PDS Limited

NSE:PDSL

Earnings Call Analysis

Optimism for Profitable Expansion and Dividends

Interest cost pressures and taxes led to a profit decline, but the margins were maintained. The sourcing segment exhibited growth in new verticals and a strong return on capital, whereas the manufacturing segment faces demand pressures with anticipated growth. The recent Ted Baker acquisition adds to our portfolio with $1 billion in contracts and is integrated to streamline operations. The targeted average margins are 5% EBITDA to sales, with higher rates in low-cost operations, and a 25% dividend payout aligns with our distribution policy. Future strategies include scaling margin-enhancing activities and exploiting growth opportunities, reflecting a positive outlook for a strong rebound next year.

Company's Resilience Amidst a Challenging External Environment

The company has shown steadfast resilience in the face of a challenging external environment. While the overall demand pressures have had an impact on the top line with a dip in sales, the company has managed to increase its gross merchandise value (GMV) by 13%, primarily due to an improved service mix. Notably, the growth in GMV is largely attributed to long-term contracts in the sourcing as a service business. With the acquisition of the Ted Baker, wholesale, and design business, this segment has become a significant part of the company's revenue stream. Additionally, the company has expanded gross margins by capitalizing on high-margin services such as brand management and has now declared an interim dividend of 25% of the distributable pack, which translates into INR 1.60 dividend per share.

Robust Financial Performance and Margin Expansion

Financially, the company has reported a solid performance for the first half of FY '24. With a top line of INR 4,578 crores and a gross margin of 20.4% for the half-year ending September 2023, the company saw a notable margin expansion of 394 basis points compared to the previous year. EBITDA has also risen to INR 204 crores with an EBITDA margin increase of 80 basis points. Excluding gains from real estate sales in the previous year, EBIT registered a growth of 8.4% along with a 74 basis point margin expansion.

Segmental Performance Insights

Delving into segmental performance, the Sourcing segment, which includes design-led sourcing, sourcing as a service, and brand management, exhibited a top line of INR 4,443 crores and an EBIT of INR 165 crores, achieving a return on capital employed of 34%. The Manufacturing segment recorded an EBIT margin expansion of 104 basis points to 4.1%. The strong GMV figures and gross margin expansion reflect the company's ability to deliver growth amid existing market demand pressures. With an increase in GMV by 13% and an expanded gross margin of 31.9%, the company's health is affirmatively robust.

Balance Sheet Considerations and Acquisition Impacts

The acquisition of the Ted Baker business has necessitated increased net debt and working capital, mainly due to the assimilation of inventory, trade payables, and receivables. This integration process and the eventual streamlining of working capital requirements aim to bolster the company's financial position in the upcoming periods. The company's agile business model has consistently delivered strong returns with 30% return on capital employed and a return on equity of 24% for the first half of the year. Moreover, there's a keen focus on evaluating the global markets and demand scenarios with cautious optimism for stabilization in demand in the latter half of the year.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the PDS Limited Q2 FY '24 and H1 FY '24 conference call. [Operator Instructions] Please note that this conference is being recorded. From the management team, we have Mr. Sanjay Jain, Group CEO; Mr. Rahul Ahuja, Group CFO; Ms. Reenah Joseph, Head, Corporate Finance, M&A, Investor Relations.I now hand the conference over to Mr. Diwakar Pingle from Ernst & Young. Thank you, and over to you, Mr. Pingle.

[Diwakar Pingle]

Thank you so much. Welcome, everyone, to the Q2 and H1 FY '24 earnings call of PDS Limited. The financial results are available on the company website and the stock exchanges. Please note that anything said on this call that reflects out for the future or that can be concluded on the forward-looking statements must be viewed in [ conjunction ] of risk factors. This conference call is being recorded and a transcript along with audio the same be made available on the website of the company after the exchanges. Please also note that the audio of the conference call is the copyright corporate of PDS Limited and cannot be copied, rebroadcasted or attribute press and media with the specific and written concern to the company.With that said, I hand over the call to Mr. Sanjay Jain, Group CEO of PDS, for his opening remarks. Over to you, Sanjay.

