PDS Limited (PDSL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the PDS Limited Q1 FY '27 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Shirley Rodrigues. Thank you, and over to you, ma'am.

Good afternoon, everyone. A warm welcome to all participants to PDS Limited Q1 FY '27 Earnings Call. The presentation and financial results for the quarter are available on the company's website and the stock exchanges. Please note that certain statements made during this call may constitute forward-looking statements and should be viewed in conjunction with the risks faced by the company. The conference call is being recorded, and the transcript and audio recording will subsequently be made available on the company's website and stock exchanges. We have with us today the management, including Mr. Pallak Seth, Executive Vice Chairman; Mr. Sanjay Jain, Group CEO; and Mr. Sadik Sunasara, Group CFO. I now hand over the call to Sanjay Jain to make the opening remarks.

Thank you, Shirley. Greetings to everyone, and thank you for joining us. As we begin FY '27, I would like to take a moment to reflect on where PDS is today and also, most importantly, the opportunity ahead. Over the past year or so, we have focused on strengthening the fundamentals of the organization, sharpening our portfolio, improving operating efficiency, strengthening further the capital discipline and importantly, building a stronger balance sheet. But at the same time, we have continued to build capabilities that will drive the next phase of growth of the company. This comes at a time of meaningful structural change in the global apparel and retail industry with brands and retailers increasingly seeking simpler, more diversified and cost-efficient supply chains. We believe these shifts play directly to PDS strengths. Our integrated platform across design, sourcing, manufacturing and supply chain solutions enable us to support customers access multiple parts of their value chain and respond to their evolving needs. We are, therefore, moving from a phase of building and investing in the platform to one of scaling the capabilities we have built. And importantly, we are beginning to see this translate into stronger operating and financial performance. And importantly, we are gradually now happy to see this translating into numbers. We started the year with a good momentum across key operating metrics. The GMV has increased 11% year-on-year to INR 5,146 crores and the revenue has grown 15% to INR 3,444 crores, led by a particularly strong performance in North America, where the sales have grown 48%. More importantly, this growth has translated into significant improvement in profitability with EBITDA margin increasing 90% and profit after tax growing 43% year-over-year. We're also feeling positive with the visibility that we are now seeing on the quarters ahead. Our order book has grown 23% year-on-year to INR 6,095 crores, and this reflects continued customer traction and a healthy pipeline of business. We have seen increasing traction across our customer base with new mandates and deeper engagement, reinforcing the relevance of our platform to global retailers and brands. During this quarter, we enhanced our customer base and new mandates from marquee customers, including Family Dollar, our leading French retailer, Pentland brands, representing an annual business potential of approximately USD 330 million. And given the longevity of these contracts over the 3- to 4-year horizon, we feel more positive that such an annual potential is not just for 1 year, for the coming years as well. We also partnered with Busana Apparel Group to further strengthen our manufacturing capabilities. As you know, we make at present EBIT margin of close to 6.5% on our manufacturing. That is largely coming in from catering to value retailers. With this Busana partnership, we get to engage with more and more fashion customers, and we also get to benefit from the skill set that Busana brings in. Therefore, in our present manufacturing capacity, we should do upgrade to customer profile and the margin thereof. These engagements across the sourcing as a service contracts and with Busana are important not only for the business that we bring today, but for the long-term opportunities that would keep unfolding. At the same time, our focus on enhancing efficiency in the way we deploy our capital continues to be sharp. Our net working capital has improved further to present level of 1 day, and the net debt has reduced close to 73% to about INR 29 crores. This is a reflection of the operating performance backed by continued strengthened financial position. And we believe this gives us good flexibility to embrace more and more opportunities that we are seeing unfolding for us. Importantly, the work that we have undertaken on our portfolio is also beginning to position the business for the next phase of growth. Our newer investments are progressing towards profitability and the rationalization of portfolio that we have initiated is on track. This allows us to direct our management attention and capital towards business and opportunities where we are now seeing more potential and a lower gestation in terms of bringing this to profitability. The next important aspect is that as we are entering into this important phase of our growth, there is an investment into digital and AI transformation journey. We are now seeing technology not simply as an enabler, but a structural lever for the next phase of PDS growth. By embedding AI and digital capabilities across sourcing, pricing, supply management, data and operation, we are very positive and expect to enhance productivity, improve decision-making and create greater operating leverage as we scale. And alongside this, we are already in the midst of upgrading our SAP present platform to S/4HANA. So therefore, a blend of AI and digital capabilities on one hand, customized to interface with vendors, with factories with customers. And at the same time, the core IT infrastructure upgradation, we believe is necessary building blocks to the next phase of growth of our company, deeper and wider engagement and therefore, being able to scale without corresponding increase in costs. Importantly, this transformation is being underpinned by continued investment in our people and broader sustainability agenda. We have been a Great Place to Work across 10 of our locations, reflecting our continued focus on building an engaged, inclusive and high-performing organization. Our progress is also being recognized externally with our latest ESG assessment moving up to score of 62 that in the rationale of the rating agency reflects strong category in ESG, driven by improvements across areas, including renewable energy, hazardous waste intensity and gender diversity. So as we look ahead, our focus is clear: grow with our customers deeper and wider, improve the quality of our earnings, strengthen returns and most importantly, continue building a more technology-enabled and more capital-efficient platform. We believe with quarter 1 behind us, we are looking more positively towards the current year unfolding in the coming few quarters. With this, let me hand over to our CFO, Sadik, who will take you through the financial performance for the quarter. Thank you.

