In the five years since it went public, Interloop Limited (PSX: ILP) has increased its export revenue as well as bottom line by 2.3 times in dollar terms. During the latest fiscal year 2023-24, it also became the largest exporting firm out of Pakistan, amassing exports of over half a billion dollars. The company is well on its way to doubling its balance sheet(in dollar value), while the book value of equity may also soon triple, compared to the pre-IPO size.
Yet, Interloop’s post-IPO success has failed to convince Pakistan’s other privately held textile businesses to take their firms public. In fact, Interloop is the only textile firm to raise capital from the equities market in over 14 years.
For many, this may speak to the overall health of the economy. But remember, the stock market has witnessed 13 IPOs over the last four years following Interloop, of which two took place at the height of the pandemic lockdown of summer 2020 (PSX: TOMCL and TPLT), and four in the past 12 months alone(PSX: IPAK, FCL, SLGL, and SYM), when the interest rates had climbed the historic ceiling of 22 percent. And each of those 13 IPOs was massively oversubscribed.
The textile industry did not always feel so unwelcome at the bourse. Of the 406 non-financial companies listed on the main board of the Pakistan Stock Exchange, 132 – or one-third – are textile businesses. In fact, textile companies were once so dominant on the exchange that they had to be bifurcated into five sub-segments spinning, weaving, composite, woolen, and synthetics. Today, 50 of those 132 scrips have been relegated to the default counter. Only seven textile firms remain part of the KSE-100 index, as many as the FMCG or the cement industries, and almost half as many as commercial banks.
Although the first textile firm was listed on the exchange as early as in 1954, the golden age of textile IPOs did not begin until the mid-80s. In the ten years between 1987 – 1997, the then-Karachi Stock Exchange saw a listing of 81 textile firms, almost three times more than the total number of IPOs over the last decade across all sectors on the main board.
The dismantling of the trade quota under WTO is remembered as the time when Pakistan’s textile exports also finally came into their own. Exports rose from an average of $5.5 billion between 1995 – 2005 to $10.8 billion by 2007. Spinning units multiplied overnight, rising from 355 in 2001-02 to 525 units in 2010-11. Interestingly, however, the stock exchange witnessed public offerings of only five new mills. Overnight, textiles had become the ‘business-to-be-in’, but sponsors no longer looked towards the equities market for investors.
This is particularly interesting considering that the mid-2000s witnessed an epic boom in stock market activity in the country, but unlike the mid-1990s, textile was no longer at the forefront. Put differently, Pakistan’s textile exports were rising, but the equity investors were unable to become part of the rally. On balance, all listed firms cumulatively accounted for no more than 20 percent of total goods exports in any given year. Meanwhile, listed textile firms accounted for under 17 percent of total textile group exports over the last decade and a half. What was going on?
First, the composition of Pakistan’s textile export revenue began to change dramatically in the post-quota world. The share of cotton yarn and cotton cloth dropped from 35 percent at its peak in 2003-04, to just 18 percent today. Readymade garments took the place of yarn and cloth as the main driver of textile export growth, with its share rising from single digits to over 21 percent. Most significantly, the new entrants in the garments – and other value-added segments -no longer needed the stock market to do their handholding during the teething years.
Why? Enter concessional financing schemes. Although subsidized working capital financing under the Export Finance Scheme (EFS) had been around since 1973, it was only under the Ishrat Husain era that the floodgates were truly opened. In just four years, the disbursed amount more than doubled from $2.5 billion to $5.4 billion per annum between 2003 and 2007. If you were a sponsor with a bankable credit history and a regular stream of export orders, all you had to do was show two times the churn of your EFS limit in a given year, and your business could run on autopilot with subsidized working capital provided by the central bank.
