3 Reasons for ILP’s disappointing quarterly result

Interloop Limited (ILP) announced its quarterly results today and its earnings declined by more than 50%.

The company’s sales showed considerable growth, so why did the EPS decline by more than half? There are various factors for that. Let’s go over them one by one.

Higher cotton and electricity prices

The company uses cotton as its raw material. The prices of cotton had been on a steady rise during the last quarter. Local cotton prices have increased as textile and spinning industries want to buy as much local cotton as possible.

On top of that, the international cotton prices have also been going steadily higher. as shown in the chart below

The higher cotton prices have directly impacted the cost of goods sold, resulting in a lower gross profit margin of 29% as compared to 47% SPLY.

Higher electricity prices

The higher electricity prices have increased the cost of production, also directly impacting the gross margins of the company. This stems from the countrywide mismanagement of energy policies that have raised questions about the survival of the textile sector.

Finance cost

Finance costs have doubled for ILP due to its increased loans in a high-interest environment. This is one problem for growth companies where they have to increase their borrowings to maintain growth. When interest rates are high, the cost of this borrowing is high, which directly affects the profits of the company.

ILP may get some relief on this front by the end of the year as the interest rates are expected to start going doing in the second half of the year. In the latest SBP monetary policy meeting held yesterday, the State Bank decided to maintain the interest rates at 22%.