Valuation

The determination of ILP target share price involved a meticulous application of three sophisticated
valuation models: Discounted Cash Flows (DCF), Relative Valuation, and the Dividend Discount Model
(DDM). This systematic integration was coupled with a cautious allocation of weights, assigning 80%
significance to DCF, while Relative Valuation and DDM each received a 10% weighting. The resulting
target price of PKR 83 per share signifies a notable 23.88% upside potential, consolidating our
recommendation of a 'BUY' strategy. Notable in this valuation process was the strategic emphasis on the
Free Cash Flow to Firm (FCFF) metric, chosen for its ability to incorporate forecasted values according to
both local and international economic market conditions, thereby enriching the portrayal of IPL market
positioning.

Free Cash Flow to Firm

Interloop's strategic initiative involves the construction of a sizable apparel park spanning 232 acres,
aligning seamlessly with the company's vision to position itself as wide-ranging family clothing provider.
This extensive venture encompasses specialized facilities for knitwear, denim, active wear, and hosiery
production, reflecting a strategic and diversified approach to meet evolving market demands.

FCFF

In light of Interloop's swift expansion in a volatile market environment, the Free Cash Flow to Firm
(FCFF) valuation technique has been judiciously selected. This method, prioritizing actual cash
movements over accounting profits, appropriately aligns with the company's operational complexity.
The substantial capital expenditure requirements associated with the apparel park project further
highlight the suitability of FCFF. Allocating the highest weight to FCFF ensures a thorough analysis,
incorporating the impact of evolving capital expenditures (CAPEX) and providing an accurate depiction
of the company's operating performance.

Discounted Model

The chosen discounted model technique involves the meticulous discounting of future cash flows to
their present value, incorporating a perpetual growth rate of 5%. Notably, this valuation approach
deliberately excludes the influence of debt acquisition, offering a transparent and precise intrinsic value
of Interloop.

WACC

Acknowledging the potential shifts in IPL capital structure due to its rapid expansion, the Weighted
Average Cost of Capital (WACC) has been dynamically computed. The determination of the equity and
debt weights is grounded in the company's prior capital structure in 2023, maintaining a constant tax
rate of 7%. The resulting WACC figure of 21% is employed to discount forecasted cash flows,
accommodating the dynamic financial landscape.

CAPM

The Capital Asset Pricing Model (CAPM) has been used to determine the cost of equity. The risk-free
rate is derived from the T-Bill policy rate, while beta is computed through the regression of stock returns
against the KSE-100 index. Adjustments for long-term market convergence contribute to a sophisticate
and realistic assessment of the cost of equity.

DCF Target Price

The Discounted Cash Flow (DCF) model, incorporating the calculated WACC and cost of equity, yields a
target price of PKR 89.22 per share. This intrinsic valuation serves as a comprehensive and reliable
indicator for potential investors, navigating the complex environment of dynamic market conditions and
IPL ambitious projects.

Relative Valuation

In the assessment of Interloop's target price, the application of relative valuation proves essential. This
technique allows for a comprehensive understanding of IPL relative position within the textile sector,
characterized by competitive dynamics influenced by consumer preferences, fashion cycles, and global
economic conditions.

Industry Comparable

IPL emerges as a market leader, particularly in hosiery and socks, owing to its strategic niche marketing
approach. However, in comparison to textile giants such as China, India, and Bangladesh, IPL faces
challenges due to the stable economic conditions and positive reputation of these countries in the USA
and Europe.

Weightage Assignment

Given the unmatched positioning of IPL in the Pakistani textile sector and the formidable competition
from international players, a modest 10% weightage is assigned to the relative valuation technique,
recognizing its limitations in capturing the unique attributes of IPL business model.

Price/Earnings Multiple (P/E)

The P/E ratio, chosen for its reflection of growth prospects and investor sentiment, indicates that IPL
should trade at a P/E ratio, resulting in a target price of PKR 98. This multiple emphasizes earnings
sensitivity in the variable nature of the textile industry.

Price/Sales Multiple (P/S)

Considering the global supply chains and currency fluctuations inherent in the textile industry, the P/S
ratio is employed. Comparative analysis with peers suggests a target price of PKR 47, reflecting how the
market values the overall revenue of IPL.

Price/Book Value Multiple (P/BV)

Acknowledging the significant investments in assets within the textile sector, the P/BV ratio is utilized.
With IPL’s expansion plans and increasing capital expenditures, the P/BV ratio points to a target price of
PKR 40, showcasing how the market values the company's assets relative to its market capitalization.

Weighted Average
The target price of PKR 82 is attained through a weighted average (70/15/15) of the three price
multiples, with the P/E ratio receiving the highest weightage. This approach aligns with the earnings-
centric nature of the textile industry, providing a well-rounded evaluation for forecasting IPL’s share
price relative to both local and regional peers.

Dividend Discount Model (DDM)

Strategic Focus

Despite operating in a dynamically evolving industry, Interloop maintains a steadfast commitment to its
core objective of maximizing shareholder wealth. This commitment underscores a strategic focus on
delivering value to its investors.

Dividend Payout

An essential aspect of IPL financial strategy is its consistent and upward-trending dividend payout ratio,
never falling below 30%. This stability indicates a reliable and predictable history of dividend payments,
a crucial factor for income-seeking investors.

Mature Business Lifecycle

The decision to employ the Dividend Discount Model (DDM) as a valuation technique aligns with
Interloop's position in the mature phase of its business lifecycle. This strategic choice is well-suited for
providing a comprehensive analysis tailored to income-seeking investors who prioritize stable and
predictable dividend income.

Methodology

In the Dividend Discount Model, the future dividends, expected to grow by a rate of 30%, are discounted
back to their present value. This meticulous process allows for the calculation of the intrinsic value of
the firm, taking into account the anticipated growth in dividend payments.

Target Price

The application of the DDM methodology yields a target price of PKR 30.77 per share. This figure serves
as a valuation benchmark, providing income-seeking investors with a clear indication of the intrinsic
value associated with IPL dividend-paying potential.