Interloop (ILP) reported 2QFY22 NPAT of PKR2.0bn (EPS: PKR2.26), up c.35% yoy, while down c.25% qoq. The result significantly missed our expected NPAT of PKR2.9bn (EPS: PKR3.18), where the deviation largely stemmed from lower-than-expected gross margins. ILP announced an interim dividend of PKR2.0/sh, higher than our dividend expectation of PKR1.0/sh.
Key highlights from 2QFY22 results
Revenues rose a staggering c.50% yoy to PKR20.0bn (in line with expectations), led by higher export sales, likely in both the Hosiery and Denim segments, attributed to greater sales volumes and improved pricing amid strong demand, in our view. Note that Pakistan’s overall textile exports rose by c.25% yoy during the period. Revenues are likely to increase further in the coming quarters, led by the recent commissioning of Hosiery Plant 5, in our view.
Gross margins remained flattish yoy at c.25%, while down a sharp c.4ppt qoq, lower than our expectation of c.29%. This may be due to (i) normalizing Spinning and Hosiery margins, (ii) worsening Denim segment losses and (iii) higher freight costs, in our view.
Distribution and Admin expenses rose c.45% yoy, in line with our expectations. Other expenses rose by a sharp c.75% yoy, which is likely due to greater profitability, in our view. We await detailed accounts for clarity on the latter.
Finance costs increased by c.75% yoy, which may be due to higher borrowing amid sharp PKR/USD depreciation, in our view. Effective tax rate clocked in at 8%.
This is a weak result for ILP, despite the sharp revenue growth (record high in 2Q). We expect ILP’s profitability to improve further in the coming quarters, on the back of Hosiery Plant 5 (Hosiery segment has hitherto been operating at full capacity). According to channel checks, ILP has booked orders for at least the next 3-6mths, which should continue the present growth momentum.
Improvements in Denim margins along with positive Apparel segment penetration further reinforces our liking for the scrip. We thus reiterate our Buy stance on ILP with a June 2022 TP of PKR115/sh.