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Interloop Limited Interloop Limited Subscribe at the base price! 11-Mar-19 • Interloop Limited is scheduled to offer 109mn shares through book Recommendation Subscribe building process on Mar 13, 2019 – Mar 14, 2019. Base Price PKR45/sh • The company is offering 12.5% of the total post-IPO paid up capital at a floor price of PKR45/sh (including a premium of PKR10/sh) in order to raise PKR4.9bn through IPO. • The company plans to undertake PKR11.2bn capital expenditure through a combination of equity and debt to i) increase its hosiery segment and ii) set up a new production line ‘Denim’. • The company has one of the highest gross margins and ROE in textile Offering details sector that have averaged at 26% and 29%, respectively. Issue Size 109mn • At a floor price of PKR45/sh, the forward PER comes at 8.9x. However, we Base price PKR45/sh believe that the company’s new projects would squeeze the PER going IPO proceeds PKR4,860mn forward, thus making it a buy at the base price. – ‘Subscribe’ Source: IPO Prospectus, Company presentation Expansion plan ahead: Interloop Limited plans to incur a total expenditure of PKR11.2bn which will be raised through a combination of equity and debt financing with a ratio of 44%/56% to i) expand its hosiery segment by adding a new production facility in Faisalabad and ii) set up a new production line of ‘Denim’ in Lahore. Expansion Capex (PKRmn) Already incurred (PKRmn) Hosiery Project 4,504 210 Denim Project 6,750 270 Total 11,254 480 i) Hosiery expansion: The hosiery expansion is expected to increase the capacity by ~22.6% and take the actual production of socks to 750+mn pairs/annum from 530+mn pairs/annum. For this, the company has purchased land of 38 acres in Faisalabad where the division will be constructed. ii) Denim expansion: This will take place in 2 phases where 20K pieces of denim/day are expected to be commissioned by 1QFY20 and the capacity would be enhanced to 40K pieces denim/day by 2QFY21. In this regard, the Company has already acquired a piece of land in Lahore through debt for PKR267mn and the civil work for setting up the production facility started in Nov’18 and is expected to be completed by Aug’19. Particulars Pre-Expansion Post-Expansion Socks, Tight (mn dozens) pair Total Capacity 52.0 75.0 Denim (pieces stitched per day) Total stitching capacity Nil 40,000 BIPLS Research [email protected] IPO structure: Interloop Limited is scheduled to auction 109mn shares through BIPL Securities Limited book building process on Mar 13, 2019 – Mar 14, 2019. The company is +92 21 111 222 000 offering 12.5% of post-IPO paid up capital of ~871mn shares at a floor price of PKR45/sh (including a premium of PKR10/sh) to raise PKR4.9bn. Of the total REP 039 www.jamapunji.pk Interloop Limited Subscribe at the base price! offer, 75% of the shares will be allotted to HNWI/institutions and the rest would be offered to the general public. Gross margins of Interloop vs. peers Company’s background: Interloop is a market leader in producing a wide range of i) top quality socks for sports, medical and work-wear, ii) tights and leggings 40% NML NCL KTML Interloop for infants, kids and women and iii) yarn, where 40% is used internally and the rest is sold to renowned weavers. The company has wide range of global 30% customer base including Nike, Adidas, Puma and Reebok etc. Currently, it has 20% 4,500+ state of the art knitting machines in operation with production of 530+ million pairs of socks/annum. It operates 5 hosiery production facilities 10% including 4 in Pakistan and 1 in Bangladesh. For its power requirement, the company installed 15.4MW tri-fuel engines in 2017. 0% FY15 FY16 FY17 FY18 Key revenue drivers: Interloop experienced growth in revenue at a CAGR of Source: Company Accounts, Prospectus 8.3% during the last 5yrs where 90% of the revenue is export based. As per the company, with changing consumer behavior and growing brand awareness, the global hosiery market’s revenue is expected to grow at a 3yr CAGR of 3.5%. Additionally, global denim market is expected to rise to >USD75bn in 2021 from >USD57bn in 2016 on the back of i) increasing disposable income, ii) inclination towards western fashion trends and iii) durability and higher comfort level. Therefore, with the expansion in hosiery segment and set up of new denim line, the company aims to achieve sustainable earnings growth. Comparison with peers: The company has one of the highest gross margins in ROE of Interloop vs. peers textile sector that have averaged at 26% in the past 5yr in comparison to 60% NML NCL KTML Interloop average gross margins of 12% for BIPL textile universe (comprising NML, NCL and KTML). Additionally, it has the highest average ROE of 29% for the last 5yrs 40% as opposed to 10% for BIPLS textile universe. For the new denim segment, the company would have to compete against Artistic Denim (ADMM) and Azgard 20% Nine (ANL) amongst the listed companies that have average gross margins of 10% and 16%, respectively. 