PDS Limited (PDSL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to PDS Limited Quarter 2 FY '26 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference over to Reenah Joseph. Thank you, and over to you.

A warm welcome to all participants to PDS Limited Q2 FY '26 and H1 FY '26 Earnings Call. Our presentation and financial results are available on the company's website and stock exchanges. Please note that anything said on this call, which reflects our outlook for the future, or which may be construed as forward-looking statements must be viewed in conjunction with the risks that the company faces. The conference call is being recorded and the transcript, along with the audio will be available on the company website and stock exchanges. Today, we have with us the management, which includes Mr. Pallak Seth, Executive Vice Chairman; Mr. Sanjay Jain, Group CEO; and Mr. Rahul Ahuja, Group CFO. I now hand over the call to Mr. Sanjay Jain to make the opening remarks.

Thank you, Reenah. Good afternoon, and good evening, everyone, and thank you for joining us for PDS Limited's earnings call to discuss our performance for the second quarter and first half of financial year 2025-'26. Let me start by saying that we are pleased to report another quarter of steady progress, a quarter where we sustained top line growth, notwithstanding the overall global challenges and challenges specific to the industry, we have sustained top line growth and continued executing on our profitability and cash flow improvement agenda. Our gross merchandise value stood at INR 5,461 crores in quarter 2 and has crossed INR 10,000 crore mark for H1 and therefore, is up 8% year-over-year. Encouragingly, our business pipeline remains strong as our order book as of early October stands at about INR 5,300 crores, a 15% year-over-year increase, demonstrating the continued trust of our global retail partners, notwithstanding the macroeconomic pressures. During the first half of the year, our focus has been on profitability, cost optimization and cash generation. We have rolled out a series of structural initiatives from competitive reverse bidding for materials to tighter cost controls across corporate and business units. These actions we feel positive, should start delivering somewhere in quarter 3 and then should deliver more in quarter 4 and thereafter, would benefit flow in the entire year of FY '27. We have taken decisive steps to address underperforming verticals and also established clearly defined guardrails for any new investments. We have put in place clear financial and process guardrails for any future investments in new business, ensuring that profitability, cash flow and return benchmarks are met before any additional capital deployment. We are streamlining our existing investment portfolio under PDS Ventures, wherein we have visibility of two investments being identified for potential sale in the near future. So, on one hand, with a 15% growth in the order book, we are continuing to be remain buoyant in terms of our engagement with the customer. But at the same time, given these turbulent times, notwithstanding the growth in order book, we are trying to take measures in terms of enhancement of profitability and careful deployment of further capital. Our efforts on working capital optimization are beginning to give results. The net working capital days have reduced from 17 days in March '25 to about 6 days at the end of September '25, significantly releasing the cash and helping us generate INR 593 crores of cash flow from operations in the first half of the year as compared to a cash outflow in the entire of last year. And this is notwithstanding that the quarter 2 sales of ours were the best ever quarter 2 in the last 5 years of the company in terms of revenue generation. We continue to see the inherent strength of our asset-light demand responsive business model, which remains the cornerstone of PDS growth journey. This model enable us to stay agile, scale efficiently and manage volatility across markets while maintaining cost discipline and financial prudence. Despite ongoing global headwinds, our diversified sourcing network and customer-centric execution continue to drive steadily business momentum across regions. As an illustration, our single largest customer in U.K. and Ireland, wherein we have been so far serving them largely from Bangladesh or from Sri Lanka post the signing of FTA between U.K. and India, this customer is very deeply engaged with us, whereby on one hand, our Knit Gallery factory has been onboarded. But at the same time, our sourcing teams are engaged to have multiple factories beyond Knit Gallery onboarded with the customer. So therefore, this approach of asset-light and hence, highly networked through partner factories is making us feel very positive that we should be in a good position to make the most of the unfolding of U.K. and India FTA. The global trade environment continue to evolve. And as I said, the anticipated FTA now beyond India, U.K. with Europe as well should continue to benefit us while we are trying to navigate the position of tariffs with U.S. Notwithstanding that, our top line in terms of what we sell to U.S., which should touch about INR 2,500 crores this year is actually 25% up in the first half as compared to the same period last year. And once again, while on one hand, there is U.S. and India 50% tariff issue, but our ability to feed into U.S. market from Vietnam, from China and increasingly now from Egypt and Latin America is helping us maintain this growth momentum of 25%. In this dynamic geopolitical landscape, our diversified multi-country sourcing, as I said, is continuing to help us and leading to more and more opportunities. With a footprint spanning Bangladesh, Vietnam, Sri Lanka, Turkey, Egypt and expanding presence in India and Latin America, we believe we are well placed to mitigate the concentration risks and support our customers with flexibility and speed. As part of our strategic road map, as I mentioned earlier, we are strengthening our India sourcing capabilities, and that is beginning to show some early results. We're accelerating digital transformation across our ecosystem. On one hand, we are implementing S/4HANA to revamp our existing processes. But at the same time, we are looking at revamping the costing and master data management tools and deploy Coupa e-auction, building dynamic pricing platforms. So, as you know, that biggest part of our cost structure is cost of goods sold containing fabric and trims procurement. Post BCG recommendations, we have already started now rolling out of the e-auction processes and thereby benefit from price advantages. These should drive stronger analytics, better cost control and improved compliance across all our verticals. And lastly, I'm pleased to announce that we have declared an interim dividend or INR 1.65 per share, which is same as last year at the same time. With this, I would like to invite Mr. Rahul Ahuja, our Group CFO, to walk you through the financial highlights for the quarter. Over to you, Rahul.