[Sanjay Jain, executive]

Thank you, Diwakar. A very warm welcome to all of you for the quarter 2 FY '24 earnings call. Before we delve into our quarterly and half yearly performance, let me provide a quick backdrop of the current economic conditions and the industry outlook. Global economy continued to navigate through somewhat of turbulent waters. There is inflation around -- we are through a geopolitical crisis in some parts of the world. And all this put together has created a bit of uncertain environment around us. However, if you look at some specific economies, the U.S. witnessed growth in the third quarter that apparently was propelled by a resurgence in personal consumption expenditure.This recovery from a near 0.8% to 4% rise, compared to the preceding quarter is an indicator that consumer spending is beginning to show signs of revival. And therefore, it's somewhere as a bearing that maybe now there is being of positivity on the sector in terms of customer spend and therefore, the retail sales benefiting from it.Turning towards the United Kingdom. This economy also has the global cues impacting in terms of inflation impact and notably in the clothing sector. Even though in the recent past, there has been some margin easing. Europe, on the other hand, presents a mixed pack with headline inflation, demonstrating somewhere of a declining trend where the core inflation is persisting. A silver lining, however, is that the wage growth is catching up with the inflation and could be a precursor to a revival in consumer purchasing power, potentially giving a boost to domestic demand.Moving our attention to the fashion industry. Predominant challenges are that inflated channel inventories, tepid consumer demand, have continued to cast shadows somewhere in the first 6 months of this financial year. However, there is optimism now with signs of a demand rebound and also vendor consolidation at retailers and brand and that is beginning to provide strategic tailwinds.To sum it up, while there has been an impact of the factors that I mentioned in the beginning on the demand, on the revenue in the first 6 months, we believe these trends are beginning to bottom out in various parts of the world. And as a result, we should see that the sector in general and company specifically should start benefiting from it in the second half of the year.There is one more trend that given the pain that has been somewhat there in the retail sector, there has been, from a retail customer side, an effort to let go a part of their value chain activities to credible counterparties, and that is where we believe that PDS should keep benefiting from this in terms of our order book, beginning to be strong from the new line of activities that we started, whether it is brand management or sourcing as a service. So on the whole, we are positive about the remaining 6 months of the year, and we believe there should be a reversal of the trend that has been there in the last 2, 3 quarters.Moving to PDS performance for the quarter. We have demonstrated resilience despite a challenging external environment. Though the demand pressures have impacted the top line, we saw a 13% increase in the gross merchandise value, coupled with gross margin expansion. The increase in GMV is because of an improved service mix with the sourcing as a service and brand management business, particularly Ted Baker, wholesale and design business now being the lion part of -- a decent part of our total order inflow.So when we see a 13% growth in GMV, whereas you are seeing a decline in sales, the GMV growth is coming in from -- largely from sourcing as a service business, and that these are pretty much long-term contracts -- and as a result, slowly the company is building a steady stream of revenue, while the order comes in and it actually gets built over a period of longer horizon as compared to the short-term contracts of design-led sourcing.We are further exploring and expanding our portfolio of brands and brand managed services. Our subsidiary, Poeticgem in London recently acquired the intellectual property rights to design, source and distribute the Little Mistress brands globally. We've also curated brands in collaboration such as Oh Me Oh My for Tesco, F&F Clothing. We are expanding our brand licensing portfolio with the licenses of Snoop Dog, Elvis Presley, Marilyn Monroe and Snoop Dog.Though industry is going through a rough patch, we continue to evaluate our pipeline of strategic opportunities and long-term collaborations. We aim to capitalize on the prevailing market conditions, which presents numerous assets at very lucrative valuations. So when I am touching upon the fact that there have been these opportunities around brand management solutions or getting some brands into our fold, we are sensitive to the fact that we will continue to pursue these opportunities where in B2B shall be our focus area rather than we channelizing our energy in terms of our retail brand distribution.We want to capitalize on our relationships, whether they're existing retail customers and see how we get B2B rights for various brands, whether we develop them in-house or we get a global license for some well-known brands. It is noteworthy to mention that even these turbulent times, our unique model consistently allows us to generate free cash flow operations, keeping our balance sheet strong and steady.In line with our dividend distribution policies, we have declared an interim dividend of 25% of the distributable pack, which has resulted into INR 1.60 dividend per share. Growing from our track record of collaborating with industry experts, that's how PDS has been getting experts onboard in its platform to pursue various or new verticals that we're adding. We've onboarded Mr. Harold Tillman, CBE as the Global Ambassador for PDS and Mr. Mark Green on PDS U.S. Advisory Board.Mr. Tillman is a renowned luminary in the British fashion scene and was a former Chairman of the British Fashion Council with relationships spanning across continents and industries. Mr. Mark Green has been a leading professional in global supply and value chain operation over the past 23 years. Previously, he was associated with leading retailers and brands, including Walmart, Victoria's Secret and PVH. His focus will be on the North American growth strategy, representing PDS across industry forums and exploring new opportunities with U.S. retail and brands.To conclude, I believe there are reasons to be optimistic that the industry is turning the corner, and we should beginning to see some growth from quarter 3 onwards.With this, I would now hand over to our group CFO, Mr. Rahul Ahuja, who will take you through the financial performance for the quarter and for the first half of the year.