Thank you, everyone, and good afternoon. Let me now take you through the financial performance for the quarter, starting with the P&L. For the quarter, revenue grew 15% year-on-year to INR 3,444 crores, while gross profit increased 18.5% to INR 690 crores. This reflects the 63 basis point improvement in gross margin to 20%, which is an important driver of the improvement in the operating profitability. On the operating cost side, employee expenses have increased by 8% in INR terms year-on-year to INR 339 crores. In USD terms, the employee expenses have decreased by 2.4% year-over-year and 6.2% quarter-on-quarter. The reduction in employee cost is due to closure of loss-making verticals, partly offset by bonus payouts and merit-based salary increments. Other expenses increased 17% to INR 255 crores. However, in dollar terms, the increase is only 1.5%, broadly in line with the higher scale of operations and efficiencies. As a result, EBITDA increased 90% year-on-year to INR 96 crores with EBITDA margin expanding from 1.7% to 2.8%, an improvement of 111 basis points. We are beginning to see now operating leverage as revenue scales and results of our efforts continue to give us results. Below EBITDA, depreciation increased 21% to INR 36 crores, reflecting the higher asset base following acquisition of Meat Gallery and capitalization of our office property in U.K. Other income was INR 9 crores versus INR 40 crores in Q1 last year. Q1 last year had around INR 22 crores FX gain. Finance costs increased 11% year-on-year to INR 37 crores. In dollar terms, the interest cost had remained at the same level compared to the last year. The composition of our interest cost is now more skewed towards the usage of factoring lines. The resultant cash on hand has helped us improve our equity collections and improve margins. Profit after tax stood at INR 29 crores, an increase of 43% year-over-year. Overall, the improvement in profitability reflects the benefits of higher gross margins and operating leverage during the quarter. Coming to the segment performance. Sourcing remained the key contributor, reporting revenue of INR 3,272 crores, up 16% year-on-year with EBIT of INR 58 crores and EBIT margin of 1.8%. Manufacturing reported revenue of INR 227 crores, up 4% year-on-year with EBIT of INR 15 crores and a margin of 6.5%, continuing to demonstrate healthy profitability. From a new verticals perspective, total investments during the quarter reduced by 8% year-on-year to INR 37 crores from INR 41 crores last year. Investment in brand management declined by 38% and design-led sourcing declined 5%. The increase in North America investment reflects the continued scale-up of GSCL, while certain businesses have been merged or exited, allowing capital to be redirected towards more scalable opportunities. Moving to the balance sheet. As I mentioned earlier, we continue to see strong improvement in working capital efficiency. Net working capital reduced from 4 days at March 2026 to just 1 day at June 2026. This improvement, together with strong operating cash generation helped us reduce net debt from INR 105 crores to INR 29 crores, a reduction of 73% during the quarter. Cash generated from operations stood at INR 151 crores. Our leverage is very low now with net debt to equity at 0.02x and net debt to EBITDA at 0.07x. Reported ROCE stood at 19%, while ROCE, excluding the impact of new verticals, was 26%. So from a financial perspective, the quarter reflects stronger revenue growth, improving margins, lower investments in new verticals, strong cash conversion and a significantly stronger balance sheet. With this, now I open the floor for Q&A.