Thank you, Sanjay. Good evening, everyone. Let me take you through the key financial highlights for the first half of FY '26. Our reported top line in Q2 FY '26 was INR 3,419 crores, which is a growth of 14% compared to Q1 of the same year. During H1 FY '26, we reported an 8% growth in top line of INR 6,419 crores. During H1, our existing verticals grew 6%, while our new verticals clocked 46% growth with a top line of INR 469 crores. During the second quarter, gross margins expanded from 19.4% in Q1 FY '26 and 19.6% in Q2 FY '25 to about 19.9%. Employee expenses, which is our largest OpEx cost have been flat compared to Q1 at INR 312 crores. Other expenses have seen an increase mainly due to increase in license fees, given increase in our branded business, selling and marketing expenses and freight costs to some extent and shutting down of a few verticals like we have mentioned in the past few meetings wherein we are closely looking at verticals which are not in line with our expected performance. All of this translated into an EBITDA of 3% in Q2 versus 1.7% in Q1. While we have witnessed some margin pressures in some of our top 10 businesses, at the same time, we have also witnessed Spring Near East, which focuses on sourcing from Turkey, Zamira, which largely specializes in denim; Norlanka, which operates out of Sri Lanka and Krayons, largely Bangladesh sourcing, which have shown much better performance as compared to similar periods. The pressure on other verticals is mainly a timing gap, and we should expect a rebound in the next few quarters. Our profitability includes the impact of our investment in new verticals, which happen through the P&L. From a capital allocation standpoint, we continue to remain disciplined. As per our stated guidance, we have not made any new investments through the P&L. Investment in new verticals increased marginally by 3% due to the impact of getting foundry business onto our platform. This is a business in Hong Kong, which caters to the U.S. market. We are closely monitoring new verticals and are focused on ensuring reduction of losses by 25%. Excluding the impact of new investments, our EBITDA margin is 4%. Further, depreciation has seen an increase mainly on account of our investment in the U.K. property, getting Knit Gallery, the manufacturing operations in Tirupur onto our platform during -- towards the end of Q1 of this year. Other income includes mark-to-market gains of INR 14 crores in H1 and gains from ForEx. Finance costs increased due to increased factoring during the quarter, which is also visible in reduction of our receivables by INR 436 crores in first half of FY '26. The increase in finance cost was offset by getting more early payment discounts given the reduction in receivables that we witnessed, we used the cash to negotiate better payment terms with our vendors. So, this increase in finance cost was largely offset by getting more early payment discounts. Our PAT is INR 48 crores during the quarter, an increase of 142% versus Q1 FY '26. During H1, we reported a PAT of INR 68 crores, which has declined by 41% versus the same period last year. On the balance sheet side, net working capital days have improved from 17 in March 2025 to 6 days during this quarter. While receivables have reduced, as mentioned earlier, we witnessed increase in inventory from INR 483 crores in March 2025 to INR 542 crores in September 2025. This is largely due to increased DDP business and improvement in the order book position of our manufacturing units. Gross debt of INR 1,102 crores includes around INR 100 crores of debt from the consolidation of the Knit Gallery business, which came to our fold in Q1 of this year. Excluding this, our gross debt has declined by around INR 110 crores in the first half. Our net debt reduced by INR 279 crores compared to March 2025. This was mainly due to robust cash flow generation from our operations. Basis the above, our return on capital employed stood at 20% with healthy leverage ratios of 0.1x net debt to equity and 0.2x net debt to EBITDA. With this, we open the floor for questions from all of you.

