Equity Analysis /

Interloop Ltd: Revised expansion plan enhances the outlook for earnings growth

  • In a PSX notice earlier today, ILP announced a revised expansion plan for the Apparel and Hosiery segment

  • In light of the robust order flows, ILP plans on bringing forward the planned Hosiery Plant 6 expansion to FY24

  • ILP is our top pick in the Textile Sector (TP PKR115/sh), on account of healthy earning growth and expansion plans

Intermarket Securities
3 February 2022

In a PSX notice earlier today, Interloop Ltd (ILP) announced a revised expansion plan for the Apparel and Hosiery segments. The salient features of the announcement are given below.

Salient features of the expansion

Hosiery Plant 6

Hosiery Plant 6 is now estimated to commence in FY24, a year earlier than previously guided in FY25.

Apparel Project

Estimated capex is US$100mn (c.PKR17.6bn). The company has arranged an LTFF loan of c.US$30mn (PKR5bn), with the remainder to be financed through internal cash generation. 

Apparel Project COD

The project is expected to be completed by 2HFY23.

Earlier in 2021, ILP announced its Vision 2025 plan, which entailed various expansion plans (in all segments) to the tune of US$300mn

The project brings forward the expected earnings growth

The earlier than originally planned Hosiery Plant 6 expansion, will ensure that the company captures the growing order flow  – presently rerouting out of China (mainly from existing clients such as Nike and Adidas). The plan is a strong testament of the strength of future demand and enhances the outlook for future earnings growth, in our view. The project will follow the recent completion of Hosiery Plant 5, which has taken the existing capacity of the segment to 750-800mn pairs per annum. According to channel checks, Hosiery Plant 6 will add an additional 20% to the existing capacity. Note that the Hosiery segment has been enjoying healthy gross margins of over 25% since FY18 (c.33% in 1QFY22).

ILP also announced that civil work on the new Apparel project will also start soon (the management guided in the last Analyst Briefing). This project will make the Apparel plant fully vertically integrated and lift its profits margins (1Q margins clocked in at a modest c.5%), in our view. Management also guided that trial orders have received promising response from clients.

However, due to increased cash allocation toward the more profitable segments, such as Hosiery, other plans of doubling the capacity of Denim segment is likely to be pushed back, in our view. Denim segment is yet to break even and may become profitable by end 1HFY23, in our view, as ILP is aggressively focusing on capturing premium denim clothing brands (recently on-boarded the luxury brand, Hugo Boss). According to our estimates, ILP is likely to generate at least PKR15bn in EBITDA over the next 5 years, while availing PKR5bn in LTFF for each project. We highlight that c.90% of ILP’s borrowing is at subsidized fixed rates, and is less likely to be impacted by rising borrowing costs. 

ILP remains our top pick in the Textile space

ILP is our top-pick in the IMS Universe (June 2022 TP of PKR115/sh) on account of healthy earnings growth, backed by extensive expansion plans and opportune timing. The significant earnings miss in 2QFY22 results stemmed from a one-off DLTL reversal to the tune of c.PKR750mn (c.PKR0.83/sh); which is likely to be rebooked in future upon the passage of the Textile Policy (expected this quarter, due to successful IMF review). Also, following approval, robust DLTL benefits (2% of exports, 4% in case of 10% increase in exports), will elevate earnings in the coming quarters, in our view.