PDS Limited (PDSL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the PDS Limited Q4 and FY '23 Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. [indiscernible] from Nuvama Wealth. Thank you, and over to you, sir.

Thank you, [indiscernible]. Good afternoon, everyone. On behalf of Nuvama, I welcome you all to PDS Limited Quarter 4 FY '23 Earnings Call. We have with us today Mr. Pallak Seth, Executive Vice Chairman of PDS Limited; Mr. Sanjay Jain, Group CEO; Mr. Rahul Ahuja, Group CFO; and Ms. Reenah Joseph, Head of Corporate Finance, M&A and Chief of IR. Before I hand over the floor to Mr. Pallak, I would like to highlight that the safe harbor statement on the second slide of our analyst presentation is assumed to be read and understood. With this, Pallak, over to you. Thank you.

Good morning -- good afternoon, everyone. A warm welcome to you all to our fourth quarter and full year 2023 Earnings Call. The investor update and the financial results are available on the company's website and the stock exchanges. I would like to draw to your attention that the discussion today may have forward-looking statements, which are subject to certain risks, uncertainties and other factors that could cause actual results to differ from those contemplated by the relevant forward-looking statements. The [ 2022 ] financial year has been an increasing year for us. In the first 2 quarters, we have achieved high growth while during the second half, we've witnessed some slowdown. The impact of the macroeconomic and geopolitical factors had a bearing on our operations. We have witnessed some customer pushbacks due to lower demand and high level of inventory with brands and retailers. The impact of these factors are expected to continue in the first half of the financial year 2024. However, as the saying goes, every cloud has a silver lining. Similarly, for us during these signs of muted demand, we are also witnessing a huge amount of new opportunities and the pipeline of opportunities is better now than we've ever seen in the last 25 years of the company's formation. As our customers continue to focus on the front-end operations, customer acquisition and visual merchandising, among others, they see credible partners such as PDS Manufacturing and Sourcing Operations. The credibility here refers to the ability to provide global sourcing solutions with full government standards with finance ability and almost a debt-free balance sheet. In order to tap into these opportunities, 18 months back, we launched sourcing-as-a-service, which has witnessed good traction with PDS signing contracts with the potential to handle merchandise value over USD 1 billion. As part of the ramp-up, we should be clocking closer to 50% levels of the merchandise value during the current year. We are also pleased to share that John Lewis has entered into agreement with PDS subsidiary Spring Near East to help us manage their sourcing. John Lewis owns and operates department stores, supermarkets and convenience stores in the U.K. The company conducts his business operation under John Lewis and Waitrose and a reported top line of $10 billion, with $5 billion derived from John Lewis alone. Also, I'm happy to just announce that just before this call, PDS is going into a strategic partnership with a large German retailer called Gerry Weber. PDS will be taking over their sourcing operations in Asia through a subsidiary Techno Design in Germany and managing that business. This business also has a potential sourcing volume of over $100 million, which should be added to our top line in the next couple of years. The traction of our SaaS model enables us to create more customized solutions. We have also recently signed a strategic partnership with one of U.S.'s largest companies called Authentic Brands Group, which has over USD 30 billion retail sales. With their acquisition of Ted Baker in U.K., PDS has become a strategic partner through them managing Techno Design Group, which will run the Ted Baker head office plus also the wholesale business, both in U.K. and Europe. The focus is on driving business through long-term strategic partnership which significantly enhances medium to long-term visibility into the business and drive the annuity stream of revenue for PDS. Further, this is enabling us to transition from low-margin transactional orders and focus on value-accretive businesses driving higher margins along with better return ratios and long-term ratio of contracts. It is interesting to note, globally, there is no single platform in the fashion industry like PDS because of which we are getting immense opportunity. If a retailer has to do strategy, PDS is emerging as a point of choice for them to engage and discuss strategically their plans. As a company, we are not interested with selling to retailers, but become part of the strategy. So that is opening a huge amount of opportunities for us on the whole sourcing business that retailers need to restructure their operations and that specialist players handle their back end. Also, I'm pleased to mention that our manufacturing business reported its first year of profitability. We are focusing on driving our profitability journey in this segment. During the year, we expanded our capabilities across our manufacturing vertical. Our Bangladesh facility launched a washing plant, which was funded by Good Fashion Fund. Good Fashion Fund is one of its kind impact -- initiated by the Laudes Foundation founded by C&A family, aimed to drive systematic challenges in the textile and apparent industry by financing the implementation of state of art and disruptive technologies, innovation and delivering good fashion practices. Further, we have also launched a centralized packing plant in Sri Lanka. These investments are key steps forward in asking the previous manufacturing vertical capabilities to state-of-art machinery and digitized processes. PDS is also not pursuing expanding its manufacturing footprint in new geographies like PGF in India. PGF is dutyfree to the U.S. by 12-day sailing, plus India also has seen increased demand, so we are considering to make potential acquisitions in India to enhance our own manufacturing footprint. With an aim to expand its supply chain capabilities in the fashion value chain, PDS has also announced acquisition of a logistics company called Transport Partner Limited. They are based in Bangladesh and are already working with some large retailers and brands. So PDS being a platform company, not only is offering its customers today designed as sourcing, but also running their offices, complete brand management, manufacturing options as well as ability to having the logistics. So this all factors of being a platform is increasing our stickiness with our customers who are looking to us more and more as solution providers. And as I had mentioned earlier, globally, we are probably one of the only companies who can have strategic discussions with large retailers who are Fortune 100, S&P 500 and companies and be aligned with their strategy and their future road map. We continue to focus on building a robust platform where our businesses and verticals can thrive and grow. As a platform, we are working effortlessly to strengthen our digital capabilities initiatives and to drive process improvements and efficiencies. These initiatives are driven by our group CIO, Saurabh Saxena, who's ex-IBM. Further, we have augmented our teams by hiring experts in fabric and trim procurement, which will enable us to drive more procurement synergies. We are pleased to share during the year period, Indian Sri Lankan subsidiary are certified also a great place to work. It gives me also a great pleasure to announce that Mr. BG Srinivas has come to PDS Board as the Board of Directors. Mr. Srinivas is a well-known and respected member of India Inc, with over 30 years of experience in the information technology sector and was previously the President and Wholetime Director of Infosys Limited. With his global expertise in strategy, operations, finance, especially the experience in the technology sector, make Mr. BG a vital addition to our Board. PDS is going towards a full 100% compliance journey. And having Mr. BG guiding us in this process is also a great testament of our future plans as a company. As a global platform, our outlook for the long term is strong and robust. We are very much geared to continue aspire to achieve more than $2.5 billion of topline in the next couple of years, along with a gradual increase in profitability. However, we do see some headwinds in the next few quarters of 2024. Having said that, we are focusing on building a pipeline of curated business opportunities, which I mentioned earlier, with existing and new customers, which will drive our growth and profitability in the years to come. Thank you very much for joining our call today. I would like to hand over the call to Rahul Ahuja, our Group CFO. Thank you very much.

