UPL Ltd Quarterly Results Q2FY27 stock analysis

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Sector Outlook: Positive

Revenue Crosses Rs. 1,000 Crores for Second Consecutive Quarter; Input Cost Headwinds Impact Margins While PAT Surges 4.7x YoY

Sheela Foam Ltd., India’s leading manufacturer of polyurethane foam and mattresses (owner of flagship brands Sleepwell and Kurlon), reported its Q2FY27 financial results, marking another milestone as consolidated quarterly revenue crossed the Rs. 1,000 crores mark for the second consecutive quarter (first time ever in a Q2) and sustaining 15%+ YoY growth for the third consecutive quarter. For the quarter, consolidated revenue from operations grew 19.4% YoY (1.3% QoQ) to Rs. 1,045 crores, driven by resilient pricing actions and steady contributions across domestic and overseas businesses. Consolidated operating EBITDA stood broadly flat YoY at Rs. 87 crores (down 23.6% QoQ), with operating EBITDA margin contracting by 158 bps YoY to 8.4% (vs 10.0% in Q2FY26 and 10.9% in Q1FY27), heavily impacted by unprecedented raw material inflation (Crude +50%, Polyol +65%, TDI +33%) stemming from West Asia geopolitical disruptions and freight cost surges (+300%), alongside elevated festive A&P investments (additional Rs. 15–16 crores incurred for the Great Sleepwell Festival). Reported EBITDA stood at Rs. 83 crores (8.0% margin) after accounting for a one-time receivable provision of Rs. 4 crores related to customer A.H. Beard’s insolvency at Joyce Australia. Consolidated PAT surged 4.7x YoY (up 355% YoY) to Rs. 46 crores (vs Rs. 10 crores in Q2FY26), delivering a healthy cash EPS of Rs. 8.3 and diluted EPS of Rs. 4.2, supported by operational discipline, significantly lower finance costs (Rs. 17 crores vs Rs. 28 crores in Q2FY26), and reduced depreciation (Rs. 34 crores vs Rs. 50 crores). On a standalone basis (SFL + KEL), revenue grew 17.1% YoY to Rs. 781 crores, while EBITDA stood at Rs. 61 crores (7.8% margin). Operational segment performance reflected price pass-throughs amidst consumer elasticity: mattress value grew 8% YoY with volumes down 3% YoY (impacted by the festive season shift to Q3), while foam value expanded 26% YoY with volumes tapering 5% YoY. In distribution and mass-market channels, U2O value grew 41% YoY (volumes +1%) reaching over 10,000 dealers, while e-commerce maintained positive momentum (value +13%, volumes +2%). Overall, despite extreme input price shocks, Sheela Foam defended absolute operating EBITDA, demonstrated strong pricing power, and delivered robust bottom-line growth.

Valuation and Outlook

Sheela Foam’s medium to long-term outlook remains structurally robust, backed by undisputed domestic market leadership (30% branded mattress market share), strategic multi-brand positioning across luxury, premium, and mass categories, and the landmark consolidation of Furlenco as a subsidiary effective October 1, 2026. Management reiterated its target to achieve a 15% revenue CAGR under normalized market conditions, driven by volumes in a stable environment and pricing during inflationary periods. With Furlenco’s line-by-line consolidation starting Q3FY27, the group’s pro forma FY27 revenue is guided at Rs. 5,000 crores (Rs. 4,300–4,400 crores from core SFL and Rs. 500-600 crores from Furlenco) and pro forma operating EBITDA at Rs. 600 crores (Rs. 400–450 crores from SFL and Rs. 200 crores from Furlenco), with Furlenco’s high profitability (39% EBITDA margin, 25% ROCE) structurally enhancing group margins by 300 bps. Input cost headwinds from the Middle East conflict (+50% crude, +65% polyol, +33% TDI) led to cumulative price hikes of 35%-40% in foam and 25% in mattresses; management expects a 2%–3% margin recovery once raw material supply and global logistics normalize, paving the path back toward 12% core EBITDA margin and 13%-15% medium-term group margin targets. Domestic growth will be revitalized through the launch of innovative technology-based support layers targeting the critical sub-Rs. 10,000 segment (40% of industry volumes), rapid expansion across 10,000+ U2O touchpoints, scaling of 48 COCO stores, and aggressive entry into branded retail furniture (beds and recliners) leveraging Furlenco’s backend design and supply chain with zero incremental capex. International operations continue their strong run, with H1 revenue reaching Rs. 241 crores in Australia (13.4% operating EBITDA margin) and Rs. 250 crores in Spain (+44% YoY, 10.7% EBITDA margin). Bolstered by healthy core annual free cash flow of Rs. 150-200 crores dedicated to Indian debt reduction, deferred tax benefits of Rs. 150 crores over the next 1-2 years from Kurlon intangibles, and a net debt reduction glide path toward Rs. 500-550 crores (SFL core), Sheela Foam is exceptionally well-placed to deliver superior operating leverage, sustainable earnings expansion, and healthy return ratios. Thus, we expect Sheela Foam to generate stable revenues over the long term and is trading at a PE of 17.3x/13.2x on FY27e/28e EPS estimates. We value Sheela Foam at 21x FY27e EPS and have revised the target price to Rs. 618 (21% Upside).