[Operator Instructions] The first question comes from the line Kaushik, AK Investment.

My first question is to Pallak. Pallak, where your most amount of time is going into the business? That's my broader question to you. And secondly, the question is on -- I mean, we are building like hundreds to -- I mean, we are investing into some of the brand management on those stuff. And it is taking time to be executed at par. And it is taking time to be executed at par. So how do you see that? I mean it is a gap, or it is the gestation period in this business. So, these are my broader level 2 questions.

Thank you for the question. So most of the time in the last four months, five months has been going on making sure the existing businesses we have, either they are old established businesses or some of the new businesses we had started in the last two, three years, they are turning around and making sure that they are generating income enough revenue to be able to become profitable. And a lot of time is also going in strategic customer meetings and discussions, how to make them more sticky with PDS, and bringing the revenue to our existing verticals or some of the new verticals that we have started. I think overall, the situation, there's a lot of stickiness with the customers. A lot of U.S. business has started, which we have been investing for the last 2 years. Some large European accounts like M&S, which we are not working with, are beginning with PDS. So, there are a lot of big customers which are coming into the group, and a lot of that is a result of constant meetings and discussions and showcasing the PDS value proposition to these retailers. So that's where most of the time is going. We are not really looking at any new businesses till the time all existing businesses turn around and start becoming profitable, or if they're not work, then we take the call to either restructure or merge them with some of our large entities. So that's where most of the time is going and is bearing good results. And hopefully, we'll see the turnaround in the profitability in the next H2 of this year and a strong financial year coming next year as well. In terms of the brand business, I think -- if you look at, there are two brand businesses we are doing. One is with partnership with existing retailers. We are offering them a category management. That is profitable from day 1 because we have a core retailer already in place, giving us orders, and then there's no inventory, and there is no stock position there as well. That's bulk of our brand business. There are a few businesses that we have started in the last couple of years where there was more direct-to-consumer through website. So there, we are taking a very careful consideration if they have really scaled up or not. Otherwise, we are trying to also see what to do with those businesses. I think Tech Baker, also we are seeing a lot of traction coming from even Marks & Spencer and a few other retailers are talking about doing shop-in-shops. So, their brand is now rebounding. I think we've turned the corner, and we are going to see good results in the H2 as well. So overall, the focus is on existing businesses, strategic customer interactions, and also meeting our commercial banks in Hong Kong, and making sure we have enough working capital limits to support the growth of the turnover of this business. I hope that answers your question.

Yes. So currently, whatever the margins we have, right, is it because of we are investing, that's why it is dragging down, or it is also a tariff effect, both have come into picture because it is one of the lowest quarters we have reported.

I think the tariffs also had a big issue like the American tariffs, a lot of the business in the U.S. that was supposed to grow at a much faster pace, including business like Fashion Nova, customers have held back the orders because there was so much uncertainty, where with the tariff rates, a lot of retailers were not wanting to ship the goods. So that also had some impact on the margin, and they turn around some of the U.S.-focused businesses. But overall, I think the margin of the industry is stabilizing. I don't think there's any massive pressure because there is a lot of deflation on fabric and trims coming as well. So, there's a customer pressure on one side of price. The raw material prices are also adjusting accordingly. And there's a lot of excess capacity right now. So, if you're a factory group without a strategic customer base, there's excess capacity sitting in many parts of the world. So, PDS, being an asset-light model is able to negotiate those capacities, and with the deflation in fabric and trims costing, we are able to then go about maintaining or securing our margins.

Okay. And do you see this margin for upcoming quarter also a little bit? How do you see for FY '25? That is my last question.

For '27?

Yes, '27 and the second half also. How do you see the margins?

Overall, see, the thing is my concern would be if a company is having decline of turnover and order book, right, which is healthy for PDS, for the same time last year, we are up almost up 15%. So, the order book is strong, customer traction is strong. The business is being booked. Once the orders are in place, using our leverage of fabric trim procurement and also the factory base we have, we can negotiate and squeeze in the profits we require or even increase the profits. So, I don't think there's any big issue. If the turnover is declining and there was an issue on the traction with the customers in any business in our industry, that's where I think the problem starts. But that is least of our worries. Big hockey stick customers have opened account in the last 2, 3 months alone, TK Maxx U.S., Ross Stores, Target, Walmart, some of these existing accounts are growing in good space. PVH, which is the owner of Tommy and Calvin Klein has onboarded one of our subsidiaries as a vendor. So, customer traction being there, a lot of new businesses being having the revenue they require to turn around is coming in. So overall, we are seeing the situation as quite positive going into the next 6 months and especially into next year.