Good afternoon, everyone. We are pleased to share that PDS has delivered a 20% growth in the financial year ended 31st March 2023 and reported a top line of INR 10,577 crores, we reported gross margins of 16.7%, an expansion of 53 basis points compared to the last year. Our EBITDA grew by 40% from INR 327 crores in FY '22 to INR 459 crores in FY '23. EBITDA margins also expanded by 64 basis points to 4.3% in FY '23. EBIT during the year increased by 25% compared to last year, which includes INR 36 crores gain from our sale of our real estate property in Milton Keynes in FY '23 and around INR 41 crores of gain from the sale of real estate investment property in the U.K. in FY '22. Our profit before tax has increased by 15%, which included the impact of the increase in interest costs during the year. Our total gross debt decreased from INR 623 crores last year to INR 601 crores this year. However, the interest cost increased from INR 33 crores in FY '22 to INR 74 crores in FY '23. This is mainly attributable to the increase in borrowing costs with so far LIBOR increasing from 0.08% in March '22 to 4.16% in March 2023. We continue to be in a comfortable position with net debt being negative. Our sourcing segment, which accounts for 96% of our topline has clocked 19% growth compared to the previous year, with a topline of INR 10,105 crores. Our sourcing business reported an EBIT of INR 366 crores, which is an 18% growth compared to FY '22 and a return on capital employed of 48%. The new verticals contributed INR 614 crores to the top line compared to INR 321 crores in FY '22. Given that gestation phase, these businesses had a PBT loss of INR 51 crores. As these businesses grow and achieve size and scale, they will contribute to the bottom line of the company. Our Manufacturing segment reported a growth of 28% with a topline of INR 703 crores versus INR 547 crores in FY '22. This segment achieved its first full year of profitability journey with a PAT margin of 2.6% in FY '23 versus a loss of around 3.6% in last year. Talking about our balance sheet. Our net debt was negative with net cash of INR 128 crores versus INR 41 crores reported last year. Notwithstanding the 20% growth, we continue to operate with negative 2 days of net working capital days and we would focus on staying on this journey. However, our new ventures into brand management might expand the working capital requirements temporarily going forward. We will focus on driving working capital optimization as the business comes into our fold. The company continues the growth and profitability journey and delivered 44% return on capital employed and return on equity of 29% in FY '23. We would now be happy to answer questions that you might have.