Key concall Highlights

Margin Outlook & Guidance

Pro forma FY27 revenue and EBITDA, including Furlenco, are expected at approximately Rs. 5,000 crores and Rs. 600 crores, respectively.
Historical gross margins of 40%-42% have moderated to approximately 38% due to raw material inflation and limited pricing flexibility.
Management expects a 2%-3% margin improvement once raw material prices and logistics normalise.
The company had earlier targeted EBITDA margins of 13%-15% for FY28, subject to normalization of the operating environment.
Without Furlenco, approximately 12% EBITDA margin is considered achievable under normal conditions.
Existing Sheela Foam net debt of Rs. 600 crores is expected to decline to Rs. 500-550 crores by FY27-end.
Furlenco carries net debt of approximately Rs. 250 crores, taking combined net debt to around Rs. 800 crores.
Existing business is expected to generate annual free cash flow of Rs. 150-200 crores, primarily towards debt reduction.

Raw Material Inflation & Pricing

Since mid-February, crude prices increased approximately 50%, while polyol and TDI prices rose 65% and 33%, respectively.
The Middle East conflict has disrupted global supply chains, with approximately 15%-20% of global TDI capacity impacted.
The company has undertaken price increases of 35%-40% in foam and approximately 25% in mattresses.
Management prioritised absolute profitability over margins and volumes, given consumer affordability constraints.
Raw material prices are expected to ease once geopolitical tensions and global logistics normalise.

Mattress & Foam Business

H1FY27 mattress and foam segments grew 11% and 26%, respectively, while volumes remained broadly flat.
The company is introducing a new technology-based support layer to offer mattresses below Rs. 10,000 without compromising margins.
The sub-Rs. 10,000 segment accounts for approximately 40% of the mattress market and remains a key volume opportunity.
U2O business expanded to over 10,000 dealer touchpoints and registered approximately 41% growth.
Management continues to target approximately 15% revenue growth on a CAGR basis.

Marketing & Demand Outlook

Additional Rs. 15-16 crores were spent on advertising during Q2, including the Great Sleepwell Festival campaign.
Marketing expenditure is expected to remain elevated in Q3FY27 to capitalise on festive demand.
Management indicated an improvement in market demand during September and October, with the marriage season expected to support demand.

Furlenco – Consolidation & Performance

Furlenco became a subsidiary effective October 1, 2026, with line-by-line consolidation starting Q3FY27.
Sheela Foam holds approximately 43% stake on a fully diluted basis, while current accounting equity ownership stands at approximately 35%.
Furlenco’s H1FY27 revenue grew 34% YoY to Rs. 229 crores, while EBITDA increased 69% to Rs. 89 crores, with a margin of approximately 39%.
Active subscribers increased 35% YoY, with asset utilisation exceeding 90%.
FY27 revenue and EBITDA are expected at Rs. 500-600 crores and approximately Rs. 200 crores, respectively.
Furlenco will support Sleepwell and Kurlon’s branded furniture business through design, manufacturing and logistics capabilities, with limited incremental capex.

International Business Performance

Joyce (Australia): H1FY27 revenue grew 16% to Rs. 241 crores, with an EBITDA margin of 13.4%.
Interplasp (Spain): H1FY27 revenue increased 44% to Rs. 250 crores, with an EBITDA margin of 10.7%.
Joyce’s Q2 profitability was impacted by a one-time provision of approximately Rs. 7 crores following the insolvency of customer A.H. Beard.
Staqo continued to perform well, maintaining EBITDA margins of approximately 28%.