Interloop Ltd IPO: Should you invest?

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  • Interloop Limited is offering to sell 81.75 million shares through book building process on 13th and 14th March, 2019
  • The company intends to carry out Rs. 11.2 billion capital expenditure to expand its hosiery segment and set up a new “Denim” production line

Interloop limited, one of the largest players in the textile sector of Pakistan is all set to offer 81.75 million shares for sale through Book Building on 13th and 14th March 2019. The company has set floor price of Rs. 45/share to raise minimum fresh capital of Rs. 4.9 billion. Retail Investors IPO for 27.2 million shares is scheduled for 21 & 22 March 2019

Interloop Limited: A large scale Textile Player

Interloop limited is one of the world’s best and largest hosiery manufacturers. The company operates the largest, vertically integrated state of the art production facilities including spinning, dyeing, knitting, and finishing, in Pakistan and Bangladesh.
Interloop has the largest customer base with big names including Nike, Adidas, Reebok, and Puma. It wasn’t an easy feat to make these big names its regular clients. Interloop was able to attract these clients by offering superior product quality, timely delivery and following strict business ethics.

Why is there need of an IPO?

The company is planning to carry out Rs. 11.2 billion Capital Expenditure to expand its Hosiery segment and setup new Denim manufacturing facility. Currently, hosiery segment has capacity to produce 624mn pairs annually and operates at 84% capacity utilization. While new Denim manufacturing facility is planned to have capacity of 40,000 pieces per day. Hosiery segment capacity is projected to be increased to 750 million pairs annually.

Out of total expansion cost of Rs. 11.2 billion, company intends to raise minimum of Rs. 4.89 billion as fresh equity through IPO while remaining Rs. 6.3 billion will be raised through debt/bank financing.

Hosiery segment capacity enhancement will be incurred at the cost of Rs. 4.45 billion while Rs.6.75 billion is the projected cost of establishing a denim manufacturing facility. All these facilities are expected to commence operations within a year.

Financial Performance of Interloop

Despite challenging times for Pakistan’s Textile sector, Interloop has depicted steady growth in the last five years. It experienced an average Revenue growth of 8% in the last five years while average profitability grew by 16%. One of the strongest financial indicators of the company is its Gross margin which stands at 29%, one of the highest in Pakistan’s textile sector. Interloop posted Net earnings of Rs. 3.8 billion (Earnings per Share: 4.5) in 2018 on Net revenue of Rs. 31 billion. Interloop also has one of the highest Returns on Equity of 33%. Going onwards, management expects revenue to increase by 17% to reach Rs. 8.7 billion by 2023.

Key Positive developments

Currency Depreciation

A ~30% currency depreciation over last one year period has benefitted the company as it book 89% revenue in US Dollar. Going onwards, a lagged impact of currency depreciation is expected to jack up revenue.

Denim Manufacturing to increase margins

Interloop is all set to diversify in Denim Manufacturing segment with 40,000 pairs/ day capacity. Pakistani Cotton is well suited for denim manufacturing and a high margin product. Moreover, denim is one textile segment which has a higher expected global growth rate of 6% as compared to hosiery (3%). These factors are expected to lift gross margins of the company and enhance net profitability going onwards.

Diversifying Customer base

Currently, 90% of the exports are concentrated towards large US and European customers. However, company is now further diversifying and gaining market in Japan, Russia, China, Brazil and Argentina.

Interloop Valuations, What level should you invest at?

At floor price of Rs. 45/share, and forward earnings of Rs. 5/share in 2019, the Price-to-Earnings ratio stands at 9x which is in line with the Current PE ratio of 8.9x of the listed textile sector. However, investors will be eyeing 2020/2021 earnings when the full impact of enhanced capacities is realized. 2020/2021 earning per share is projected to be at Rs. 6.1 and 7.6 respectively. Resultantly, at the floor price of Rs. 45/share, Price-to-earnings ratio is projected to be at 7.3x/6x which depicts attractive level to buy the share.

Prominent brokerage houses have given buy call for the stock up till strike price of Rs. 49/ share. However, keeping in view premier clientele of the company, strong foothold in the international arena, big margins & ROE, and expected growth in earnings, massive participation is expected which may take the strike price in excess of Rs. 60 per share.

2018201920202021
Revenue (Rs. In Million)31,13936,55843,83952,744
Net Profit (Rs. In Million)3,8864,3705,2926,636
Earning/Share(Rs.)4.556.17.6
Return on Equity (ROE %)33%32%26%26%
Revenue Growth %17%17%20%20%

 This is not a recommendation, nor a buy call. Investors are requested to contact their Investment Advisor before taking risk in any investment. The Mint PK is an information portal and is not responsible for any Loss.

2 COMMENTS

  1. ”massive participation is expected which may take the strike price in the range of Rs. 60 –Rs. 70 per share.” This is simply not possible if you read offering document. There is floor price and cap price and the strike price has to be in between. Its b/w 45-63

    • Caps are tentative and as per past Book Buildings, CAPS were removed by SECP. e.g: ASC, LOADS, PREMA etc. Final Instruction on CAP is released on the day of book building.

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