[Operator Instructions] We have a first question from the line of Vishal Prasad from BP Capital.

So, I mean, I'm trying to understand how sourcing-as-a-service is different from design-as-a-service. If you could help me understand that, that would be great.

Yes. So how sourcing-as-a-service is different from design and sourcing, right? So basically design and sourcing is a vendor model, where we are working with retailers providing a full solution of design development and sourcing from third-party factories. In design and sourcing, there is no long-term contract. Every 6 months, we are presenting new product. There's a strategic relationship with the customers, but still we need to start business every 6 months on getting new revenue streams with them. This is a higher-margin business because obviously, then it's order to order and then we are basically giving them the design development and then we are doing the business with the customers. The sourcing as a service is totally different because it is actually running the retailers' offices for them where the entire business the retailer in a particular market has run through that office. So we did a deal with [indiscernible] and then also with ALTA. And today, we announced with Gerry Weber as well as another German brand. Their detail is today don't want to have the headache and the ESG governance issues of having offices around Asia and many of these emerging market countries. So PDS didn't see another platform, which gives high governance standards and our ability to attract the best talent and open offices for the retailer in these markets where everything the retailer sources from that particular geography will come to the PDS office, very often under joint banding between the retailer and PDS. So for example, with ALTA, they were running their own offices earlier. With Walmart, they decided to not continue with Walmart relationship, and PDS came in as one of the options. So it's the entire USD 500 million business of ALTA, which is U.K.'s largest supermarket between home and general merchandise and clothing, PDS took over the existing teams and between China, Bangladesh, India and other geographies wherever they are present. And those teams became part of the PDS platform, servicing them on an open transparent cost plus basis model. So again, this differentiating designer sourcing is order to order, season by season starting again, but sourcing as a service is actually representing the retailer in a market, the entire business go through that operation through the offices we set up with the customer. So today, retailers, either they want to enter new geographies where they don't have offices, PDS is becoming their office which of them opening themselves or where they're currently already running operations, they don't want the headache of having teams across Asia to be managing by themselves because their focus is now more on the retail and customer side. PDS is taking over retail operations in these parts of the world and running it for them. So margin structure is different and the volume of business quantum is different in both these options. Have I been able to answer your question?

Yes. So to add to that, is it possible for you to elaborate on the rules and -- our roles and responsibilities in sourcing as a service contract, what things we generally do in that?

Sourcing as a service, basically, we start from -- so the design comes from the customer in this part of the business. So customers and the tech pack. Our team on the ground in countries like Asia, in Bangladesh, India, wherever we have these offices, we will get the tech pack, then we will source the best, most compliant, cost-effective vendor base. We'll get into price negotiation, product development, quality control and order follow-up merchandising. So our role is basically not design, but basically managing the office for the customer in that part of the world in these functions. Sometimes, we get involved in financing, other times, we will not -- like Mr. Jain and I just also mentioned, we have signed over USD 1 billion of sourcing as a service contracts. We are not going to be invoicing $1 billion on our topline. So our income is going to be the service fee we are going to be taking for this business, and the profit is a percentage of a service fee. So sourcing as a service model as -- I mean, in finite return on capital employed because the capital employed is not coming as much, right? We are just running the overhead of the office. The downside is low because the retailers are also paying the cost of the operation on a monthly basis and our profitability is clear. So for example, on a $1 billion, I'm just giving some examples. We charge a 4% management fee. So our gross revenue is USD 50 million. And our profit is on a cost-plus model. So we say, for example, we're going to be running on a 2% profit of this business. So $40 million is our topline, which would be added and $20 million will be the bottom line that will be added in this vertical. The gross merchandise value we will handle is $1 billion in that case. But we're not invoicing $1 billion, we're invoicing only the gross margin and the profit as a percentage of the gross margin. So there's no capital employed in this basis. But gives us immense power in the market we operate because then PDS is representing the retailers with some of the biggest factories in Asia. So our vendor base in this model are some of the biggest manufacturers even in India or Bangladesh, other geographies we operate, who are taking orders from these offices, which are under PDS.

