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, 2023, ILP has a total of 1401.447 million shares outstanding which are held by 5997 shareholders. Directors, CEO, their spouse and minor children have the majority stake of 78.61 percent in the company followed by local general public holding 12.02 percent shares of ILP. Modarbas and Mutual Funds account for 2.81 percent shares of ILP while Banks, DFIs and NBFIs hold 2.16 percent shares. Foreign companies and insurance companies have a respective shareholding of 2.14 percent and 1.07 percent in ILP. The remaining shares are held by other categories of shareholders.Financial Performance (2019-23)With an exception of 2020, the topline and bottomline of ILP has been growing staggeringly in all the years under consideration. The margins, after maxing out in 2019 touched the rock bottom in 2020. In the subsequent years, the margins took an upward flight to reach their optimum level in 2023. The detailed performance review of the period under consideration is given below. In 2019, ILP posted 20.36 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 coupled with depreciating value of Pak Rupee, high fuel and power charges and upward revision in salaries and wages and hiring of new employees as the company added new machinery and equipments to its plants resulted in 16 percent escalation in cost of sales in 2019. Despite that, gross profit rose up by 31 percent year-on-year in 2019 with GP margin jumping up to 31.9 percent from 29.37 percent in 2018. Distribution expense remained quite in control during 2019 while administrative expense surged by 24.18 percent year-on-year. Other expense also registered massive 84.41 percent year-on-year spike due to higher provisioning for 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 healthy 42.93 percent year-on-year rise in 2019 with OP margin moving up to 17.12 percent from 14.42 percent in 2018. Finance cost increased by 106 percent due to higher discount rate during the year. Gearing ratio fell from 66.95 percent in 2018 to 48.15 percent in 2019 due to issuance of 109 million ordinary shares during the year and a decline in the borrowings. ILP’s bottomline posted an increase of 33.69 percent year-on-year in 2019 with NP margin of 13.86 percent, up from 12.48 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 during the year not only resulted in curtailed operations but also squeezed the demand from major export markets. ILP’s net sales revenue tumbled by 3.14 percent in 2020 yet there was no respite in the cost of sales owing to supply bottlenecks. This pushed the gross profit down by 34.22 percent year-on-year in 2020 with GP margin deteriorating to 21.66 percent. Distribution expense shrank by 27.89 percent because of lower sales volume, while administrative expense grew up 10.77 percent in 2020. Other expense faded by 35.69 percent in 2020 on account of lesser provisioning for WPPF, lesser donations and no provisions booked against impairment loss in 2020. Other income also provided tremendous support to the bottomline as it grew by 585.41 percent in 2020 due to robust profit on TDRs and TFCs. Despite shrunken operating and other expense and robust other income, operating profit couldn’t sustain and dropped by 49.30 percent year-on-year in 2020 with OP margin drastically falling down to 8.96 percent. Finance cost grew by 14.21 percent in 2020 due to high discount rate in the initial quarters of FY20 as well as increased borrowings during 2020. Gearing ratio again ticked up to 55.53 in 2020. Net profit fell down by 65.42 percent year-on-year in 2020 to clock in at Rs.1796.40 million with NP margin of 4.95 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 51.4 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 43.29 percent. GP margin rebounded to 25.86 percent in 2021 with 80.73 percent rise in gross profit due to hefty export sales. Higher sales volume translated into higher selling commission which drove the distribution expense up by 31.5 percent in 2021. Administrative and other expense also went up by 27.22 percent and 82.25 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 146.54 percent in 2021 with OP margin of 14.59 percent. Downward revisions in discount rate played a role in keeping the finance cost almost intact despite increased borrowings in 2021. Gearing ratio climbed to 59.62 percent in 2021. Net profit posted a tremendous gain of 250.23 percent in 2021 to clock in at Rs. 6291.57 million with NP margin of 11.45 percent. EPS also improved and rose up to Rs. 7.0 in 2021. 