The drought in Pakistan’s primary equity market has been longer than ever before. Corporate entities that had lined up for listings in 2017 are now avoiding the initial public offerings (IPOs). The relentless sell-off in the secondary market has forced the potential offers of new issues to withdraw. Everyone’s timeline has been pushed back.
The number of firms seeking registration at the Securities and Exchange Commission of Pakistan (SECP) continues to mount. The SECP enrolled 1,130 new firms in December 2018, taking the total number of registered companies to 94,205. In contrast, the number of companies listed on the Pakistan Stock Exchange (PSX) is only 559. That is straight away disproportionate. But why do corporate entities avoid the stock market to raise funds from the public?
Companies weigh the benefits and returns of going public against potential hazards. Besides having to endure the rowdy outside shareholders at annual general meetings, listed companies are seldom comfortable because they believe the regulators are constantly breathing down their necks. “I have created a separate department just to keep up with the cumbersome work of maintaining loads of paper work, filing endless statutory documents and answering notices and queries from Islamabad,” says the head of a mid-sized firm, adding bitterly that it adds to the cost of doing business.
Interloop Ltd will be among the top-50 companies listed on the PSX in terms of market capitalisation
The mini-budget or the Economic Reforms Package announced early this year seemed to be the harbinger of good times for the IPO market. Four of the six major demands forwarded by the PSX were granted, including the removal of the super tax for all non-banking companies from July 1. The accepted demands also include the abolition of the tax on the undistributed profits levied at five per cent on corporations that do not distribute 20pc of their earnings in dividends from 2019-20. The decision will give company boards the power to decide about profit retention and distribution. Analysts hoped that corporate entities would make a beeline for public listings, but that did not happen.
Interloop Ltd, recognised as the largest hosiery producer in Pakistan, has set out to raise Rs4.9 billion, representing a 12.5pc stake in the company, which makes it the largest ever private-sector IPO. The giant size of the offer can be gauged from the fact that it dwarfs the total funds of Rs4.32bn that the three IPOs raised in 2018.
Interloop is believed to be the country’s largest exporter of socks, holding a 4pc share in the global socks market. Interloop has annual sales of over Rs30bn. It ranks as Pakistan’s seventh largest exporter generating approximately 90pc of its revenue through exports. It supplies yarn, hosiery and apparel items to some of the world’s leading brands, including Nike, Puma, Reebok, H&M and Levi’s.
The company produces 52 million dozen socks a year at its four plants. Three of these plants are in Faisalabad and one is in Lahore. The company has also established a production facility in Bangladesh.
Interloop has set out to issue 109m shares to the public, of which 75pc or 81.75m shares were offered to institutional investors and high-net-worth individuals last week under the book-building process. The Faisalabad-based giant intends to raise money for the expansion of its hosiery production capacity and setting up a new plant for stitched denim jeans in Lahore. The book-building process, which continued for two days last week, was oversubscribed 1.37 times with the price closing at Rs46.10 per share.
Total demand amounted to Rs6.72bn against the offer size of Rs4.9bn, which represented oversubscription by Rs1.82bn. Even Finance Minister Asad Umar could not resist his urge to take to Twitter. “This is the biggest equity issue ever by a Pakistani private sector company... particularly pleasing that it’s an exporting company,” he tweeted.
Following the completion of its issue, the company will be among the top-50 companies listed on the PSX by market capitalisation. A well-known value investor, Amin Tai, said the IPO is a good augury for the stock market. He believes that the company is set to grow because its revenue is mostly dollar-based. He observed that it makes sense to raise money from the stock market in the rising interest rate environment as bank financing is available at approximately 11-12pc. “While the borrower is obliged to pay interest to financial institutions on time, a company can skip dividends and retain cash when it is in the throes of heavy expansion,” he said.
Interloop is now set to offer 25pc of the issue or 27.25m shares to retail investors. The general public will be offered the stock on March 21 and 22 at Rs46.10 per share. Given that each prospective subscriber can apply for 500 shares, 55,000 applications are required to fully meet the public offer. A couple of brokers said that it was difficult to gauge the public mood in a bleak market. A stock strategist reckoned that considering the market’s current price-to-earnings multiple of seven times the forward earnings, the offer looked fairly priced. Investors with a long-term outlook may want in, he added.
Published in Dawn, The Business and Finance Weekly, March 18th, 2019