So is it possible to forecast to give sourcing as a service as well as design as a service? So...

Same retailer, there are various cases with -- because a retailer has certain part of the business managed through third-party design and certain part of the business, which is sourced directly from them with their own design services. So normally, I would say 60% is sourcing as a service. Normally, they do their own design and show it to their own offices now which PDS is taking over. And 40% is they look at third-party vendor for design inputs. So it's not uncommon that with the same retailer when we start offering a menu of services, we look at PDS for both options. So it's quite possible. PDS today is a product company. We are offering 4 products to our customers. One is our own manufacturing, which is small, but it's important to keep -- to make sure that we have the credibility in our industry and also on certain customers who only work at manufacturing needs. Second is a vendor model, right, which is basically design it, sourcing, which we are offering full complete design services. Third is running their retail as offices, right? And fourth is brand management. So with the same customer, we're offering them full menu of services and then they're picking and choosing what they want. But there is a role for each four of them within the same retailer to be able to work. That's how our penetration and stickiness with the retail is increasing. see ourselves a solution provider rather than just a factory in middle of Asia trying to sell into them, which is I feel there's no future in that business in our industry.

So this is Sanjay, just to add to what Pallak said is 1 U.K.-based customer, our design-led sourcing annual business is about INR 800 crore plus, resourcing as a service contract that we have signed is approximately INR 2,200 crores of gross merchandise value. This is 1 and 2 and very recently from the same customer we also got a contract for the home category that we are going to, and that contract would give us an annual potential of about INR 1,000 crores worth of home merchandise being handed over to the same customer. So with 1 customer, 3 kinds of revenue streams are currently already there in terms of contract we have signed. Sorry, Pallak.

Based on strategic discussion, so when we talk to our customers today, we have a Board-level discussion, and they all want to discuss what are the pain points, what is the next 5-year strategy and how PDS can be a solution provider to their pain points in the strategy? So we're not interested to sell garments to anyone or consumer goods. We are only interested to be part of the strategy and align with them to provide solutions.

Yes, that's great. And one last question, sir.

We have our next question from the line of Keshav from [ Roxan ] Investors.

Sir, just to understand demand -- demand-side risks a bit better. So in times when the demand goes down, the garmenters typically get squeezed, then there could be some sourcing shift from country to country. So if, say, the demand sees a sizable reduction and if retailers face difficulty passing on the costs, in the entire supply chain, right, from fabric to garment is -- to us who are handling the merchandise. Do we all have to take some price readjustments or be -- or relatively insulated?

I would say we are relatively insulated. But at the same time, if we take a strategic view that we need to support our customer to continue gaining market share, that's a strategic view we will take if we have to take it. For example, if a customer are doing $50 million, but they need support and they think they're willing to grow with us to $150 million but we need to help and partner with them on the margin challenge. So we are going to take a not a quarterly view, but a 6- to 12-month view and partner with them to achieve their objectives. So today, it's important to partner with people, understand the strategy, raw material prices going up and down, and making sure that we are collaborative in our working, but at the same time, respecting their own interest. Again, being an asset-light model, we can pass a lot of the costs. We can -- if we are getting squeeze, we can squeeze the yarn, fabric, trim, manufacturing partners. So everyone at the end of the day, we are not sitting on huge open capacities of 100s and 1000s of machine to feed, right? So we are able to then pass that to the factories, which have huge capacity to see. So they will also want to get the business. So PDS is seen as a platform to many manufacturers in Asia to make sure that capacities don't go idle and they get feeding from our company. So they will...