The next question comes from the line of Rudraksh Raheja, ithought Financial Consulting.

Congratulations on a good set of numbers, especially on the cash flow, and I would say, the gross margin front. My question is, we plan for around INR 40 crores reduction in P&L investment, which roughly translates into INR 120 crores, if I take the annual figure. And till H1, we have already incurred around INR 80 crores. So, do we still see this happening for us, which means we would see around INR 20 crores of quarterly run rate in terms of P&L investments for the H2?

We continue to be positive on what we had foreseen that we may have about close to 25% reduction, while we are flat even after capturing in foundries acquisition, and there is about INR 8 crore loss because of that. But overall, as well, we remain positive that we should be able to bring down close to INR 40 crore reduction for the entire year.

Got it, sir. In terms of regional mix of revenues, we have seen some decline in Europe, and U.K. has seen some pickup. So, could you throw more light on that?

Yes. I think when it comes to growth in U.K., as Pallak was mentioning, these are tough times. So, our ability to strategically engage with key customers like Primark, Sainsbury's, Nex, Tesco, and Asda through sourcing the service contracts is seeing us good traction. Customers see us bringing value. Customers see us agile, customers see us understanding. That's why in a flattish market like U.K., we are able to grow. In Europe, there is a specific case of Gerry Weber that we mentioned to you that we did about $70 million of business last year. That business has gone. So, we -- our subsidiary, Techno in Germany, which focuses on Germany, EU customers, is trying -- it's already signed up with new customers, but the revenue buildup is only going to start from December, January onwards. So that's an interim decline that you see. While German market on the whole also has been under pressure, I believe the government has rolled out a package to revive the economy. So, we remain positive that, A, we should benefit from the overall demand surge expected next year; and B, we're replacing Gerry Weber with alternate customers.

Yes. Like unfortunately, Gerry Weber had a bankruptcy. So unfortunately, the revenue has gone. So, Rajiv Ranjan on the business side and Techno is actively looking at replacing and having very good traction. So hopefully, Sanjay said December onwards, it should be picking back.

Understood. So, the whole impact can be attributed majorly to the Gerry Weber case, right?

Yes. That's the thing.

Got it, sir. And sir, on the U.S. front, should we expect some substantial growth in H2? Like we have been talking about a lot of big clients that we have onboarded in the last, let's say, 6 to 12 months. So, the big hockey stick impact that we have been discussing, would that reflect in FY '27 numbers or something could be seen in H2 of FY '26 as well?

I think '26 H2 will show steady growth, but the biggest growth will come in '27 because the cycle of starting a business, when you start -- onboard a new client like PVH, the owner of Tommy and Calvin Klein, they will give trial orders, sampling goes on. So most important is opening the vendor account. In the vendor account, a big retailer opens, they don't open to do $1 million, $2 million. They're opening to do substantial business. So, when the buildup happens, it's a 12- to 18-month cycle. But at least the big accounts like TK Maxx, Ross Stores, PVH, some of the largest American retailers, Walmart and Target, they are the 5 biggest American retailers have opened the PDS account in the last 6, 9 months and continue to build business and show traction. So, the intent is there. The teams are in place to build that business. Now it's about the cycle because our business is 6 months seasonal, spring, summer, autumn, winter. If you enter one season, next season, it builds and then the third season, it scales up. So that's where we are in the cycle right now.

Understood, sir.

If you look at the Fashion Nova around 12 months, current year order book for this customer will almost $30 million, $35 million. And next year, we could cross $50 million. So, it's a buildup, but the customer like we started probably 18 months back. First year, it was slow, but this full financial year, which is the first full financial year, we'll end up being around $30 million to $35 million. And next year could almost double either between $50 million to $70 million the way things are looking. Techno is another account, right? That's also account we started 3 years ago. Current year, we might end up doing around $60 million, but next year's projections are even more robust. So, once you are in the retailer, your teams are engaged, teams are set, then within 18 to 24 months, the business starts scaling up and ramping up. And American accounts are much more strategic, where Europe is product to product like style to style, but U.S. is more strategy between a company to company. So once they start the account, they have a strategic plan and then they build around that plan. I hope that answers your question.

Understood, sir. So we have seen some profitability decline in our top 2 verticals, Poeticgem and Simple Approach. Could you help us understand that part?

Sanjay, you want to take it, then I can add to it.

No, why don't you take the lead? I'll then chime in.