But the real cherry on top was the launch of Long-Term Financing-Export Oriented Projects (LTF-EOP, later rebranded as LTFF) in 2004. The entry of LT concessional credit meant that exporting firms no longer needed to look towards the equity market to raise capital for upgradation/expansion either. Even more significantly, while the utilization of working capital EFS facility was restricted to value-added units – conspicuously excluding yarn and greige fabric – LTFF was aimed to be a technology upgradation fund and faced no such restriction. Meaning that even the low-end spinning and weaving units no longer needed to raise capital through a public offering, for so long as they could prove themselves to be bankable.
This had several outcomes. First, even the well-established listed exports giants such as Nishat (listing year: 1961), Gul Ahmed (1970), Feroze1888 (1975), Sapphire (1974), and Gadoon (1994) never again returned to the stock market to seek capital via a secondary public offering. In fact, many established sponsor groups such as YBG, Sapphire, Crescent, Indus Group, and others etc later entered high value-add segments through newly formed privately held sister concerns, rather than their already listed counterparts. Most significantly, however, the control of Pakistan’s textile export earnings went from being held by hundreds of small, medium-sized, and large businesses, to a small segment of very large, well-capitalized, sponsor groups with strong banking relationships.
Why? Because post-2008 crisis, commercial banking in Pakistan truly took a leap backward into the 20th century, with credit decisions overwhelmingly dictated by the relationship between the sponsor’s families and the bank, rather than on the business feasibility of the underlying project. As of financial year 2024, more than 60 percent of Pakistan’s textile export earnings are accounted for by the top hundred firms, of which only 21 are listed. And shockingly, these listed firms – which include giants such as Interloop, Nishat, Gul Ahmed, Feroze1888, Sapphire, and Masood – account for less than 18 percent of total textile export earnings for the last financial year.
Over the past two decades, several privately held textile sponsor groups – primarily from the Memon and Chinioti communities of Karachi and Faisalabad –enjoyed amazing success in the export market. For example, per the author’s estimates, over 90 percent of Pakistan’s denim exports and two-thirds of towel exports today are concentrated among top-15 privately held firms in each segment. In fact, many of these privately-held export business groups – such as Akhtar, Chawala, Arshad, Artistic, Soorty, Style, US group, Shamsi, Mukhtar, Saya, and others would have made for amazing growth plays on the stock market. Unfortunately, prospective equity investors would have to compete with commercial banks,ever-ready to supply these groups with growth capital on concessional terms into perpetuity, made available courtesy of the central bank.
The endless availability of concessional finance to a select group of sponsors also meant that many entrepreneurial entrants never felt the need to adopt corporate governance practices usually reserved for listed entities. Closely held firms rarely seek transparency and accountability by hiring top-rated audit firms, nominating independent directors, and most importantly, ensuring separation between ownership and management.
But all that might come to an end, sooner than we think. The dramatic collapse of export growth following the concessional finance bonanza of the pandemic has also permanently put an end to concessional finance schemes, at least until the macroeconomic policy stewardship remains in the hands of the IMF. And although privately held sponsor groups were temporarily flush with liquidity for capex during the pandemic, adverse borrowing costs, and prohibitive energy tariffs mean that the working capital requirements have also skyrocketed over the last two years.
Since June 2022, working capital loans to the textile industry have dropped by over a third in dollar terms. The EFS window has now been converted into a post-shipment discounting facility, operating on a self-liquidation basis – and the credit limit – at under Rs500 billion has been maxed out for at least the last three years. Meanwhile, much of the massive technology upgradation and capacity expansion undertaken through TERF loans now sits idle due to weak profitability amid historic markup rates on working capital on offer at essentially commercial pricing.
Put the pieces of the puzzle together, and you may discover that many top exporting textile firms hitherto held private may find sense in seeking growth capital from the equity markets, especially now that they must compete for a share in already crowded-out banking credit with hundreds of others non-exporting corporates with equally strong relationship history with the banks. And if the success of the 14 IPOs over the last five years during extremely adverse economic conditions – especially that of Interloop – is any guide, the equity market investors are salivating for the right investment opportunities as well.
It could be a match made in heaven. But are closely held sponsor groups ready to make regular disclosures of their business practices to the general public?
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