Sir, secondly, so we have had some exclusive and nonexclusive relationships for sourcing out of Turkey. So what's been the impact? What's been our response? And what's the value address there?

Turkey, one of the markets now, the election is just happening, I think, this week. So the thing is that many of the emerging countries like Sri Lanka, Egypt, India, Pakistan. So wherever the rupee dollar trend is there, normally, the dollar is becoming stronger and these emerging market countries are becoming weaker. So even there's huge inflation coming, but in export sector because of devaluation, most of it is getting nullified. So that is one advantage we have in being in the export business. Turkey as a country is a little bit under pressure right now because of geopolitical situation and the earthquake that happened. But the thing is many small, medium-sized businesses disappear. It's only consolidation and survival of the fittest. The PDS has seen as a safe pair of hands with high governance standards, financial stability, ability to attract the best people. So retailers continue to partner with us in that journey. So rather than them trying to work with other small, medium-sized companies, PDS has now gained enough critical mass and has got enough goodwill in the industry that we are seeing as a company of choice for them to partner even if the macro economic situation is getting tougher.

Right, sir. And sir, lastly, what would be the reason for a decline in manufacturing margin quarter-on-quarter.

Sanjay, you want to take that, please?

Yes. I think this is just barely seasonal in terms of the mix that we have had for the particular quarter. There are no permanent influences to be drawn. For year-over-year, we see the gross margin trajectory keep improving. So to specifically answer your question, just the mix that we had for the particular quarter and no other specific reason. That's one. And from our own effort side, given the fact that we clocked in $1.4 billion topline in the last 12 months, and have got $1 billion plus of sourcing-as-a-service order plus the recently signed Ted Baker-Gerry Weber deal as a group, the amount of fabric and amount of trends that we are handling should give us humongous achieving efficiencies. They should also start getting reflected in our gross margins or manufacturing as well. So I think it's just a mix for a particular quarter and nothing otherwise.

We have a next question from the line of Mohammed Patel from Care Portfolio Managers.

How is the demand scenario in the current quarter as compared to last 2 quarters?

Current quarter. Yes. So I'll take that, Pallak. As we mentioned in the last con call as Mr. Pallak Seth touched upon that the global situation has a bearing on the last quarter and the next 2 quarters, but we see signals of on-ground activity increasing now. If you talk about the locations like Bangladesh and Sri Lanka and Turkey from where we source in terms of manufacturing, the buyers are now coming into active discussion. So therefore, for the spring/summer collections of '24 February, March, typically, the orders get placed by September, October of '23. So therefore, while the immediate quarter and the next quarter are a bit soft, impacted by the global situations, but the signals are coming good, that the second half of the year should be considerably better than the first half. And this is commenting on or reflecting on the continued design led sourcing business. But as Mr. Seth earlier touched upon, as we keep signing into more long-term annuity-based contracts, then our longevity of revenue would keep improving. But on as is where is basis, we see traction improving in the second half to be considerably better.

Okay. Consolidated EBITDA margins are better, but the segment margins are both down Y-o-Y and Q-o-Q in sourcing segment. So can you explain that?

Yes. I think one reason is that for our new verticals, which as our CFO, Rahul Ahuja, mentioned, for the entire year, we have incurred INR 51 crores of loss, which is up into an investment into the gestation phase. So the loss in the 9 months figure was 37%. And in the quarter 4 alone, it is about INR 14 crores because we are starting new verticals. So therefore, it's more an impact of the new verticals loss going up in quarter 4, but we anticipate during the current year PBT breakeven during the new verticals. That's one of the reasons for any margins being softer in -- sequentially in quarter -- this quarter versus last year.

So you'll PBT breakeven in FY '24 on the new ventures.

Yes. I think two things there. One is for the verticals that we already have, which incur INR 51 crore loss, we anticipate a breakeven but at the same time, selectively carefully, we would keep committing to new verticals as well going forward. So that's the investment into growth. But to answer your question, we are targeting towards a PBT breakeven in the current year.

Okay. Other income has also fallen Y-o-Y in 2Q. So what is the specific reason?