Yes. So, I think Poeticgem, overall, the business is turning around in H2, we are seeing the customer traction increasing again. So, we have engaged BCG in both these businesses, Poeticgem and Simple Approach to look at the organization design of the company. So, there is a big operation of Poeticgem in U.K. and in Bangladesh. We are trying to see how to streamline both and having one office in U.K., which has been more customer focusing and the teams in Bangladesh and dealing directly with the customer rather than having a huge layer of people in U.K. as well. So that exercise cost cutting has happened. And H2, we are hoping to see the results of more streamlined operations. But on the other side, the customer traction from their core customers like Asda, Tesco, Sainsbury, Nex and Primark is strong, and that's building momentum. So overall, we are not too worried about that business. And similarly, Simple Approach, Primark saw some reduction in volumes because of tough economic conditions, but Simple Approach, order book remains stable, is growing year-on-year basis. So overall, also the business is quite stable for both these companies. They are strategic with their customers. They're having those discussions and by either improved procurement through BCG's efforts that we are seeing good traction or streamlining operations, I think both these businesses should be able to become profitable and turnaround. The business that is the one that had the biggest setback is Techno because of Gerry Weber's bankruptcy last year. So that business is the one that we feel is taking a bit longer. But the other 2 ones you mentioned, it's quite in hand to give the profitability that is required.

Actually, Simple Approach, in the last year, -- there was -- if you guys recall, in December of '23, there was a huge wage increase in Bangladesh. And the largest customer of Simple Approach, which is Primark, after intense negotiations gave us an upcharge of close to $1 million, which was part of the profit in H1 last year.

So, if you were to normalize for that, I think Simple Approach is growing very well. They have done about $4.9 million of PBT in this year, and their H2 will be better than this. So, on a BAU basis, Simple Approach will be doing better than what they did last year, if you were to normalize for the one-off upcharge that they got from the largest customer.

And Poeticgem restructuring is behind us, as Pallak mentioned, so they should also have a better H2. So, these were one-offs in the two largest verticals.

Yes, sir. Got it. And sir, could you give more clarity on sustainable gross margins for us? This quarter saw 0.5% improvement. So, going forward, like what should we model for ourselves?

I think as Pallak mentioned, current order book in hand that we have factories in general partner factories having spare capacities, the benign input prices on fabric and trims, we believe the margins should be steady for coming few quarters. And on one hand, while we expect them to be steady and as the processes like e-auction, et cetera, start unfolding, we should see the benefit of that coming in margins as well.

[Operator Instructions] The next question comes from the line of Manoj Dua from Geometric.

Coming back to the last participant question about Poeticgem and Simple Approach. As a broader, we see the results, our 150, 143 bps we were down in EBITDA margin. And my understanding was that according to the last con call that our margins are falling, even taking care of the new investment as a separate thing in accounting that because of the Germany Matlin and Gerry Weber and the tariff confusion I couldn't get that Poeticgem and Simple Approach, even the modest growth in sales, more than double-digit growth profitability has fallen. I understand that now BCG will improve it, and you are confident about H2. What were the reasons, particularly for this U.K. thing where the margins fell?

So, the margins are, Manoj, a factor of 2, 3 things that have played out. For example, in the case of Simple Approach, like I said, if you were to compare apples-to-apples, in the previous years, there was an upcharge that the largest customer, Primark had given to them, which was a one-off. If you were to adjust for that, the margins that have been earned by Simple Approach are largely in line with that of last year. But that said, last 1 year has been pretty challenging as far as the whole industry has been concerned. And hence, there has been pressure on margin across customers. Like Pallak said, what we -- our endeavor has been to ensure that we remain with our customers and continue to get orders from them. Margin is something which we can address as the market stabilizes. Also, margins is a factor of what products you sell in what season. So typically, it's the winter season where the margins are better because of the nature of the products. If Simple Approach is making a key line product in H1, which is some spring/summer season, then those, by definition, are lower-margin products. So, these 2, 3 reasons played out as far as Simple Approach was concerned as far as margin, the profile is there. But like I said, Simple Approach as a business, we expect them to deliver similar or slightly better performance for the full financial year, both in absolute terms and hopefully in margins as well.

Okay. I understand that their product profile is different, sometimes there is one of good year also. So going forward, FY '27, this is where the confusion is because the last year, we were expecting higher margin from because of the more higher sales and more new initiatives, which has actually gone on the south side. So, let's assume normalized case FY '27, how to look at a base margin of a company, which including BCG and you give us some picture from where we've taken a base and how to grow from there?

