Foundation Research|

Equities REP-095

Pakistan
Interloop Limited
Interloop
Floor Price
Recommended Price
Rs
Rs
45.0
49.4
Leading socks maker in the world
Upside/Downside % na Event
- Discounted Cashflows
Sector Textile  Interloop Limited, the largest hosiery producer in Pakistan and among the largest
Market cap Rs bn 39.2
30-day avg turnover $m na
global player, is set to be the new addition to the PSX. The company intends to raise
Market cap $m 282 ~Rs4.9bn to expand its hosiery line to meet growing demand and enter into the
Freet float % 13 lucrative denim market. It has strong profitability (margins/ROE of 29/33%) profile in
Number of shares to be issued m 109 Pakistan textile industry. We recommend subscribing to the IPO up to Rs49.4/sh.
Total shares (Post IPO) m 871
Investment fundamentals Impact
Year end June 2018A 2019E 2020E 2021E
 About the issue: The present offer comprises of 109mn ordinary shares (12.5% of
Net Revenues m 31,139 36,558 43,839 52,744
EBITDA m 5,971 7,227 8,503 10,204 the post-IPO paid up capital), all of which will be offered via the book building (March
EBITDA growth % na 21 18 20 13 & 14) at a floor price of Rs45/sh with an upper limit of 40% above floor price
PBT m 4,006 4,625 5,399 6,654 (Rs63/sh). However, the successful bidders would be provisionally allotted only 75% of
Recurring prof. m 3,886 4,370 5,292 6,636
the shares (81.75mn) and the remaining 25% (27.25mn) would be offered to the retail
Net Profit m 3,886 4,370 5,292 6,636
investors on March 21 & 22. The issue would generate Rs4.9bn at the floor price and
be utilized for (1) expansion of hosiery segment and (2) expansion into denim
EPS Rs 4.5 5.0 6.1 7.6 production. Any excess funds generated from the IPO would be utilized to reduce
Rev Growth % 17.4 17.4 19.9 20.3
EPS growth % 29.1 12.5 21.1 25.4
reliance on debt (short and long term) and meeting working capital requirements.
Price to Earnings x 10.1 9.0 7.4 5.9
 Hosiery expansion on the back of demand growth: The company has been a top
DPS Rs 1.1 - 1.2 2.3 supplier to global brands (Nike, Reebok, Adidas, Target, Amazon, etc) for a number of
Div. Yield % 2.4 - 2.7 5.1 years and intends to expand its hosiery line (by 23%) which is operating at ~82%
utilization with high margins/ROE of 29/33% in FY18. Global hosiery demand is
ROA % 14.4 11.5 11.8 13.5
ROE % 33.0 31.8 25.8 26.6
expected to grow by CAGR of 3.5% (as per statista.com) over the next 3 years due to
EV/EBITDA x 9.8 7.2 6.3 5.3 changing lifestyles and demographics. We foresee that when the hosiery project comes
Net D/E x 2.0 1.0 0.8 0.6 online in 1-2 years, it would help to cater to demand growth.
Price to Book x 4.3 2.1 1.7 1.4
Price to Sales x 1.3 1.1 0.9 0.7  New denim line to diversify product offering: As this business line is very different
from the socks business, we expect that generating denim sales would take a long
time. Demand for denim is strong given that (1) Pakistani cotton is more suitable for
denim, (2) increasing disposable income and (3) inclination towards western fashion
trends in emerging economies. However, supply growth is expected to supersede
increase in demand due to expected increase in production facilities around the globe.
 Currency depreciation a positive: The 24% Rs-US$ devaluation over the last year
would bode well for the company as ~89% of the company’s product is exported.
However, this would translate into a 6-7% impact on the bottom line (some benefit is
passed on) that would subsequently be normalized with local inflation catching up.
 Diversifying customer base: About 85-90% of the company sales are to US and
Europe. However, the company is diversifying and expanding into Russia, Japan, China
Brazil and Argentina. The company is given preferential treatment by clients for large
orders and new product launches due to long reputable relationship.
Analysts
Key Catalysts & Risks
Zeeshan Azhar zeeshan@fs.com.pk
+92 21 3561 2290-94 Ext 331  Key catalysts: (1) Pilot projects to test new products, (2) Promissory notes in lieu of
sales tax refund from govt and (3) GIDC reduction.
 Key risks: (1) Economic slowdown in export markets and (2) client concentration.

Founda ti on Securi ti es (Pvt) Ltd Recommendation

Monda y, Ma rch 11, 2019
 We advise investors to ‘Subscribe’ the issue up to Rs49.4/sh.
Please Refer to last page for important disclosures and analyst certifications www.jamapunji.pk
Interloop Limited March 11, 2019

Fig 01: Sales growth vs Industry growth Fig 02: High profitability ratios
15% US$-Rs rate 112
GP margins ROE
Textile industry growth 34%
110
10% Sales growth 32%
108
30%
5%
106 28%

104 26%
0%
FY15

FY16

FY17

FY18
24%
102
-5% 22%
100
20%

FY15

FY16

FY17

FY18
-10% 98

Source: Company acc, FSL Research, March 2019 Source: Company acc, FSL Research, March 2019

Fig 03: Production increasing (mn pairs) Fig 04: Projects funded nearly equal by debt & equity

540 Machines Production 4700 12,000

530
4500 10,000
520
4300 8,000
510 Denim Debt

500 4100 6,000

490
3900 4,000
480
3700 2,000 Hosiery Equity
470

460 3500 -
FY16

FY17

FY18

Projects Equity/Debt

Source: Company acc, FSL Research, March 2019 Source: Company acc, FSL Research, March 2019

