Interloop Limited

Interloop Limited (PSX: ILP) was incorporated in Pakistan in 1992 and got listed on PSX in 2019. The company is engaged in manufacturing hosiery, denim, knitted apparel, active wear for the world’s leading brands and retailers. Besides, ILP also produces yarn. The company has its industrial infrastructure based in Pakistan, an associate manufacturing facility in Srilanka, sourcing office and affiliate manufacturing facility in China and marketing offices in USA, Europe and Japan.

Pattern of Shareholding

As of June 30, 2022, INP has a total of 898.363 million shares outstanding which are held by 4282 shareholders. Directors, their spouse and minor children with a shareholding of 79.86 percent shares are the largest shareholders of ILP. This is followed by local general public holding 9.44 percent shares of ILP. Modarbas and Mutual Funds have a stake of 4.51 percent in the company while Banks, DFIs and NBFIs hold 1.91 percent shares. The next category of shareholders is Insurance companies which hold 1.82 percent shares of ILP while foreign companies have a shareholding of 1.31 percent. The remaining shares are held by other categories of shareholders each having less than 1 percent stake in ILP.

Performance Trail (2018-22)

The topline and bottomline of ILP has been growing staggeringly in all the years under consideration with an exception in 2020. The margins after maxing out in 2019 touched the rock bottom in 2020. In the subsequent years, the margins took an upward flight. The detailed performance review of each of the years under consideration is given below.

In 2019, ILP posted a 20 percent year-on-year growth in its topline which mainly came on the back of robust export sales which became even more attractive because of favorable movement in the exchange rate. High cost of raw materials came on account of depreciating value of Pak Rupee, high fuel and power charges coupled with upward revision in salaries and wages and hiring of new employees as the company added new machinery and equipments to its plants. Despite that, gross profit rose up by 31 percent year-on-year in 2019 with GP margin jumping up to 32 percent from 29 percent in 2018. Distribution expense remained quite in control during 2019 while admin expense inched up by 24 percent year-on-year. Other expense also registered a massive 84 percent year-on-year rise due to higher WPPF, generous donations and charity and provision on impairment loss on investment in IL Bangla Limited. Other income also magnified by 58 percent year-on-year due to interest on receivables from IL Bangla Limited. Operating profit posted a healthy 43 percent year-on-year in 2019 with OP margin moving up to 17 percent from 14.4 percent in 2018. Finance cost increased by 106 percent due to higher discount rate during the year. Debt-to-equity ratio fell down from 2.61 in 2018 to 1.28 in 2019 due to issuance of 109 million ordinary shares during the year and a decline in the borrowings. The bottomline posted an increase of 34 percent year-on-year in 2019 with an NP margin of 14 percent from 12.5 in 2018. EPS also enlarged from Rs.5.1 percent in 2018 to Rs.6.67 in 2019.

Being an export oriented business, ILP badly suffered in 2020 due to restrictions on the movement of people and goods on account of COVID-19. Lockdown imposed not only resulted in curtailed operations of the company but also tamed demand from major export markets. The sales revenue tumbled by 3 percent in 2020 yet there was no respite in the cost of sales owing to supply bottlenecks. This pushed the gross profit down by 34 percent year-on-year in 2020 with GP margin deteriorating to 21.7 percent in 2020. Distribution expense shrank because of lower sales volume, while admin expense grew up by 11 percent in 2020. Other expense buttressed the bottomline as it faded by 36 percent on account of lesser provision for WPPF, lesser donations and no provisions booked against the impairment loss in 2020. Other income also provided tremendous support to the bottomline as it grew by 585 percent in 2020 due to robust profit on TDRs and TFCs. Despite shrunken operating and other expense and high other income, operating profit couldn’t help but dropped by 49 percent year-on-year in 2020 with OP margin drastically falling to 9 percent. Finance cost grew by 14 percent in 2020 due to high discount rate in the initial quarters of FY20 as well as increased borrowings during 2020. Debt-to-equity ratio again ticked up to 1.63 times in 2020. Net profit fell down by 65 percent year-on-year in 2020 to clock in at Rs.1796.40 million with an NP margin of 5 percent. EPS also contracted to Rs.2.06 in 2020.