0% Poor working capital management: Interloop has one of the poorest cash FY15 FY16 FY17 FY18 conversion cycle in the industry where it stands at 215 days for FY18 as against Source: Company Accounts, Prospectus BIPLS textile universe of 143 days. This consequently forces company to meet the working capital requirements through short term borrowings thereby eroding profitability. Inefficient energy mix – a potential for value addition: Currently, the company meets its power requirement of 22MW through national grid along with a backup of tri-fuel engines (Diesel/FO/RLNG). However, the company is planning to secure the RLNG supply which would potentially improve its gross margins in the future. Investment perspective: At a floor price of PKR45/sh, the forward PER comes at 8.9x. However, we believe that the company’s new projects would squeeze the PER going forward, thus making it a buy at the base price. – ‘Subscribe’ Disclaimer This research report is for information purposes only and does not constitute nor is it intended as an offer or solicitation for the purchase or sale of securities or other financial instruments. Neither the information contained in this research report nor any future information made available with the subject matter contained herein will form the basis of any contract. Information and opinions contained herein have been compiled or arrived at by BIPL Securities Limited from publicly available information and sources that BIPL Securities Limited believed to be reliable. Whilst every care has been taken in preparing this research report, no research analyst, director, officer, employee, agent or adviser of any member of BIPL Securities Limited gives or makes any representation, warranty or undertaking, whether express or implied, and accepts no responsibility or liability as to the reliability, accuracy or completeness of the information set out in this research report. Any responsibility or liability for any information contained herein is expressly disclaimed. All information contained herein is subject to change at any time without notice. No member of BIPL Securities Limited has an obligation to update, modify or amend this research report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the subject company is withdrawn. Furthermore, past performance is not indicative of future results. The investments and strategies discussed herein may not be suitable for all investors or any particular class of investor. Investors should make their own investment decisions using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives when investing. Investors should consult their independent advisors if they have any doubts as to the applicability to their business or investment objectives of the information and the strategies discussed herein. This research report is being furnished to certain persons as permitted by applicable law, and accordingly may not be reproduced or circulated to any other person without the prior written consent of a member of BIPL Securities Limited. This research report may not be relied upon by any retail customers or person to whom this research report may not be provided by law. Unauthorized use or disclosure of this research report is strictly prohibited. Members of BIPL Securities and/or their respective principals, directors, officers, and employees and their families may own, have positions or affect transactions in the securities or financial instruments referred herein or in the investments of any issuers discussed herein, may engage in securities transactions in a manner inconsistent with the research contained in this research report and with respect to securities or financial instruments covered by this research report, may sell to or buy from customers on a principal basis and may serve or act as director, placement agent, advisor or lender, or make a market in, or may have been a manager or a co-manager of the most recent public offering in respect of any investments or issuers of such securities or financial instruments referenced in this research report or may perform any other investment banking or other services for, or solicit investment banking or other business from any company mentioned in this research report. Investing in Pakistan involves a high degree of risk and many persons, physical and legal, may be restricted from dealing in the securities market of Pakistan. Investors should perform their own due diligence before investing.
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