JS Global Research has restated its Buy recommendation on Interloop Limited with a target price of Rs137 per share, reiterating its confidence in the turnaround capacity expansion story at Interloop after an interaction with management and its site visit at the new Apparels and Hosiery plants. It is evident from their findings that the initial operational difficulties faced by the new plants have now been sorted out, and the turning point is around the corner.

The Interloop earnings turnaround story involving Interloop in terms of capacity expansions is carried out in three segments in parallel fashion – Apparels, Denim and Hosiery; all at different stages of maturity and all making up a composite earnings turnaround that JS Global believes will be evident from FY27 onwards.

Apparels — From Start-up Losses to Break-even

The story of turnaround and expansion in the case of Interloop revolves around the Apparels factory, which is the most recently constructed unit of the company’s manufacturing facilities.

The company has passed through its greatest early obstacle of having a large work force recruited and trained and is now seeing some positive margins in EBITDA while being still operating at only half capacity. Gross break-even for FY27 will mark the turning point for the segment to become an earnings contributor.

Denim — Capacity Expansion in Progress, Margin Improvement in Effect

The capacity expansion from 12 million to 18 million units for FY27 represents a 50 percent expansion in direct response to increased demand from customers. The differentiation of the segment on account of its ability to manufacture fashionable designs along with regular denim ensures that Interloop enjoys a price advantage over commodity denim producers.

Hosiery – The Backbone, which is Getting Stronger Now

Hosiery continues to be the core business of Interloop. The completion of the capacity increase of 25 percent in this line helps Interloop in handling orders which were being handled externally at an extra cost for Interloop since these orders could not have been met internally before.

The customers for Interloop’s hosiery products include some of the most discriminating names in the world of athletics and fashion. These include Nike, Puma, Adidas, and FILA. The company’s product offering is made up of basic, sport, and medicated socks.

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Favorable Policy Environment

There were three concrete policy aspects mentioned by management which help in Interloop’s capacity expansion through earnings turnaround strategy:

• Removal of super tax for big exporters — contributing to after-tax earnings retention
  

• Consistent power supply from the national grid — necessary for uninterrupted

• production in the face of energy crisis
  

• Lower refinancing costs for exports

• India Risk – Recognized but Partially Managed

The Interloop earnings turnaround improvement growth by capacity expansion hypothesis is exposed to a specific competitive risk pointed out by the management of the firm – India’s possible entrance to the EU market via the upcoming EU-India Free Trade Agreement to be signed in the coming year.

India poses a significant competitive challenge to Pakistani exporters in the textiles and hosiery industry, and the EU market access via such an agreement would only make the challenge more significant for Interloop in its main export markets.

The risk mitigation strategy involves the geographical diversification of production of Interloop by producing in countries other than Pakistan – namely in Egypt, North America, the EU and Sri Lanka.

Interloop: Js Global's Rs137 Target - What It Means

The Buy rating on Interloop from Js Global with a target of Rs137 indicates their belief in the earnings capacity turnaround thesis of Interloop becoming a reality in the next 12-18 months. The earnings path would be determined by Apparels becoming break-even, Denim increasing its capacity into growing demand, Hosiery taking over in-house orders and a favorable policy environment regarding super tax and refinancing rates.