See, other income, in fact, the agency contracts, agency business, part of the revenue of our agency. And typically, that doesn't go through the turnover, any agency commission goes into the other income, so that's one thing that actually declined during this quarter, plus I think there were, for example, some of the scrap sales that we had as part of our inventory cleanup in the previous quarter of last year, that reduced as well. So these are some -- and then there was a INR 3 crore profit on one of our venture tech investments as well in the period -- in quarter 4 last year. So there are some 2, 3 reasons because of which you see a lower other income in this quarter. But any recurring kind of income is well intact.

Okay. And also, if you can throw some light on the potential of the recent deals like Ted Baker-Gerry Weber, what can be the GMV topline or bottom line potential, if you can just help us understand?

Yes. Look, I'll take that. I think for Ted Baker, there are two kinds of revenue streams that would come to us. One is that as we are handling the global design, then the merchandise value that we would be handling under this, we would be having about $90 million to $100 million, but so there is a 10% -- sorry, GBP 90 million to GBP 100 million, which means in terms of dollar, it is 1.2x more, and we should get about 10% commission on that. And then there is wholesale for which we are the closing partner for Ted Baker. That has annual potential of GBP 60 million to GBP 70 million with anticipated 35% margin. So therefore, if I have to summarize the two revenue streams of Ted Baker, it's about 80 million on about 100 million annually, which means about INR 800 crores coming in from Ted Baker. It may take us 2, 3 quarters to get to the full volume potential. That's Ted Baker alone. In terms of Gerry Weber, that's approximately $100 million of annual sourcing that we will be handling for customers. Here, we are acting as a principal. So that's another INR 800 crores. So these put together cost INR 1,600 crores. John Lewis is about circa $10 million to $15 million that we would be handling and we would getting an agency commission there as well. So these two contracts is about INR 1,600 crores. The $1 billion sourcing-as-a-service that we already reported, we signed up, we are aiming that we should be able to get to 50% levels, that means around INR 4,000 crores to INR 5,000 crores is what we would be handling. And on that, as Mr. Seth said, 4% will come to us. So INR 160 crores is my revenue. So to now add up everything INR 800 crores plus of Ted Baker, INR 800 crores worth of Gerry Weber and about INR 160 crores coming in as in terms of revenue to our books, that's what INR 1,600 crores to INR 1,800 crores visibility on a per annum basis as we scale up the new contracts that we have signed. It is 15%, 16% more than the current annualized topline that we are having at present.

And Sanjay, we have 10 more in discussions. The amount of opportunity PDS is getting now, we have not got in the last 25 years of being in existence. So I mean, the company has invested for since 2007 or '08, but the restructuring happening in the industry, the consolidation happening, there will be no other global players strategically being able to engage with the retailers, having a platform model, offering various variety of services, many of services. It just immense the opportunity that you are finding for the mid- to long term. So the short-term demand slowdown is honestly not a concern to us much. But yes, 6 months, there is going to be a strong softening in demand. But all these new things we have currently doing have not been budgeted in our next financial year, internal budget. It's going to have a very big impact, hopefully, in the next couple of years.

I have one last question. So in one of the interviews, you said that FY '22, you're expecting a single digit growth in revenues. And we have a lot of deals that we have signed. So are you being conservative on that guidance?

I think we are trying to permit with you a prudent here, cautious here as well. Yes, we are very positive, very confident and feel good about the contracts we are signing and the funnel of such contracts. But those single-digit growth is coming out of a bit of caution. So yes, we are a bit cautious and careful. We really hope that we should be able to do better, but that's where we stand as of now.

The testament in our industry is the support we get from our commercial banks. So the bank in partner we just got is a very diversified portfolio of banking partner for working capital limits. We just DBS, Singapore, and Hong Kong and a few others who are in the pipeline. I met them in Hong Kong recently. Their comment was that in the last 2 years, they've got many of the small, medium size apparel, fashion, and consumable accounts out of the portfolio. PDS is the only one they have added and they have huge appetite to grow with us. So consolidation not only happening in the retail, but also in the banking for support to the sector. So all these are good factors that are supporting our buildup of the business, which are going to enable us to capture more market share as industry basically consolidates.