[Rahul Ahuja, executive]

Thanks, Sanjay, and good evening, everyone. Coming to our financial performance, we reported a top line of INR 4,578 crores for H1, FY '24, with a gross margin of 20.4% for the half year ended September 2023. As Sanjay mentioned, top line was mainly impacted by rampant consumer demand, which seems to be on the road to recovery as we speak.Despite the headwinds, we achieved gross margin of 20.4% for the half year ended September '23, an expansion of 394 basis points, compared to H1 last year. This was mainly driven by better service mix with high-margin services such as brand management and service fees from sourcing as a service business.EBITDA for H1, FY '24 was INR 204 crores with an EBITDA margin of 4.5%, an increase of 80 basis points compared to the same period of last year. EBIT for the first half of the year stood at INR 173 crores with an EBIT margin of 3.8%. Last year's EBIT included gains from sale of real estate. If you normalize that income, our EBIT in H1 of FY '24 has reported growth of 8.4% with 74 basis points margin expansion.We continue to operate with higher interest costs primarily due to increase in the base rates. Average SOFR increased from 1.42% for H1, FY '23 to 5.14% for H1 of the current year. While the average limit utilization has decreased, interest costs have increased due to higher base rates of interest costs. Tax flow also increased by 5%, as compared to the same period last year. One of the main reasons is taxability of companies in higher tax regions, namely Ted Baker, which operates in the U.K. jurisdictions. As a result, profit after tax declined to INR 112 crores, while we have maintained our margins at 2.4%.Moving on to the segmental performance. Our Sourcing segment, which comprises of design-led sourcing, sourcing as a service and brand management, reported a top line of INR 4,443 crores with an EBIT of INR 165 crores. While our core existing business verticals witnessed contraction due to demand pressures, new verticals driving source software as a service and brand management services delivered growth. Overall, the segment achieved a return on capital employed of 34%.Our manufacturing segment reported a revenue of INR 214 crores, with EBIT of INR 9 crores, margin expansion of 104 basis points to 4.1% compared to H1 of last year. As demand pressures ease, we expect this segment to grow in the coming quarters. With regards to the quarter, we were able to garner healthy GMV, which increased by 13%. Gross margins expanded by 496 basis points to 31.9%. EBIT adjusting for last year's real estate gains was up 17.5% with margins increasing by 140 basis points to 5%. Normalized PAT also expanded by 5% with margins expanding 71 basis points to 2.6%.Speaking of our balance sheet, you must have seen a slight jump in our net debt and working capital. It's important to note here that, this was mainly attributable to the acquisition of Ted Baker, wholesale and design business. We completed the acquisition in the later part of June of this year by taking over the working capital, which mainly consisted of inventory, trade payables and receivables.Currently, we are in the process of integration of this business and setting up the required bank lines, which should enable us to streamline the working capital requirements. Our agile business model continues to help us deliver strong 30% return on capital employed and a return on equity of 24% in the first half of this year. The Board of Directors have declared an interment dividend of INR 1.60 per share, a payout of 25%, which is in line with our dividend distribution policy.To conclude, we continue to evaluate and monitor the global markets and the demand scenario. Our model enables us to have the agility to pivot based on market conditions, which makes us believe we are well poised to capitalize on the unfolding opportunities. We are still cautiously optimistic about the demand scenario stabilizing in the second half of this year.With this, I'll request the moderator to open the floor for questions-and-answers. Thank you.

[Operator]

[Operator Instructions] The first question we've got from the line of Sagar from Sameeksha Capital. Sagar, you're not audible. Could you speak closer to the headset? Hello Sagar, you're still not audible. I would request you to speak closer on the headset or I guess there is a network issue. I think we've lost Sagar.So the next question is from the line of Mr. Aditya [indiscernible] from AJ Capital.

