Interloop Limited

Interloop Limited (PSX: ILP) – one of the largest hosiery manufacturers of the world was set up in 1992 in Faisalabad with 10 knitting machines. Today after series of expansions, it is a complete vertically integrated company with state-of-the-art spinning, yarn dyeing, knitting and finishing facilities; it is also Pakistan’s one of the largest exporting firms and one of the largest listed companies on PSX by in terms of market capitalization.

The company has clients and networks across 3 continents (EU, US and Asia) and in total, and has the capacity to produce 700 million pairs of socks and tights annually. It’s majority of the revenue comes from export sales. Interloop Hosiery consists of 5 vertically integrated manufacturing facilities spread across South Asia including 4 in Pakistan, and 1 in Sri Lanka. The hosiery giant is expanding its hosiery business further and is also diversifying into other related apparel segments such as denim, knitwear and active wear. In 2018 it set seamless active wear manufacturing unit at Interloop Industrial Park, Faisalabad. It also established IL Apparel (Pvt.) Limited; a subsidiary of Interloop Limited, for manufacturing knitwear apparel, which is planned for a complete vertical setup by 2021.

Recent Performance

Textile sector - though the largest export segment - has been struggling over the years with many challenges including value addition, keeping up the export orders, shortage of gas, lack of timely sales tax refunds etc. In addition, macroeconomic indicators at home and rising global competition primarily from China, India, Bangladesh, and Cambodia has been taking away much of the country’s share in total textile exports. Overall, FY19 was a challenging year for Pakistan characterized by consolidation measures and economic contraction. However, 2019 was a happening year for Interloop. Besides increasing its hosiery capacity further, the company was listed on the stock exchange, which was the largest private sector IPO in the country’s history. It further expanded into apparel with the establishment of Interloop Denim apparel manufacturing plant at Lahore that commenced operation in December 2019.

ILP had a historical 5-year CAGR of around 9 percent and 17 percent for revenue and earnings, respectively till FY19. The company’s revenues grew by 20 percent year-on-year in FY19, while its earnings jumped up by 34 percent year-on-year. Besides the investments paying off, a key factor for growth in topline was the favorable exchange rate regime.

Overall, where profit margin of the company increased due to its cost management and devaluation of the currency, its asset base improved on account of continuous expansion of production facilities and balancing, modernizing and replacement of existing manufacturing facilities and other routine capex investments. As far as financial leverage is concerned, it dropped due to the increase in equity base over the period due to equity injection.

FY20 was a weaker year for Interloop in terms of profitability and sales as COVID-19 struck and the ensuing restrictions affected operations. During the year, Interloop sold 39.5 million dozen of socks and tights, 11.2 million kgs of yarn and processed 0.846 million kgs of dyed yarn. While revenues witnessed a decline of around 3 percent, year-on-year, a 10 percent decline was seen in exports of the company that fell from $231 million to $209 million in FY20. Earnings saw a decline of over 65 percent in FY20 as country wide lockdown as ell as lockdown in the international markets affected company’s sales. ILP has been diversifying its operations rapidly because resulting in additional finance costs in times of high interest rate environment. Also, increase in asset base of the company resulted in higher leverage ratio for the year.

Interloop in 1HFY21 and beyond

Textile exports in FY20 dropped by 6 percent year-on-year with most of the decline witnessed in the last 4 months. The sector’s profits plunged by 62 percent year-on-year in FY20. However, textile exports for 1HFY21 grew by 7.79 percent year-on-year. The knitwear exports increased by 16.55 percent. Likewise, exports of bed wear increased by 16.38 percent while the exports of towels increased by 17.47 percent. As such, one sector that has come out successful from the pandemic-hit year has been the textile sector in the country primarily because of resumption of backlogged export orders as well as rising new export orders, especially in the value-added textiles. Where FY20 bogged was down declining exports and profits for the textile sector hopes for FY21 have been pinned to a V-shaped recovery in the sector.

The textile giant has been focusing on investment in all segments especially denim, and knitwear. The company’s performance in its recently announced financial performance for 1HFY21 shows massive increase in the company’s profits. Around 90 percent year-on-year growth in 1HFY21 earnings for ILP came from the top where revenues were seen climbing by 37 percent year-on-year. The growth in revenues came from full capacity utilization post revival of the economic activity that brought with itself stockpiled orders as well as order diversion from countries that continued to remain closed or under restrictions due to Covid-19. Not only has ILP’s hosiery division been operating at 100 percent capacity with no more order-booking till June’21 as well as continuous addition of new machineries; but the denim plant also reached close to 100 percent capacity utilization by the end 1QFY21.

Besides the growth in the topline, the gross profits and net profits also benefitted from lower raw material cost - in particular, the procurement of cotton earlier at cheaper prices. Also, the gross margins and net margins improved due to economies of scale being achieved in the denim division and moderate increase in finance cost despite the expansions going on.

ILP has many ongoing expansion projects and integration on the horizon. Capacity addition of up to 22 percent of the current capacity in the hosiery division is expected to be commissioned by end of CY21; Denim division expansion project’s second phase of the project is almost ready and is expected to start its commercial operations by the end of FY21; and the integration of ILP Apparels into ILP as well as is divestment of ILP Bangla Limited is anticipated soon.