2022 stands out in terms oftopline growth which was recorded at 65.38 percent in 2022. Steep depreciation of local currency provided remarkable growth impetus to ILP’s sales which reached the record high value of Rs.90,894.05 million in 2022. Despite high inflation and supply chain bottlenecks due to import restrictions, gross profit surged by 83.41 percent year-on-year in 2022 with GP margin of 28.68 percent. 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 multiplied by 133.11 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 64.94 percent in 2022 as there was no reversal of impairment loss in 2022 unlike last year. Operating profit rose by 98.46 percent in 2022 with OP margin of 17.5 percent. Finance cost surged by a massive 117.34 percent in 2022 due to monetary tightening as well as high borrowings. Gearing ratio escalated to 63.12 in 2022. Net profit mounted by 96.45 percent in 2022 to stand at Rs.12,359.50 million with NP margin of 13.6 percent. EPS clocked in Rs.8.82 in 2022. ILP registered 31.14 percent year-on-year topline growth in 2023 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 22.37 percent in 2023, yet gross profit rose by 52.97 percent with GP margin clocking in at 33.45 percent – the highest during the period under consideration. Distribution expense grew by 16.87 percent due to higher selling commission and shipping charges incurred during the year. Administrative expense also surged by 33.41 percent in 2023 on account of higher payroll expense despite the fact that ILP streamlined its workforce from 31,986 employees in 2022 to 30,774 employees in 2023. 26.96 percent year-on-year spike in other expense in 2023 was due to higher profit related provisioning done during the year. Other income grew by 177 percent in 2023 on the back of profit on TFCs, exchange gain and unrealized gain on derivative instruments. ILP registered 70.34 percent improvement in its operating profit in 2023 with OP margin climbing up to 22.74 percent. Finance cost multiplied by 121.73 percent in 2023 owing to higher discount rate and additional long-term and short-term borrowings obtained during the year. However, increase in the company’s equity due to higher un-appropriated profit and elevated paid-up capital through issuance of bonus shares pushed down gearing ratio to 57.57 percent in 2023. Net profit strengthened by 63.21 percent to clock in at Rs.20,171.846 million with EPS of Rs.14.39 and NP margin of 16.92 percent. Recent Performance (9MFY24) ILP recorded year-on-year improvement of 34.15 percent in its net sales during 9MFY24 due to surge in export orders. However, stability in the value of local currency, high inflation and energy cost didn’t allow the company to sustain its GP margin which fell to 30 percent in 9MFY24 from 33.5 percent during the same period last year. Distribution expense multiplied by 35.73 percent during 9MFY24 due to higher shipping charges and elevated sales commission owing to increased sales volume. Administrative expense also hiked by 43.48 percent during the period due to higher payroll expense on account of inflationary pressure. Lower profit related provisioning cut down other expense by 5.12 percent in 9MFY24 while other income grew by 278.21 percent during the same period supposedly due to higher profit on TFCs. The company didn’t make any exchange gain during the period. Operating profit picked up by 15.86 percent during 9MFY24 with OP margin of 19.6 percent versus OP margin of 22.7 percent recorded during the same period last year. Repayment of subsidized loans and acquiring new loans increased the outstanding total borrowing of ILP during the period and drove up finance cost by 86.64 percent during 9MFY24. Net profit slumped by 7.15 percent to clock in at Rs.13155.33 million in 9MFY24 with EPS of Rs.9.39 versus EPS of Rs.10.11 recorded during 9MFY23. NP margin also slid from 16.8 percent in 9MFY23 to 11.7 percent during 9MFY24.Future OutlookHigh demand from the US and the Eurozone based apparel and fashion industry will continue to drive the sales up. Recent investment in a vertically integrated knitwear plant will diversify the company’s sales mix and add to its topline growth. Acquisition of 64 percent stake in a US based firm Top Circle hosiery mills co. Inc. will also enhance shareholders value. On the flipside, volatility in raw material prices, towering energy prices and high cost of borrowing will continue to be the areas of concern.