I think, Manoj, before I specifically answer your point, I think what is also noticeable that our spring business, which is run out of Turkey, the margins are up from 1.3% to 4% and our Norlanka business from Sri Lanka, up from 4.7% to 5%. Our Krayons business catering to U.S. from Bangladesh, margins are up from 6.6% to 7.2%. So, there are cases, as you can see in the disclosure we have made in the top 10, our Zamira denim business 0.1% to 3.8%. So, there are 4 or 5 such businesses like we have Kleider margin up from 7.3% to 7.6%. The 2 specific Poeticgem and Simple Approach case, as Rahul clarified, Simple Approach, if you take out the $1 billion upcharge, we are okay on margins. In H2, we are looking good. Poeticgem, we took bold steps restructure, as well as Pallak mentioned, the costs and that all happened in the quarter 2 by towards the end of it. So, we should see a traction building up. And I think we are somewhere hovering near the bottom. On one hand, we had -- we are trying to see that the P&L-related investments in new articles start bearing fruits. That's on one hand. But there is a gestation underway. On the other, we got squeezed by Gerry Weber and Matlin sales impact. So, these 2 things plus, of course, the overall tariff situation. So, I guess somewhere closer to bottom, we should look at better performance going forward because of multiple factors spanning out. But it's a timing issue that everything -- the last thing one wanted is tariff hitting our customers and therefore, indirectly getting passed on to us. So that's where we are. I think somewhere closer to bottom, and this should only get better from here.

Okay. So, coming to tariff in the U.S. part, how things are going? I understand that you have taken good clients, which will be seen in future. But how is the demand from the retailer side in general because they are also struggling with tariff demand in terms of volumes that you see USA going forward?

Pallak, do you want to take that, and then we'll add into numbers?

So, the U.S. is a huge consolidation. A lot of the department store business is under pressure. A lot of the luxury business is also under pressure. The sector that is continuing to grow, which is where what happened in Europe in the last 10 years is the discount and value sector. So, customers like Walmart, Target, Costco, TK Maxx, Ross Store, Burlington all the discount sector seems to be stable and growing. Anything in the middle market or specialty brands or luxury is struggling. The focus of PDS is on the value sector and the clubs and the discounters. And that sector is still robust because the consumer is still buying, but they're buying for value. They're not going buying expensive product. So, a lot of the specialty brands are going bankrupt. They have been acquired by people like ABG and becoming IP. So that's increasingly the trend. But then when the IP is available, the discounters can sell them in their stores and then generate sales. So, it's becoming a highly discounted market of what -- a bit like what Europe has been in the last 10 years. That's the trend we are seeing. So, if you have with the right customers, you are still okay. If you have the wrong customer base, then you struggle. So that's the overall general trend in the U.S. we are seeing right now. Sanjay, do you want to add anything?

No Pallak, as I also covered earlier, we have seen about 25% growth in sales to North America. And more specific to U.S. as a geography, the sales are up 36% in the first half as compared to the same half last year. Accounts opened, teams stabilized. So Manoj, the traction should only improve thereafter when it comes to sales to U.S.

Okay. So, congratulations on improvement in some key metrics, and I really like the presentation with so many disclosures.

Thank you, Manoj.

[Operator Instructions] The next question comes from the line of Prakash Diwan from Matterhorn Investment Advisors.

Sanjay Ji, Pallak, congratulations on a brilliant set of numbers, particularly I think the gross margin number is very, very encouraging for sure. And what's very heartening to see is the financial guardrails that you finally articulated because that's been the bug bear all the investments going through the P&L that people have been worried about or all of us have been concerned about. I just wanted to focus on that part. You -- let's say, last year and this year, you've been investing a lot in new businesses, and they will take some time as the industry dynamics are to start reflecting into improvement in the metrics. But this year, you said you spent about INR 80 crores for the Michael Lee foundry business in the U.S. And going forward this would mean that you'll still have some pending investments. But once this stops then once this gets within those guardrails that you've defined, this would -- what would this number come to? That's part A. Part B is the bleed that we had in the previous year through some of the new investments that it took longer than what was anticipated like Ted Baker and now going into administration and all. That will also start kind of -- somewhere it stops and starts getting plot back on the P&L. So what kind of quantum could we anticipate or pencil in for that? And I'm talking about '27, possibly not H2 '26 maybe that's too early. I just wanted to get a color on that.