[Unknown Analyst]

I have a question on the top 10 verticals. Firstly, if I see [ Matlin ] and every 10 other joint ventures we have, the margins here are fluctuating from year-on-year if I compare quarter-on-quarter. So could you throw some light here, what are the sustainable margins for some of the top 5, if you can name them? That would be helpful. That is my first question.

[Rahul Ahuja, executive]

Yes. I think it's an average maintainable margin is 5% EBITDA to sales ratio that, we should see across the top 10 verticals. And some of them, for example, in Norlanka, which is operating in Sri Lanka should be upwards of 7% to 8%, because they are very close to the source and low cost of operation, something like Kleider, which is actually also operating in Bangladesh should also be upwards of 8% to 9%.And Poeticgem, at the same time, which is largely centered in U.K., they should be getting closer to 5% or so. So on the whole, I would say, if I just take design-led sourcing verticals, because given the size of Ted Baker, wherein we are trying to build INR 50 crores to INR 60 crores a month, but actually this clearly start coming under the top end verticals. But taking that vertical out to answer the question, an average 5% PBT sales ratio is what we should be seeing across top 10 verticals.

[Unknown Analyst]

Okay. Now this is totally just sourcing as a service business, right, whatever the top 10 verticals you have shared?

[Sanjay Jain, executive]

The top 10 verticals you have shared is design-led sourcing business, which has been continuing for many years. The sourcing as a service business is something that we started in the last 12 to 18 months in the Hanes JV in Bangladesh and also Asta. So that is not yet in terms of size in the top 10 verticals across. And there the margin profile, if I have to talk about that, for example, this year, we believe we should be getting closer to from INR 7,000 crores of the gross merchandise value, about INR 350 crores to INR 400 crores should at least get added into the top line of the company for the entire year. And on that, we should be getting somewhere closer to 18% to 20% PBT margin. So that's where it is not yet in the top 10, that's a new line of activity. We've added INR 350 crores to INR 400 crores of annual revenue and about 15% to 20% PBT margin.

[Unknown Analyst]

Okay. The Ted Baker business is part of brand management, right? That is another vertical?

[Sanjay Jain, executive]

So yes, it is a brand management for now in terms of the segment during which we have reported. We have reported 3 segments: sourcing, manufacturing and others. So for now, it is all clubbed under the sourcing segment. The sourcing as a service, the brand management, design-led sourcing is all clubbed under that segment.

[Unknown Analyst]

So for this full year, what can be the Ted Baker total contribution? And for the next 3 years, what can be the total contribution?

[Rahul Ahuja, executive]

As we have mentioned that this is a little about 3 months of getting to a bit into a fold. At present, it is been rating INR 50 crores to INR 60 crores of revenue on a monthly basis. So therefore, to answer the question, if I take almost 9 months of Ted Baker into our fold, it should be somewhere around INR 500 crores in terms of its contribution to the top line of the company.And we are, on an average, making 10% PBT margin that has been a performance in a little over 3 months that it is in a fold and we anticipate that to continue. So INR 500 crore top line contribution around 10% PBT margin. To give you answer to the second question that you asked, I think somewhere next year, we're aiming at -- can we scale it up to INR 700 crore annualized revenue contribution and try and maintain or slowly augment the PBT margin from upwards of 10% to about 11%. So that's the outlook for next year.

[Unknown Analyst]

Okay. So when you say income, it is not GMV is just the income or the gross profit you are saying?

[Rahul Ahuja, executive]

So when I'm talking about this year, INR 500 crore, this is actually the revenue that you will see the top line for our Ted Baker business, there is nothing like the GMV. It is whatever is on order book, it's actually getting into the top line. But the difference -- the main difference that you see in GMV and revenue from operating, it's so similar service contracts, wherein as we have said $1 billion worth of contracts are in our fold. So therefore, asking a question specifically, the INR 500 crore aspiration from Ted Baker should be a revenue and 10% PBT should be the state addition to the PBT bottom line of the company.

[Unknown Analyst]

My last question is on the broader perspective for 2 to 3 years or 5 years. Can you say that we will -- on a consol level, will be 2.5 -- so basically INR 20,000 crores of revenue in some 3 to 5 years and 5% PAT margin, right? So there is a change. What is your short-term goal like 3 years? That is my first question in that. And the second one is in this mix change, how much the contribution will be coming from the new vertical, because I think the new verticals will be contributing larger chunk to the PAT margin. So that is one Ted Baker that we understood, and there is Hanes, that is another part. And what are the other contributors currently we have so that you are guiding that we will be reaching 5% PAT margin because that is huge currently, whatever we are at current stage? Basically, 3x PAT jump you are envisaging here. So I wanted to a little color or deeper insights here.

