Disclaimer: The article below is the work of a participant of Fundamentals of Capital Market training. Sarmaaya.pk holds no liability for the recommendation mentioned.

Interloop is a part of the textile composite sector in PSX.Interloop Limited is a textile based B2B manufacturing company based in Faisalabad, Pakistan. It supplies socks and leggings to retailers consisting of Nike, Adidas, H&M, Puma, Levi's, Reebok and Target. The company has five hosiery manufacturing divisions, located in Pakistan, Bangladesh and Sri Lanka.In this detailed report we will look at the various aspects of the ILP’s stock on Pakistan Stock Exchange and determine whether its suitable for investment in short and long term.

In a Nutshell

• Analyst Background

• Macroeconomic Profile

• Company Profile

• Financial Analysis

• Business and Management Analysis

• Strength and Weakness

• Summary

1.Analyst Background :

Nazir Hussain is a retiree with no background in business or investment experience. He joined the Fundamentals of Capital Marketscourse with the aim of learning investment strategies in Capital Markets to generate a passive income stream. The course structure is designed to accommodate students from all backgrounds and enable them to confidently make informed decisions regarding investments in mutual funds and stocks.

2.Macroeconomic Profile:

Pakistan is import-oriented country with lot of dependency on oil and gas imports which is also the main source of inflation.

The current effect of six factors affecting economic environment of the country is as follows: -

3. Company Profile:

Interloop (ILP) is the largest listed textile company as per market capitalization and is among top exporters.
Its organizational network is spread over 3 continents with well-developed manufacturing infrastructure in Pakistan having affiliated units in Sri Lanka and China.
The company’s products include Hosiery, Spinning, Denim, Knitted Apparel, Seamless Active wear, for top international brands and retailers, besides producing Yarns for a range of textile customers.
Company also produces energy for inhouse consumption.
Was listed in 2019.
The company’s share price has hovered between Rs 31 to 82 since listing in year 2019 and is currently around Rs 42 as reflected below.

Financial Performance:

Growth Factors:

The company since its listing has shown impressive growth in all factors including Revenue, Gross and Net Profits.



The EPS has also improved from Rs 5.1 in 2018 to Rs 13.76 in 2022.

The CAGR and its comparison with its peers is as shown in the graph.

Stability Factors:

In stability ratios the company has only 5 Positives out of 12 while 5 are Negative and 2 in Average category.

The main problem is with Free Cash Flows as company has borrowed significant amount which is being invested in operations which has also been highlighted by independent auditors in its Year 2022 Report as mentioned in Note 1 at Page 83, which says, “The Company has significant amounts of borrowings from Banks and other financial institutions amounting to Rs. 51.433 billion, being 77% of total liabilities, as at reporting date”.

The audit report has also highlighted the utilization of this borrowing in Note 2 at Page 84 i.e, “The Company is investing significant amounts in its operations”.
The other reason is piling up of huge inventory as highlighted in the audit report which says, “The company has significant levels of inventories amounting to Rs. 25 billion as at the reporting date, being 25.97% of the total assets of the Company” But despite that the company has good Operating, Net Margins and Return on Equity.
The similar situation is observed in other stocks of the sector as shown.

Inventory Ratios

The inventory ratios relating Cash Flow are also in Bad category as out of 6 ratios three including Days Receivable Outstanding, Cash Per Share and Cash Conversion Cycle is Bad.
The audit report also highlighted piling up of huge inventory which was 25.97% of total assets as mentioned above.
The other companies depict similar or even worse situation as shown.

Free Cash Flow Ratios

This is the main weakness of the company as its all ratios are in Bad Category owing to heavy debt which is being invested in operations resulting into negative Free Cash Flows.
The Free Cash Flow has declined from minus 5.69B in 2021 to minus 18.59B in 2022.
The situation in this sector doesn’t seems much better as other stocks also have Free Cash Flow problems.

Valuation Factors:

This is the only area where the company has 100% positive score although PB Ratio is Bad as per Year 2022 but presently it is around 1.03 which is considered good.



It is generally in line with PSX Valuation where majority of the stocks are available at very cheap rates.
The other comparable stocks are also available in very good range.

Total Score

The Sarmaaya Financials Score has been calculated by giving weightages to Good, Average and Bad as 1, 0.5 and 0 respectively.

Then the total score has been converted into percentage which is as given in table.

5. Business and Management Analysis

Business Factors:

The company is generating good business and having better sales growth among peers along with operating and profit margins as discussed in Growth Analysis.
The latest report covering 9 x months period upto March 2023 has also shown robust growth as compared to SPLY.

The risk factors mainly relating to Debt Management effect of currency exchange are being managed properly by maintaining accounts in various currencies other than local currency.
The company is among top exporter and its main revenue is in foreign currency which gives additional profitability owing to continuous depreciation of PKR against other currencies.

Management Analysis:

There is normal insider trading activity which doesn’t indicate any abnormal activity.
The company is continuously paying Dividend and Bonuses to its share holders which makes it more attractive for the investors. The company’s average payout ratio is about 42%.


Currently about Rs 325M has been invested by Mutual Funds in ILP which gives credence to its future potentials.

The company directors/executives are holding more than 83% of company shares while financial institutions are holding 7.2% shares which indicates their strong confidence in the company.

Miscellaneous

The company is among top exporters which has grown to $423M in 2023 and has achieved 4% positive growth while all other companies have performed negatively.


Export share of revenue is more than 80% which provides additional profitability owing to PKR devaluation.



The company has its own power generation facility so is not affected by high power rates/withdrawn of subsidies which helps in maintaining competitiveness in international market.
The ILP since its listing in year 2019 has performed better than its peers on stock market as reflected below. The ILP performance is -0.52% while others are at about -15, -50 and -66%.

ROI-Sarmaya Calculator

The ROI calculator has given very surprising results where only ILP has performed at 13.66% while others are in negative. The calculation is based on Rs 100,000/- investment on 1 May 1999 stock price when ILP was listed.

Intrinsic Value

Intrinsic values have not been calculated due to negative Free Cash Flows and Free Cash values as it may not predict the fair values.

6.Strength and Weakness

Strengths

1.Diversified product portfolio.
2.Self-sufficient in energy/ electricity.
3.Customers Portfolio and their confidence.

Weakness

1.Huge Debt resulting in negative cash flows.
2.Less penetration in local market.
3.Manufacturing and development lead times.

7.SUMMARY

The company has strong growth history with huge potential to grow as lot of capital is being invested for its expansion. Has some serious cash flow problems but are being managed effectively as it has not affected its revenue and profit growth/Margins. The company seems to have a promising future.

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