacturers of furniture and kitchen appliances, private equity investors seem to have developed a new fondness to Indian mattress makers. A clutch of PE firms have started due diligence on a few large mattress makers in what is a predominantly an unorganised market with many small regional players. A news report early this week quoting sources hinted that private equity major Carlyle is in talks to pick up a significant stake in privately held Kurlon Ltd for Rs 400 crore, valuing the company at Rs 900 crore. Apax Partners and Darby Private Equity were also, reportedly, in talks with Kurlon for a stake buy. VCCircle independently confirmed that some of these PE firms are indeed interested in the space. Here we look at what makes it a sector worth looking for PE investors. Mattress as a product is a necessity rather than consumer discretionary item which makes it a safe bet to begin with. Add to it the huge unorganised market, which is waiting to be converted into the more value added fold and we have the perfect recipe to attract investors to a sustainable growth story.
According to credit rating agency ICRA, the mattress market is currently at Rs 5,000 crore ($900 million) of which three fourth is accounted by cotton mattresses, which is largely a low value unorganised market. Just about a fifth of the total market for mattresses comprises the rubberised coir mattress (RBC) segment. Rest comprises high end foam based mattresses. Factors like favourable demographics, changing life styles and increase in disposable income make this an attractive market. The biggest selling point for the sector is that bulk of the market is unorganised and supply is by small neighbourhood cotton mattress makers. At the next level are many small regional or city-based mattress makers and there are just a handful of national mattress makers. The scenario makes for a great consolidation story waitingto be tapped by PE firms. The market leader is Kurlon, which focuses on RBC segment and has a little less than one third of total market. Kuron is three times the size of its nearest competitor Sheela Foam Pvt Ltd. Sheela Foam, which is a larger company given its other product lines, sells foam, coir and spring mattresses under the Sleepwell brand and industrial application mattresses under the Feather Foam brand.
Other major players include Duroflex India and Coirfoam (India). All the four firms are profitable and have doubled their size between FY07-11, as per data collated by VCCEdge, the financial research platform of VCCircle.There are also international brands like Raha, Hastens, Simmons and SpringAir present in India. US-based Spring Air said earlier this year that it will invest Rs 500 crore in the India market, setting up manufacturing plants in Mumbai and Kolkata. Then, there are also specialised, luxury players, who have started entering the Indian market over the last few years. Tempur Pedic International, Inc. is a manufacturer and distributor of mattresses and pillows made of open celled visco-elastic, pressure relieving and temperature sensitive material. Tempur, whose mattresses sell at over $3000, has partnered with Springwel Mattresses Private Limited in India and opened exclusive stores across the country. Another luxury player which has entered India is Italy's Magniflex brand, which is being marketed in India by Polyflex Enterprises.
Existing players like Kurlon are also entering the luxury market, with products priced between Rs 50,000 and Rs 2 lakh. Deep-diving with top local companies In terms of revenues, Sheela Foam is the largest player with standalone sales of around Rs 780 crore and consolidated group revenues of around Rs 957 crore, as per a report by rating agency CRISIL. However Kurlon has a marginally higher EBITDA margin as of FY11, the latest year for which its data is available. Taking into account Kurlon’s strong position in RBC segment, it makes perfect sense for PE firms to tap onto a growth story. “The market position of Kurlon is strengthened by a strong and growing dealer network of 7,500+ dealers, which has grown by 36 per cent since March 2010 and serves as a strong entry barrier,” as per the ICRA report. “The company reported better than anticipated growth in operating income in the nine-month period ending December 2011 on account of growth in demand from Tier II and Tier III cities,” the ICRA report dated March 2012, said.
Kurlon had net sales of Rs 569 crore and PAT of Rs 24 crore for the nine months ended December 31, 2011. Kurlon was looking to raise as much as Rs 400 crore through an IPO during FY13 to part-fund its expansion, cut debt and bankroll working capital expenses. However, the firm had planned to cut down on the expansion plan if the IPO didn’t go through. Given that the stock market is not too conducive for larger-sized issues, it could be of interest to PE firms. The firm has seen sales grow from just Rs 200 crore to over Rs 525 crore in FY11 and given the numbers for the first nine months it could be hitting on Rs 600-650 crore during FY12. This would translate into CAGR of around over 21 per cent in the six-year period. Sheela Foam, which is led by IIT Kanpur grad Rahul Gautam, is the largest player in the polyurethane foam segment. It had last year acquired its foreign partner AH Beard’s 50 per cent stake in their JV and has also been on a similar high growth trajectory.
It clocked an even higher (compared to Kurlon) 24 per cent growth in topline in FY06-11 five-year period, but also had higher debt on its books. A good chunk of Sheela Foam’s revenue comes from selling foam to furniture manufacturers and automobile seat manufacturers, which arguably shrinks the margins as a consumer facing business, could command a high pricing power. It was also looking to expand further into the home furnishing segment with bed sheets in the current fiscal. The company has also been trying to expand its retail presence through exclusive & franchisee stores and although it does not have any large manufacturing expansion project in the pipeline for which it might require PE money, it has been on the look-out for acquisition of foam units internationally with a focus on the European subcontinent. The idea was to bring cost of inputs by snapping units producing raw material used by Sheela Foam. The other two players Duroflex and Coirfoam are much smaller in size and also have lower margins.