[Sanjay Jain, executive]

See, in terms of when we finished our financial year '22, we are internally aspired -- we did about INR 9,000 crore turnover that time and then we aspired that can be into double. So that's where we set our goal, let's try and channelize our efforts towards a $2.5 billion, which is what you said about INR 20,000 crores can we slowly inch to getting closer to 5% PAT.So now that is the goal that we thought we should all aspire for. And we felt that there are 2 new line of activities within sourcing as a service. And as we have clarified earlier, whatever is my gross merchandise value, 5% of that comes to my revenue. So on that 5% coming to my revenue, we had foreseen and in about 5 years, 8% to 10% of my top line may actually coming in from sourcing as a service contracts that is one.And from a brand, whether it is brand management, the way we described earlier, we believe somewhere there is a 5% to 8%, 8% plus kind of contribution that we anticipate should come in from managing brands. So that put together these two lean out activities has a potential of getting 18% to 20% of our revenue that time.Manufacturing is about circa 5%, 6%, and we believe that is the way it should be in about 5 years. So that's the answering your point on the broad breakup. I think it'll be tough us to draw a picture where are we in an intermediate goal. What is important is that on every 6 monthly basis, if not quarterly, we should be progressing in that direction. And somewhere the quarter 3 performance seems to be reflecting that we are benefiting from the journey wherein a better margin sourcing as a service contribution has led to better gross margins. And also our brand management has led to better gross margin. So that's I would say we are poised in the long-term goal. And I think you should see us making incremental movement in that direction.

[Operator]

[Operator Instructions] The next question is from the line of Pallavi Deshpande from Sameeksha Capital.

[Pallavi Deshpande, analyst]

Just wanted to understand -- just to clarify the numbers. So fast is you're looking at it contributing to INR 350 crores to the top line. Is that right, INR 7,000 crores GMV?

[Sanjay Jain, executive]

I think the answer is yes, we have got orders worth about INR 7,000 crores in GMV. And as we scale up to its full potential. So somewhere when we exit this financial year, we would have internally tried to scale it up to the entire annual value clocking in. So therefore, by the end of the financial year at quarter 1, we should be in a position where in we are having a run rate of it contributing INR 7,000 crore annual GMV and about INR 350 crores circa contribution to top line.

[Pallavi Deshpande, analyst]

And in the first half, we've already seen INR 2,000 crores come in so yes?

[Sanjay Jain, executive]

Yes. Yes. I think in the first half, yes, when I see that close to about INR 1,800 INR 1,900 crores sourcing as a service has actually come in. So I think that, if at all, I mathematically double it up for the sake of argument, it's about INR 4,000 crores. So that's where I'm telling you that allow us another 2 to 3 quarters to scale it up to a level wherein the annualized value is at about INR 7,000 crores.

[Pallavi Deshpande, analyst]

If I go back [indiscernible] to the number is there so that's INR 100 crores of revenue contribution to your numbers on SaaS in the first half?

[Sanjay Jain, executive]

Yes, that's broadly in place that approximately that is the contribution of just about 5% that will be INR 800 crores, yes.

[Pallavi Deshpande, analyst]

And then 20% of that is the contribution to EBITDA margin [ 5% ]?

[Sanjay Jain, executive]

Yes. I think, as I said, that's a broad, maybe Rahul can add here that's a broad aim that all the 18% to 20%, but we'll clearly mention is the correct path.

[Rahul Ahuja, executive]

I guess, like Sanjay mentioned, the range could be anywhere between 14%, 15% to 20%, depending on the contract at the point of time that we are signing.

[Pallavi Deshpande, analyst]

And that's the PBT margin you are [indiscernible] from?

[Rahul Ahuja, executive]

Yes.

[Pallavi Deshpande, analyst]

All right. So if I turns this out, then the margins for the rest of the business will [ imitate ] shall be the numbers of the first half. So I just wanted to understand.

[Rahul Ahuja, executive]

The margin profile, for example, we reported in, say, quarter 2, approximately 21.9% gross margin. And I think the main core business design-led sourcing has also given us slow to 17% margin, gross margin as compared to about 15% or so. While the sales have declined in design-led sourcing, but our ability to get better margins from the value chain we have been mentioning. So the better margin to answer the question, the better margin position that we have achieved in the first quarter -- sorry, in the first half and second quarter is actually being contributed by all line of activities.

