The much awaited public offering of Interloop Limited, the world’s leading socks maker and exporter, yielded a strike price of Rs46.1/share, slightly above the floor price of Rs45.share , successfully raising Rs5 billion. All leading brokers had advised investors to subscribe to the IPO, with an average fair value of Rs55/share. But then, one would struggle to recall an IPO that the broker community advised to not subscribe. Almost all IPO prospectuses read a rosy picture – and Interloop’s was no different.
That said, the company’s past performance and the plans in place do make it difficult for any other call but to subscribe. For one, the peer comparison for Interloop does not really hold ground, as an analyst rightly bracketed the company “in a league of its own.” Specializing in the high margin segment of socks, means the gross profit margins, are as high as three times of the biggest market players. And these are not any socks; they are being made for the likes of Nike, Puma, Adidas and Reebok.
Some may point out that the stock appears expensive on grounds on earnings multiples. It must take an extremely risk averse investor to simply evaluate Interloop’s value on trailing earnings multiples, compared with the companies, where a near comparison does not warrant much merit, and the premium too is barely 1-2 percent.
The real deal is the earnings growth – and the apt ratio to look for is the Price to Earnings Growth, which sits very attractively. Even the most conservative estimates put the 5-year forecast profit CAGR to comfortably in mid teens. Don’t forget the whole purpose of the IP is expansion into the current line, and introducing a new one in the denim business, which is another high growth high margin value added category. And mind you, the margins may still see more improvement, as the benefits to the textile sector in terms of energy pricing are yet to take full effect.
The ROE too, comfortably beats the sector players – making most of them look like ‘also rans’. As the company’s CEO had earlier in a conference stated the rule of thumb in his line of business – explaining it takes no more than three years to double the return on equity. The company’s production of socks alone is to increase by 48 percent from current levels by July 2021. Add to that a matter of more than 10 million denim jeans per year – of which the first batch will commence operations by October 2019. Expect the top line growth to stay strong – and the earnings multiple comparisons can be expected go for a toss.
Some may be concerned on the financing cost of the expansion project – as 56 percent of it is planned to be debt financed. Given the project will be online within three years, and most of the finance cost will only incur once the expansion project is generating revenues – this should not be much of a concern. Interloop has also hinted at the option of using internal cash to finance the expansion project, should the situation demand so.
Interloop’s is one of many more IPOs slated for 2019. The IPOs in the last two years have been a mixed bag, with three of the six outperforming the KSE-100, whiles the other three massively underperforming. If the others in queue have fundamentals, as close to as sound that of Interloop’s, 2019 could well be a year for the IPOs.
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