[Operator Instructions] The first question from the line of Dhwanil Desai with Turtle Capital.

Is that our order book has increased by 23% and even Q4, we ended with 11% increase in order book, but we had guided for kind of mid-singledigit growth. So now given that Q1, we have grown at 15%, the order book is in good shape, should we expect much higher growth this year?

Dan, this is Sanjay. I think we started the year on a caution note as you rightly observed, the order book has shaped up well and that has also translated into stronger revenue and PAT growth. We continue to be positive. We are committed to have quarter 2 reflect the similar trend. So I think this is what the focus is. So my request and specific response to your question is that let's stay focused on one more healthy quarter and maybe post the mid of the year, we can revisit any of the guidance or anything. Important is to having done a good Q1, let's have another focus attention on the next good quarter.

Second question is on the new investment. I think we were planning to kind of scale it down to INR 80-odd crores we ended with INR 37-odd crores and there are quarterly variations there. But are we on track to kind of round about that number? And in U.S., again, the investment has scaled up. I think last quarter, we were kind of PBT positive. So how should -- how are you looking at that? How should we kind of factor all these things in, if you can elaborate on that?

So I think while within a minute, a few seconds, I will specifically answer your question. But what is even more important is that, as I also mentioned in our opening remarks, we will continue to stay focused on growth, this time around a growth wherein the visibility of revenue and visibility of the profitability is not into any longer gestation. And some of the sourcing as a service contracts that we have signed with annual $330 million potential are having -- are clearly going to unfold into profitability from quarter 1 itself. So that's on a medium to longer horizon and how we are contracting into new initiatives. To specifically answer your point, yes, we are positive. We believe with quarters passing by the efforts that we have initiated, there should be more profitability in the coming few quarters. So on the whole for the entire year, we would broadly be in line with what we felt could be the overall P&L impact of the new initiatives.

And last question, and I'll come back in the queue. So our finance cost, we reduced the net debt, but our finance cost has almost remained the same. Of course, Sadik talked about the constant currency number. But so how should we look at this number because -- does it mean that as we grow the factoring will increase and hence, this number will continue to grow in line with revenue? How are you guys looking at it?

Allow me to request Sadik to take it, and then I'll add something to be, Sadik over to you.

So Dhwanil, thank you for this question. If you recall, I'm not sure whether you participated in our Investor Day in the month of June, we had guided that our interest cost is not going up, right? So yes, we started working on, let's say, financing and operating efficiencies a few quarters ago. While we focused a lot on factoring receivables, we worked on net working capital. Now we are working on the payable side. We have to make a trade-off between the EPD and improvement in gross margin versus the interest costs. So as you know, whatever interest cost that we incur, we try and cover that from EPD, right? So overall, yes, the interest cost is not going up. There may be, let's say, some ups and downs during the quarters depending on the seasonality and other factors. Over to you, Sanjay.

Yes. I think, Dhwanil, as Sadik clarified, dollar terms, it's stagnant, rupee terms, it is up. We believe that the gross margin enhancement, which is a factor of 2 things, early payment discounts, EPD, that's where we get a reduction in COGS, which get a discount from the vendor and of course, improvement in gross margin in the normal course. So there will be a combination of the two. And if we -- if you don't allow our EPD to go up, then the interest cost clearly is heading down south. It is going to come up. But in fact, in quarter 2, we will try and enhance our investor release with how much early payment discount I'm getting and corresponding interest cost. So to summarize, dollar terms, interest cost stagnant. Had we not allowed EPD to come up, the interest costs should have been gone south, but we will keep supplementing it as the quarters pass by. Directionally, flat interest cost.

[Operator Instructions] We take the next question from the line of Sam Patel from Partners.

Congrats on a great set of numbers. So to start off first, in your presentation, you mentioned about the transformation journey -- just a question on that. When we speak about AI, do we see a lot of this coming in terms of cost saving or also we see it in terms of enhancing our revenue growth and profitable leading to better customer relation and more growth. So if you can just give us some clarity on is it only cost saving or also growth?