[Pallavi Deshpande, analyst]

Right.

[Rahul Ahuja, executive]

At the gross margin level.

[Pallavi Deshpande, analyst]

And sir under Ted Baker side of the business, so that the revenue of INR 500 crores would be what kind of inventory turns are we looking at? And what's the kind of inventory we need to hold for that?

[Rahul Ahuja, executive]

So in the Ted Baker business, if you would have seen that how working capital has gone up largely on account of our receivables from [indiscernible] peers we are going a little up given the nature of this business. And talking specifically about the future, as this business stabilizes and we are able to establish our working capital lines, which is the factoring line, this is likely to come down a bit in, let's say, a couple of quarters from now.

[Sanjay Jain, executive]

And just to add -- sorry, just to add, this allow us to put Ted Baker in a larger perspective. Our check of circa INR 150 crores approximately to get Ted Baker into a fold. We're looking at this year in the 9-month plus period, about INR 500 crores to INR 600 crores of top line getting added and about 10% PBT. That's about INR 50 crores to INR 60 crores PBT, is what we're looking at on an investment of about INR 160 crores to begin with. So it turns out to be a healthy investment to begin with, given the PBT we expect and given the check we wrote. And now as Rahul mentioned, PDS always aspires towards squeezing on the working capital optimally through operational efficiency and to use our nonrecourse factoring lines. So we just got entered into a fold. And I think as we try and put these 2 tools into practice in few quarters, you should also see that we try and bring down the net working capital in Ted Baker and with after return, the improved return ratios further.

[Pallavi Deshpande, analyst]

So just lastly, because Ted Baker has a volume, the volume globally last year was around INR 4,000 crores roughly. I just wanted to understand, we would be exclusive of suppliers for that business for excluding Europe, I believe we have -- you're also viewing it as a design-led servicing operation, excluding Europe so is this -- that is INR 4,000 crores at some point for this entire INR 4,000 crore of revenue outside Ted Baker?

[Rahul Ahuja, executive]

No. So INR 4,000 crore is the total revenue of Ted Baker as a brand globally. We only have a part of it, which is Europe and U.K. markets. And the rest is by different stakeholders and parties who are tied up with ABG the wholesale license. As Sanjay mentioned, we are currently clocking about INR 60 crores a month in Ted Baker which, on an annualized basis, take this up to about INR 700 crores. We can expect a growth in the short to medium term of anywhere around 10% year-over-year on this line. So that will be the contribution of Ted Baker in our top line.

[Operator]

[Operator Instructions] The next question is from the line of Darshil from Crown Capital.

[Darshil Jhaveri, analyst]

Am I audible?

[Sanjay Jain, executive]

Not very clear, Darshil, but we'll try and understand.

[Darshil Jhaveri, analyst]

Sir, just wanted to get a sense of guidance for our current year. I think you were mentioning about single-digit growth in the current year. What kind of -- is that true? And what margin would we expect? Because with Ted Baker coming in, we should at least get a boost of nearly INR 500 crores with just Ted Baker, right? So how much goods worth are we expecting currently, sir?

[Sanjay Jain, executive]

Yes. I think before I specifically answer your point on the full year guidance and the margin impact, I think there have been questions around Ted Baker, sourcing as a service. Just allow me to put everything in full perspective. Last year, we did about INR 10,500 crores top line. That's the last year number. And everyone is trying to see that despite the difficult times, can we climb with a low single-digit growth.And we have done about INR 4,600 crores top line in the first year. If I benchmark it to last year, that's about 40% of what we did last year, we have actually achieved in H1. And we try and do 60% plus a small growth in the second half. I think the global situation remain stable, it's other that. So that's putting things in a larger perspective. And another larger perspective, I wanted to share that if we did about INR 10,500 last year, even at the low single-digit growth. For the entire year, we talked about like INR 500 crores to INR 600 crores is coming from Ted Baker.We talked about assuming we did INR 1,800 crore sourcing as a service contract in first year, we do circa about, say, INR 5,000 crores and -- I said we'll get to a run rate of INR 7,000 crores. You're talking about INR 250 crores and then approximately that number. I'm just trying to put things in perspective from sourcing as a service and manufacturing could be about INR 500 crores, INR 600 crores full year basis.So we're talking about approximately INR 1,300 or INR 1,400 crore, INR 1,500 crores coming from these bunch of activities wherein the gross margins are relatively much higher as compared to design-led sourcing, which should be about 85% or so. So therefore, as we are scaling up these 3 line of activities. We should continue to maintain the lead he quarter-by-quarter move on the part. But I think we're heading in the direction wherein we should get our gross margin trajectory improving onwards.And secondly, the design that sourcing the main business got impacted, because of the global clues. And as we are -- we believe we are bottoming out, that should also fire back to build the growth. So that's where I am trying to answer to your question that we -- given 40% of what we did last year we have achieved in the first half, we believe we should aim for a low single-digit growth that is number one. So that's maybe 60% plus in the second half of the year. And secondly, margin trajectory, I just spanned out the full year number or therefore a hypothetical basis that this is what it is looking like. So therefore, the margin trajectory should come into [indiscernible].