In 2021, ILP’s topline bounced back and boasted a year-on-year growth of 51 percent. High raw material charges, upward revision is salaries and wages, soared knitting, processing and packing charges as well as inflated fuel and power charges pushed the cost of sales up by 43 percent. GP margin rebounded to 26 percent in 2021. Higher sales translated into higher selling commission driving the distribution expense up by 32 percent in 2021. Admin and other expense also went up by 27 percent and 82 percent respectively in 2021. Reversal of impairment loss and exchange gain were the two main drivers behind 65 percent year-on-year rise in other income in 2021. Operating profit multiplied by an astounding 147 percent in 2021 with an OP margin of 14.6 percent. Downward revisions in discount rate played a role in keeping the finance cost almost intact despite increased borrowings in 2021. Debt-to-equity climbed to 1.96 times in 2021. Net profit posted a tremendous gain of 250 percent in 2021 to clock in at Rs. 6291.57 million with an NP margin of 11.4 percent. EPS also improved and rose up to Rs. 7.0 in 2021.

2022 appears to be the most successful year when it comes to topline growth which clocked in at 65 percent. Steep depreciation of local currency provided remarkable growth impetus to ILP’s sales which reached the record high value of Rs.90894.05 million in 2022. Despite high inflation and supply chain bottlenecks due to import restrictions, gross profit surged by 83 percent year-on-year in 2022 with a GP margin of 28.7 percent in 2022. High operating cost came on the back of hefty sales commission, sea and air freight, export development surcharge and upward revisions in salaries and wages. Other expense ticked up by 83 percent year-on-year in 2022 on the back of realized loss on derivative financial instruments as well as higher provisioning of WWF and WPPF on account of high profits. Other income didn’t paint a good picture as it shrank by 65 percent in 2022 as there was no reversal of impairment loss in 2022. Operating profit rose by 98 percent in 2022 with an OP margin of 17.5 percent – the highest among all the years under consideration. Finance cost surged by a massive 117 percent in 2022 due to monetary tightening as well as high borrowings. Debt- to-equity ratio inched up to 2.22 times in 2022. Net profit mounted by 96 percent in 2022 to stand at Rs.12,359.50 million with an NP margin of 13.6 percent. EPS clocked in Rs.13.76 in 2022.

Recent Performance (9MFY23)

ILP registered a stunning 39 percent year-on-year topline growth in 9MFY23 despite severe economic and political headwinds in the country. Supply chain bottlenecks, shutdown of gas supply, sizable upsurge in cotton prices inflated the cost of sales by 25 percent in 9MFY23, yet gross profit rose by 76 percent with GP margin standing at 33.5 percent from 26.4 percent in 9MFY22. High operating expense highlights inflation as well as an increase in company’s operations during the period due to robust demand from the export markets. Other income magnified by 137 percent in 9MFY23 which other expense grew by 38 percent which may be the result of higher exchange gain and higher WWF and WPPF respectively in 9MFY23. Operating profit more than doubled during 9MFY23 while OP margin grew to 22.7 percent from 15 percent in 9MFY22. Finance cost didn’t provide any relief and moved by 150 percent due to multiple upticks in discount rate coupled with higher long-term financing. Despite high cost, operating expenses and finance cost, ILP managed to drive up its bottomline by 103 percent in 9MFY23 to clock in at Rs.14,168.71 million with an NP margin of 16.8 percent up from 11.5 percent during the same period last year. EPS also jacked up from Rs.7.49 during 9MFY23 to Rs.15.17 in the current period under review.

Future Outlook

High demand from the US and the Euro zone based apparel and fashion industry will continue to drive the sales up. Besides, Pak Rupee depreciation will make the export sales further lucrative by providing hefty exchange gain. While high cost of sales, operating expense and cost of borrowing will continue to be the areas of concern amidst record high inflation and discount rate, yet robust sales will absorb the shocks and trickle down into a fat bottomline and vigorous margins.