Pallak, I'll take that question. I think, firstly, the amount of INR 80 crores circa that number is for all new verticals put together, not just foundry. So that's the aggregate of all the new P&L- related investments. And as in response to previous question, we said that about INR 160 crores got incurred last year, and we are working towards close to INR 40 crore reduction this year. That means expected more profit generation or lesser loss. On your second point, which is an important one, I think somewhere in our investor presentation on Slide 8, we have endeavored to cover a 5-year horizon, wherein in the first 3 years of this 5-year horizon, when we were focused on harnessing what we invested earlier, and kind of slowly scaling up. Our margins went up from about 2.5% to about 3.5% gradually at the PBT level. And the net debt of the company kept coming down and return on capital employed went up from 27% to 44%. And it is in the last 2 years that we've been -- we made a conscious decision to invest. I think investment is growth is important. Our is a unique company as an asset-light company when an investment is growth is through P&L. So therefore, as we work towards bringing this P&L investment to a normalcy, then I think what we achieved in the past as a 3.5% PBT margin is what we should be as a first step looking at from a current level of close to 2%, inching up to 3.5%. That is answering your one part of your question. And in the first 3 years of the 5-year journey, in year -- we invested close to INR 30 crores, INR 35 crores each in the investment in new vertical. So, we expect that going forward as well, once we have come to steady state, an amount of INR 40 crores, INR 50 crores, which was close to INR 160 crores. But another INR 40 crores, INR 50 crores is an important investment that we will continue to make into growth initiatives, whether it is adding a new category or a new customer. But we accelerated that to INR 160 crores, and we should come down to a steady state of INR 40 crores to INR 50 crores. And that's where in line with the past, we feel our margin trajectory should inch up to closer to 3.5% in terms of PBT margin.

The next question comes from the line of Hitendra Pradhan from Maximal Capital.

Yes. This is Sarvesh. So, I had one question on the translation of PBT to PAT for the owners of the company. Now because of the ATR increase as well as the higher share of the non-controlling interest, this has come down to almost 50% now. So -- and what we are also seeing that there are these cost initiatives which are being taken probably at the central level. So now these savings when they occur for each of these decentralized businesses, would that advantage be retained by the parent company? Or how will it be shared with the entrepreneur at the subsidiary level? Because -- of course, earlier, we were assuming that because this is a decentralized structure, so the cost would be probably taken -- cost-saving measures would be done to the best possible extent at the decentralized level itself. But now it's looking like there was a lot of scope to reduce such costs and now those have to be done from a centralized perspective. So how should we see these benefits percolating to the shareholders of PDS?

I think I'll put it very simply, the INR 160 crore P&L investment to a very, very large extent has been from the platform level. So, as we turn it around, it should straight away flow without any minority leakage to a large part of it should actually flow to the PAT attributable to public market shareholders. So that's the one significant part of it and which we should see -- as we keep bringing this P&L impact down, we should see the percentage of PAT attributable to public market going up. And secondly, which is more structural, which Pallak also mentioned that it's a learning curve. This is an entrepreneurial model. And as in terms of our guardrails, in terms of the MOUs that we are now signing with our new partners, we are putting in more and more stricter controls in terms of partner funding their share of loss. So firstly, a partner selection now has to be a basis, an identified clear customer so that I can reduce my gestation. Right now, it's 18, 24 months gestation. I should have a clear visibility of revenue, not a promise. That is number one. Secondly, if the losses are exceeding beyond what has been there in the budget plan, then I think the partner has to fund the losses. So, these are one or two. And I think that's where we are seeing benefit. And also lastly, just to clarify, the BCG initiatives is at a vertical level. We have 3 separate contracts, which have been executed directly by our subsidiary, Poeticgem, Simple Approach, and Techno. It is not at the platform level.

Understood. And secondly, you have mentioned a lot of cost reductions which may occur in the second half as well as FY'27. But broadly, since you mentioned a number of 3.5%. So, is that the guidance for FY'27 PBT margin? Or how should we look at it?

Sorry, what 3.5% are you referring to?

I used that when I explained that--Rahul, that as we come to steady state on investment to P&L, what we have achieved in the past is closer to 3.5%. Currently, we are at 2.1% post the full P&L debit of the investment in new verticals. That's a trajectory to answer your point, that 1.4%, 1.5% trajectory, it's something that will span out. You will see in FY'27 and in FY'28, you will see us inching in that direction as we keep bringing the P&L investment down, as we keep getting benefits of the initiatives that we have mentioned, you should see us in that trajectory. That we believe is the first set of goal in about 12 to 18 months that we are surely aiming at.

