Interloop (ILP) reported the best 1Q result, posting a NPAT of c.PKR5.0bn (fully diluted EPS: PKR5.31) in 1QFY23, up 84% YoY (down 7% QoQ). The result slightly missed our expected NPAT of PKR5.3bn (EPS: PKR5.71), where the deviation largely stemmed from higher-than-expected finance costs.
Revenues rose to a record high c.PKR30.5bn, up 58% compared to the previous year (flat QoQ), in line with our estimates. The Hosiery and Denim segments were likely the star performers in 1Q, while exchange gains (estimated PKR3.2bn) may have contributed to the sharp revenue growth as well.
Gross margin increased by a sharp c.9ppt YoY to 33.25%, up c.7ppt QoQ and c.5ppt greater than our estimate of 28%. The surge in GM, according to channel checks, is likely due to robust inventory gains to the tune of PKR2.8bn.
Distribution and administrative expenses rose 56% YoY, due to strong revenue growth. Other expenses rose by a sharp 55% YoY to PKR899mn. We await detailed accounts for clarity on the latter.
Among other line items: i) finance costs more than tripled YoY, owing to higher interest rates and ii) effective tax rate clocked in at 6% (flat YoY).
Despite the earnings miss, this is a decent result by ILP, as revenues continued to improve from the previous quarter. However, with cotton inventory costs hovering near both the international and local market levels, we expect margins to moderate in the coming quarters. That said, expected improvement in Denim segment margins (greater utilization and clientele), should cushion the overall decline in gross margins. In this regard, we believe that sustainable gross margin range is c.25%. Going forward, revenues are likely to remain healthy across FY23 owing to decent demand and PKR weakness. Expansion into new Apparel segment and new Hosiery plant 6 in the coming years, reinforce our liking for the scrip. We retain our Buy recommendation on ILP.