Allow me to request Mr. [indiscernible] to share his views first and if there is...

The line for the management has been disconnected. Please wait... Sir, you want to give an answer for it while?

Yes, please connect Mr. Pet is in Egypt fast business. I will take it. So Samit, AI's effort is twofold. Most importantly, customer interface. I think the first area that we have picked up is designing that how I make my designing process more efficient, how I integrate it very well with my customers. So therefore, it allows better engagement. It allows more efficient and effective designs. And so that's number one. And in fact, in our French retailer contract, one thing that scored us over competition was the demonstration of AI capabilities being -- as Pallak always says, we are a 25 -- now 26-year-old start-up. So the ability that we demonstrated to the customer in terms of --

Sorry to interrupt, sir. We have been connected with Pallak, sir.

Okay. So Pallak, we are just discussing some question that where is AI going to benefit revenue cost. So I thought I'll request you to please share your thoughts.

So I think AI is in our industry, especially for the global design manufacturing sourcing business is going to be highly disruptive. But at the same time, companies who can adapt the tools can have a lot of productivity enhancement, especially on the design side, case examples of our China operation, which has 60 people in one of our subsidiaries, now doing double the turnover with the same amount of people using some very, very cost-effective AI tools. So I was in our Shanghai office, and this company has got like from $60 million has gone to $120 million sales with 60 people, staff has not increased, starting from design to order management to documentation flow. They've got software, which our local Chinese software, which is at costing less than USD 25,000 a year, has been highly, highly productivity enhancing for them to be able to do things in a way that customers are seeing great benefit. And at the same time, with the same cost base, we're able to do much more things. Other functions back-end functions like finance and there are a lot of AI tools that are readymade available we are trying to implement in our business. So currently, it's more productivity enhancement. And as we grow our organization, we feel that whenever we need to hire new people, we are seeing can we bring in AI tools to be able to do that job rather than adding a cost in manpower at this stage. So we are very well placed, and we've got a lot of good case examples. PDS being a global company in so many countries, having so much knowledge base internally and sharing those best practices from one region to another, we feel we're in a very strong position to benefit from all the disruption happening in the global world, which is also impacting our industry to a certain extent. I hope I've answered your question.

Yes, that's helpful. That's helpful. And just my second question is on working capital. So we've seen improvement on working capital to 1 day. So just one question on that. Is this something which is cyclical due to a mix change? Or is it structural in nature where we can maybe go back to where we were in '23 in negative working capital? Just some guide on that.

Sadik here. This 1 day is a mix of receivables, let's say. So a higher share of receivables coming, which can be factored. But structurally, yes, we are what we guided at, let's say, lower single-digit working capital days, yes. So we'll maintain lower single working capital days maybe in some quarter, it can go to 1 or 0 working days. But we are constantly monitoring it, and we'll try and keep it to low single digits.

Understood. And just if I can squeeze one last one in on your geographical growth. Can you give us some sense on EU and U.S. The growth really seems to have picked up some insight on GSCL or EU, which seems to be a little bit of a turnaround in growth. Can you throw some light there as well?

Amit, would you like to take this?

Yes. So GSL, I'm clear about what is...

We have 48% growth in Americas and 21% in terms of revenue from Europe. So that's the question what has led to this.