Understood. And finally, one question related to the tariff situation. So how quickly are we able to -- because this is an ever-changing sort of scenario. So how quickly are we able to adjust, let's say, to the U.S., the tariff suddenly announced, and there are some countries where the tariffs are lower. So, are we able to sort of quickly readjust to the new realities and maybe shift from the lowest tariff location? How easy or difficult is it, and how much time -- is it even practical that we are able to switch between geographies and be able to export all of these from the manufacturing locations across the world in the most optimum manner? Is it even practical? And can it be done, and how quickly can it be done?

So, as far as tariffs in the U.S. is concerned, give you a little bit of background. The U.S. is our smallest market, and we do about $200 million, $225 million of business in the U.S. every year. Now tariffs impact only a part of our business. 60% of this number that I told you is on FOB basis, 40% is on LDP DDP basis, which is where the hit of tariff comes in. Now, as far as -- at any point of time of LDP, we did this analysis, when the first round of tariffs came and the second round of tariffs came, our exposure from a confirmed order book or goods that were selling were later exempted by the U.S. government, but the order book was roughly in the range of around $50-odd million, of which, let's say, half was FOB, half was LDP. So, on LDP, which is $25 million to $30 million, we are, one, given our long-standing relationship with these customers, customers also understand that this is something which they need to bear part of the burden. If you are watching the U.S. market very closely, the prices at a retail level have started going up, which means eventually, this is getting passed on to the customer. So, let's say, if the increase is $10 on a particular export order, about 60% to 70% depending on the customer, is absorbed by the customer. About 35% to 40%, we are able to pass on to the supply chain, because a retailer and the factory, these are the 2 people who have a maximum profit margin in this whole supply chain. We are a sourcing company working on thin margins. And hence, we are usually able to hedge any such increase either with customers taking part of it or supply chain solely taking part of it. Whatever hit comes to us is more or less a residual maybe 0.5% to 1%, which is also on that particular order, because from the next order onwards, we factor that tariff as part of our pricing. So, to give you a very back of the envelope, 65%, usually the customer absorbs, 30%, 35% supply chain absorbs, and maybe timing difference, 0.5% hit comes to PDS for those particular orders. So that's been how we have seen the last 3 quarters pan out. And it's not easy to relocate or shift sourcing from one country to the other, while PDS has this unique ability, given that we have vendors spread across 7 or 8 countries, which are competitive. And we have for U.S. customers, pivoted by way of increasing our sourcing arrangements in countries like Egypt or Central America. But that is something which takes anywhere between 2 to 4 quarters to happen. But that is also something that we have been working on, and successfully, now incremental orders could go into these geographies rather than everything going into Bangladesh or China, or India.

The next question comes from the line of Sahil Sharma from Dalmus Capital Management.

I wanted to know what would be the Y-o-Y GMV and revenue growth on a constant currency basis? If you can help me with that number.

Yes. I think the dollar-rupee depreciation is closer to 3.5%, 4%. So, to that extent, if the order book has grown 15% so if I take the currency impact out, it will be about 10% to 12% growth over the same period last year. And the GMV, if it is growing 8%, then, if you take the rupee depreciation out, it will be closer to about 4% to 5% growth.

Right. But I think 3/4 of our business comes from the U.K. and Europe. And there, the depreciation has been quite significant if I compare it with the last year. So, in that context, if I see the growth, then it looks like in terms of a number of pieces, we might not have grown. Actually, we might have degrown. So, is my understanding correct there?

I think what is important as a data point here to reflect is in the first 6 months, despite all the depreciations that we are talking about, the growth to the U.K. has been 31% over the same period last year, which clearly reflects our deepened engagement. This is not because of adding new customers. This is because of selling more to existing customers. So, I think while we can offline engage with you to see how we break the currency impact geography by geography. But what is important is U.K., a 31% growth to America, 25% growth to rest of the world, 100% plus growth. That's what we have witnessed in terms of engagement with our customers. Europe is the only region because of Gerry Weber we have declined. But our team would be happy to engage and facilitate your understanding. But last point, I think we are nearing towards the end of the call. What is also important is our natural hedge. On one hand, 90% of what we sell is denominated in dollars, irrespective of the geography to where we sell. Likewise, almost 90% plus of what we buy is all dollar-denominated. So, we have a currency hedge from that perspective as well.

Ladies and gentlemen, we take that as the last question. I would now like to hand the conference over to Sanjay Jain for the closing comments.

So thank you so much, all of you for taking the time out to participate in our earnings call. The members of the management team would be available offline to engage with you and try and answer that. And I want to thank the EY team as well to help us in terms of coordination. Thank you and stay safe all of you.

On behalf of the management of PDS Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.