[Darshil Jhaveri, analyst]

That's a very detailed answer. So maybe, sir, if I can put it like this sir, the current scenario that -- our new initiatives are compensated for maybe for decline in our design-led business. So FY '25 as we know this thing will go all right, our design, there will be growth in our design-led business as well as growth in our newer verticals. So can we expect maybe both your compressed growth to come and some kind of higher growth rate than average in FY '25, would that be a great proper way to look at it? Would that maybe guide us maybe more than 20% growth in FY '25. And with our margins moving slowly towards 5%, so maybe around 3%, 3.5% in FY '25 with the newer verticals contributing more. Is that a correct way to look at it, sir?

[Sanjay Jain, executive]

No, I would be guided by the new [indiscernible] as we all believe that sometime in the near term, this inflation is bottoming out. The interest rates, the Fed has refrained from increasing the rates further. If you all believe in about 1, 2 quarters, the inflation is bottoming out, the interest rates are bottoming out. Then I think from a year of FY '23, '24, which got impacted and then next year is then starting on a good note.Getting into a healthy growth rate, yes, that's doable. I think we all remain very positive that all these things in about 6 months should bottom out. So, we are internally charged up geared up very positive that let's quickly put this year behind us, and get back into a high growth rate yes next year. And in the meanwhile, carefully adding more and more margin operative revenue driven activities into our portfolio, in line with the overall strategy then.

[Darshil Jhaveri, analyst]

Okay. Sir, any like in terms of numbers in FY '25, high growth rate would be maybe more than 25%? And what kind of margin trajectory would be with our design-led also coming back, so maybe some operating leverage in that. So sir, any kind of a range would also do maybe around 3% if you can, sir?

[Sanjay Jain, executive]

I guess, at this stage, I can talk about the factors that should have a bearing on the growth. The factors are beginning to look positive. In the next few months, we would be doing annual budgeting exercise. So somewhere when we get an opportunity to interface with you at the end of quarter 3 results.We would be in a better position to talk about what kind of growth rates we are looking at. But for now, I can say is, we are very positive that, there should be good growth next year. Specific numbers just kindly bear with me till we interface again at the end of Q3.

[Operator]

The next question is from the line of Mohammed Patel from Care PMS.

[Mohammed Patel, analyst]

Can you give us the rationale for the QIP of INR 625 crores?

[Sanjay Jain, executive]

Yes. The motivation to look at this is twofold. On one hand, we believe the security should help us in further institutionalization of shareholding of the company. It should also help us further strengthening our balance sheet. These are two motivations on one hand. And at the same time, I think as we have been mentioning earlier, there are a lot of growth opportunities ahead for us, wherein retailers are looking at complete sourcing solutions to be given to companies like PDS.There are companies looking at us to handle exclusive geographies like to our contracts we signed Asta and Hanes. Similar to Ted Baker, there are more such opportunities to be pursued for complete brand management. And the word has -- and when I say word, I am keeping the customers in mind, there have been a conversation around new shoring. And therefore, we have set up our manufacturing in Bangladesh and in Sri Lanka while we'll continue to be a supplied, but to a small extent, should we look at manufacturing in Egypt or in India, for example, originating from India, we believe there should be good prospects.So if I bundle up all these opportunities, the PDS is facing -- it's a nice situation to be in there's a lot of immense growth opportunities around us. So it's because of these twin objectives, the second bucket of objectives of the growth that I mentioned to you. In fact, interestingly things like brand management or sourcing as a service, we're also now witnessing inquiries coming in from Indian retailers that can we now support their back-end activity.The model that PDS has been trying to build and pitch to our customers, is receiving an acknowledgment by the Indian retailers as well. So therefore, being positive about the growth, we feel a suitable capitalization of the company by way of an equity would enable us to meet the 2 bucket of objectives that I just mentioned to you.