Fig 05: Project Expenditure

Hosiery Denim Hosiery+Denim
Plant and Machinery 2,698 3,893
Land & Building 872 2,193
Power and Utilities 903 529
Miscellaneous 31 135
Total 4,504 6,750 11,254

Source of funds
IPO Proceeds 4,905
Debt 6,349
Total 11,254
Source: Prospectus, Foundation Research March 2019

2 Foundation Securities (Pvt) Limited

 Interloop Limited March 11, 2019

Fig 06: Interloop Key Financials

Balance Sheet FY18A FY19E FY20E FY21E Profit & Loss FY18A FY19E FY20E FY21E

PP&E m 14,522 14,905 18,792 22,157 Net Sales m 31,139 36,558 43,839 52,744
Trade Debt m 7,293 8,417 9,977 11,247 COGS m 21,977 25,531 30,779 37,277
Cash & equivalent m 194 6,563 3,462 1,689 Gross Profit m 9,162 11,027 13,060 15,467
Other Assets m 10,741 13,035 14,582 16,234 Operating Expense m 4,256 5,208 6,323 7,315
Total Assets m 32,750 42,921 46,814 51,327 Other Expenses m 416 303 373 453
EBIT m 4,489 5,516 6,365 7,699
ST Borrowing m 15,181 13,678 10,971 9,348 Finance Charges m 484 892 966 1,045
LT Borrowing m 3,218 4,272 6,171 6,717 PBT m 4,006 4,625 5,399 6,654
Trade Payable m 2,730 4,193 4,300 4,857 Taxation m 120 255 107 18
Other Liabilities m 2,539 2,416 2,763 3,165 PAT m 3,886 4,370 5,292 6,636
Total Liabilities m 23,668 24,559 24,206 24,087
EPS 4.5 5.0 6.1 7.6
Paid-up Capital m 1,901 8,714 8,714 8,714 EPS growth yoy % 29% 12% 21% 25%
Others m 7,181 9,648 13,894 18,525 DPS 1.1 - 1.2 2.3
SH' Equity m 9,083 18,362 22,608 27,240

Key ratios FY18A FY19E FY20E FY21E Key ratios FY18A FY19E FY20E FY21E

Sales Growth % 17% 17% 20% 20% BVPS 10.4 21.1 25.9 31.3
Net Profit Growth % 29% 12% 21% 25% EPS 4.5 5.0 6.1 7.6
Current ratio x 0.9 1.4 1.6 1.8 PE x 10.1 9.0 7.4 5.9
Inventory Turnover days 72 80 80 78 PBv x 4.3 2.1 1.7 1.4
Receivables Turnover days 71 78 77 73 GP margins % 29% 30% 30% 29%
Payables Turnover days 38 49 50 45 EBIT margin % 14% 15% 15% 15%
Cash Conversion Cycle days 105 109 106 106 Net margin % 12% 12% 12% 13%
Total Debt to Equity x 2.0 1.0 0.8 0.6 ROE % 33% 32% 26% 27%
EBITDA/Interest x 12.3 8.1 8.8 9.8 ROA % 14% 12% 12% 14%
EV/EBITDA x 9.8 7.2 6.3 5.3 Earnings yield % 10% 11% 13% 17%
Payout Ratio % 24% 0% 20% 30%
Dividend Yield % 2% 0% 3% 5%
All figures in PKR unless noted
Source: Foundation Research, March 2019

Fig 07: Peer Comparison

Price PE PB Gross Margin Net Margin 3yr Rev CAGR
Nishat Mills 138.0 11.0 0.6 10.3% 7.6% 1.6%
Feroze 1888 103.3 12.8 2.4 22.2% 12.6% 7.5%
Gul Ahmed Textile 56.1 7.6 1.6 21.0% 4.5% 11.0%
Kohinoor Textile Mills 39.4 6.5 0.7 13.9% 9.3% 4.0%
Nishat Chunian 52.2 3.8 0.9 12.0% 6.6% 14.4%
Sapphire Textile 1185.7 14.9 1.5 12.2% 6.7% 7.4%
Artistic Denim Mills 65.0 11.0 0.9 9.6% 6.3% 5.6%
Average 9.7 1.2 14.5% 7.7% 7.3%

Interloop 45.0 8.8 3.8 29.4% 12.5% 8.8%

(Discount)/Premium -9% 207%
Source: Company reports, Foundation Research, March 2019

3 Foundation Securities (Pvt) Limited

Interloop Limited March 11, 2019

Important disclosures:
Disclaimer: This report has been prepared by FSL. The information and opinions contained herein have been compiled or arrived at based upon
information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified and no guaranty,
representation or warranty, express or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to
change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are
not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or
other financial instruments. FSL may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis
before such material is disseminated to its customers. Not all customers will receive the material at the same time. FSL, their respective directors, officers,
representatives, employees, related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers
described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial
instruments from time to time in the open market or otherwise, either as principal or agent. FSL may make markets in securities or other financial
instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. FSL may have
recently underwritten the securities of an issuer mentioned herein. This document may not be reproduced, distributed or published for any purposes.

Research Dissemination Policy: Foundation Securities (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible
clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the
material at the same time.

Target price risk disclosures: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors
which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially
affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in
interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative
instruments, to manage certain of these exposures.

Analyst certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers
and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this
research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Foundation
Securities and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.

Recommendations definitions
If
Expected return >+10% Outperform.
Expected return from -10% to +10% Neutral.
Expected return <-10% Underperform.

4 Foundation Securities (Pvt) Limited