Yes, yes. So I think U.S., as most of our investors know that we've been investing in this market for the last 3 or 4 years. And we've been consistently saying that first is to open the accounts. And once the accounts are open, the growth in U.S. is much faster you get in Europe because of the volumes. So all the key accounts that we are wanting to open, I would say 70%, 0% of them we have opened now and now scale up is happening because the life cycle of this business is once an account -- it takes 6 months to open account. But once the account is open, it takes another 6 months to add a factory because of compliances. And then the customer get trial order, 2 trial order. And once you perform, then they get confidence and start building it. So being in the third or fourth year of this investment, we have seen that we've been able to onboard some of the factories we wanted and customers trial orders have gone successfully. So now more volumes are coming from the same customers where accounts have been open. people like Coles, Walmart, Fashionova, T.J. Maxx, PBS, so American Eagle. So all the key accounts in the U.S. have now been onboarded by PDS. And the good thing is these accounts normally work with direct manufacturers. But looking at PDS kind of services we are able to give and the product development and global manufacturing and sourcing businesses we have within our portfolio, they've added us as a vendor without owning factory. So that means our scale up can now be much faster. We are not restricted by adding capacity to grow with some of these retailers. So I think U.S. is in a very strong position. We have now good teams, at least 4 subsidiaries within PDS focused on the U.S. market and a lot of traction coming in from the customers there as well. In terms of EU, I think, again, we've started having some good growth coming in the Spain market with Mango account we opened up, which is scaling up. And then the German market after Gerry Weber had unfortunately went bankrupt, new accounts have been replaced there as well. And then also growth coming from Polish market. We've onboarded a very big retailer called CTC, which is one of the largest, fastest growing in Eastern Europe and Southern Europe. So I would say the way we are structured out of the 10 pitches we make as a business, at least 7 to 8 accounts open up, either through a manufacturing business or design and sourcing or sourcing as a service. So one of the 3 or 4 services we have given, customers end up opening that account. And Mr. Sanjay also mentioned, we signed the largest French retailer in apparel as sourcing as a service contract. So that has the option to $300 million to $400 million GMV with the next 2 years because the signed contract there as well. So I think the pipeline of business is very healthy. There's a lot of traction that's coming our way. We have invested in a lot of capability of talent in the last 2 or 3 years, which is stable because of equity model. And now our job is to match these people with the right opportunities with the right incentive structure in place. So business should start scaling up quite well in the next 12, 24 months without adding too much incremental costs.

We take the next question from the line of Ritika Sheth from Ana Wealth Advisors.

Firstly, congratulations for a very good set of numbers. The important question which you would like to get answered is regarding the 555 strategy, which we have been talking about since a few years now. So what exactly -- can you -- can the management throw some light on where are we today in terms of anticipation of the numbers going forward? And has there been any change with the macro factors as well as the currency devaluation, et cetera, factoring in everything. Could you please throw some light on that?

So I think when we had -- it's been around close to 3 years when we had foreseen 555, we have believed in it. That potential has always existed. The platform that we have built has always been in a position to convert the potential to numbers. And as we initiated the journey by signing up new verticals to be on this path, there were some unfortunate accidents around Berry River and the Matalan account squeezing to half from about $140 million to $70 million. And then because of the global situation, the new accounts taking much longer, the new initiatives taking much longer to breakeven. But that never took away the opportunity. We spent the last 12, 18 months to stabilize. from the impact of Deriweber, from the impact of Matlin from the new verticals taking more time. And the important thing is this was also a testing of our internal credit control, and we have come out of Geryweiber and Matlin account without any delinquency at all. The last 12, 18 months have really gone into -- if I can use that word fixing it. I think the growth is back with reflecting in the quarter 1 numbers, reflecting in the order book. Most of our initiatives in new verticals are focused on Americas, there is 48% growth. Then the signing up of the Sourcing as a Service contract. So I think there could be a trailing of a few quarters. But rather than talking of 555 and the time horizon. We believe in it. What is important is that every quarter now, there should be improvement in the EBITDA margin, which we have achieved in quarter 1 and the corresponding improvement in PAT. So net-net, a few quarters of what has been a hiccup, but our belief is there. That's a long, very audacious goal that we'll keep focusing on. But for now, every few quarters, you should see us improving on the corresponding previous performance.

Sure. And one more follow-up question. In regards to what was the vision for the BDS Ventures, the companies which we are having within the BDS Ventures. So what is the larger vision for the group set of companies within the same...

Is safe to take it Pallak over to you.

So yes, I think PVS Ventures is one of the greatest tools and assets we have within PDS for our overall seen as a leader in innovation and also leader in the industry in terms of how we differentiate ourselves. I would say there are like 30,000 supply companies, including manufacturers and suppliers. Some of you must have visited Bharatech, 15 halls with thousands and thousands of vendors that are there. But PDS is probably one of the few ones or probably the only ones that have set up the structured corporate treasury arm that is investing in innovation and global bodies like Fashion for -- good and Global Fashion Agenda are comfortable co-branding and being in the same store as PDS. So we have built up this great asset within the organization with last 7 years with investment in businesses that are going to disrupt our industry. So being in a leadership position helps us with our core business to add a lot of big accounts, which generally would have not come unless you have large factory investments. So saying that now I think we've achieved your objective, but we are not really looking at investing new capital into venture very selectively will return for core business from our customers. So, and it's coming into a positive cycle because with 7 years of investment going on, we started seeing exits and returns coming in. So we're restricting that investment to sub INR 10 crores a year, so between $1 million to $1.5 million. And that also is subject to existing customers or new customers giving us core business in return for partnering with them in innovation and investment. The other thought is that if the asset has been created, we have seen a lot of external other venture and other investors wanting to come with us and saying that why don't you set up a professional arm and we will put money. So PDS doesn't have to put any further capital or very limited further capital and use the vehicle we have already created to take the professional fund that can then go about making bigger investments, but not with our own capital, but using more of what we have already done and the goodwill we have created in the industry. So that's how we are on the whole venture journey. So PDS having a manufacturing business, which we are trying to make sure becomes highly profitable in line with some of the leading players in the industry by adding the right customer base, the core sourcing business, which is doing reasonably well and scaling up in the venture side. So looking at all 3 businesses to make sure that we are all on a strong footing and having industry-leing positions in whatever we do as an organization. I hope I've answered your question.

We take the next question from the line of Neil Chabra from [indiscernible] Ventures.

Yes. So I just want to understand the opportunity size like real opportunities for PDS more deeply. So like if you look at the global apparel industry, it must be over $1 trillion. And if you look at the procurement side, it must be around somewhere around $500 million. But maybe that also may not be the real opportunity size for PDS because part of the operations will remain in-source. So what according to you the outsourced portion of the industry right now and where it is moving directionally? And if you can help us understand maybe with an example like once PDS enters into a retailer, how are able to grow their wallet share once you enter, like how the human organizational dynamics works from a retailer vantage point. Because you're not just competing with alternate vendors, you're competing with an internal sourcing team as well. So maybe you can give a share example like once PDS enters, how you are able to grow your wallet share. So that would be very helpful.

Yes. So I can start taking it. So every time we are pitching to a retailer right now, we've got a lot of light pitches coming up also currently. So retailers are seeing PDS in 2 ways. One as an alternate or competitor to their own sourcing organization. So last week, we had a very strategic meeting with Marks & Spencer. Marks & Spencer is a company that typically works only with its own offices directly with manufacturers. So now CEO of Marks & Spencer [indiscernible] told us that their current product development design cycle from concept to in-store delivery is now 60 weeks. That is more than a year is taking them to bring product from concept to in-store. And the reason is that they've got now 1,000 people offices in Asia and has become very bureaucratic and it has become very slow the way the whole product development cycle is coming. So the new CEO's vision is that 50% product should be through their own offices and 50% should go to third party, which is going to bring in some competition for their offices and also agility to the whole design cycle. So in those kind of conversations, CDS can play in both bases, either through our manufacturing with working directly through their offices or on an asset-light model competing with their offices. So the opportunity that has been put for the Marks & Spencer $100 million. So for me to do $100 million with Marks & Spencer, if I was relying on my own capacity, I need at least a $50 million, $60 million investment in manufacturing capacity or additional capacity to be able to fulfill that. But through our sourcing asset-light model, we'll be able to do it quite instantaneously, maybe within 6 months, we'll have like 4 or 5 third-party factories onboarded and do that kind of business. So based on customer needs, being a services business in the industry, what they are offering us either we go as a manufacturer, if they have only direct manufacturing requirement, they don't want to work with third party. In that case, we work through retailers' offices or we become a design sourcing vendor, which is what we are discussing in Marks & Spencer, basically coming and running their own to third party not through their own offices or we take over the sourcing operation sourcing as a service or we set up category management for them or we wholesale brands. So with the 5 services we do, when we enter a retailer, we picked our services and then 1 or 2 anchors we fine. And whatever is fitting with the strategy, one of these 5 definitely fit, we're able to open the doors with those customers. So I would say either retailers use us for competing with their sourcing offices to balance both of them out or ask us to work through their sourcing offices to basically run our own manufacturing business. So very few companies in the industry have been set up in the model we have set up, and this enables us to open most of the doors we end up pitching to. I gave the U.S. example also, many of the retailers, we have open doors only versus direct manufacturer, but they have made exceptions for PDS based on the quality of management team we've got in the organization and the kind of things we are able to deliver for them. I hope I'm able to answer your question.