[Mohammed Patel, analyst]

So would this go towards reducing the gross debt or investing in working capital for the new businesses that you mentioned?

[Sanjay Jain, executive]

I think it's broad based, of course, from a theoretical perspective, as soon as the money comes in, the first thing we do is we try and reduce your debt. So it's pending utilization. And I would -- and allow me to use the phrase, the equity should enable the balance sheet. PDS has been trying to navigate its balance sheet to keep it or supply it low leverage. And therefore, it should enable our balance sheet to pursue these growth opportunities with a lot of confidence. That's how I would see to lever it to put it.

[Mohammed Patel, analyst]

So, we already have a very strong balance sheet for that matter. My second question is, can you please give me the GMV SAAS contribution to top line and PBT for FY '23? Just wanted to understand the base?

[Sanjay Jain, executive]

I mean there was a question earlier as well wherein we had mentioned that in the GMV, we have in the second quarter, close to about INR 1,800 crores coming in from the sourcing as a service. So if we annualize it, it's about INR 4,000 crores as -- in terms of GMV after of the sourcing as a service contracts, but we should keep improving it. So assuming we are just repeating our first half, then we are talking about INR 4,000 crores and at that circa 5%, we are looking at minimum INR 200 crores, but upwards of that coming in as revenue from sourcing as a service operations into our overall revenue bucket. This was the question that was asked earlier as well.

[Mohammed Patel, analyst]

No, I wanted to get this number for FY '23?

[Rahul Ahuja, executive]

'23 was miniscule. I think -- it was less than about INR 600 crores, INR 700 crores in terms of the sourcing as a service GMV that we handle. So if I apply the same 5%, then we would have just got INR 25 crores INR 30 crores into our top line from sourcing as a service last year. Sorry if I misunderstood, I thought you also asked FY '24.

[Mohammed Patel, analyst]

Okay. And this INR 25 crores to INR 30 crores, 18% to 20% of PDT, that say so, right?

[Rahul Ahuja, executive]

Can you repeat again, please?

[Mohammed Patel, analyst]

On this INR 25 crores to INR 30 crores top line, the contribution to PBT will be 15% to 20% for FY '23 as well?

[Rahul Ahuja, executive]

Yes as well.

[Mohammed Patel, analyst]

Okay.

[Rahul Ahuja, executive]

These are broad estimates that we are giving to you, but it should be on in the vicinity.

[Mohammed Patel, analyst]

Okay. Okay. What is the potential of [indiscernible] for FY '24 and beyond?

[Sanjay Jain, executive]

We just took charge sometime in September, October. And if I count 12 months from here, we think there is a potential to do about INR 700 crores plus of annual handling of sourcing for the customer. That will be billing through us. So that's what we're looking at INR 700 crores is annual value starting effective the second half of this year.

[Mohammed Patel, analyst]

Okay, okay. And my last question. What should we take as ETR for FY '24 and beyond?

[Sanjay Jain, executive]

Rahul you want to answer the question is on effective tax rate that we should be taking '24 onwards?

[Rahul Ahuja, executive]

So effective tax rate will marginally inch up given that we have the likes of Ted Baker's operating out of U.K. So I would say maybe a couple of percentages if we go up in the next financial year. But post '25, there is the global minimum taxation coming in, which is 15%. So, we should be closer to that, few years from now

[Operator]

The next question is from the line of Akshay Chheda from Canara Robeco Mutual Funds.

[Akshay Chheda, analyst]

Just one question from my side. Since the things are gradually improving, sir, how do you see the retailers placing their orders? Is there any change in their style of working? I mean, are they a little more cautious by placing orders, or they are just the way they were working previously. So just on the retailers, how are they working out? So just if you can comment on this?

[Sanjay Jain, executive]

I think the retailers, our given retailers more cautious now. So therefore, they are closing orders as much close to the date that they can hold on. Everybody is wearing off not allowing themselves to get again into a situation of high inventory. So therefore, it is taking a little longer time for the orders to come in. And the retailers have also slowly been kind of squeezing their global span of office spaces.For example, retailers earlier were having active offices in the region, and they're collapsing them and taking it back to the head offices. So as to keep it -- keep the cost low. So therefore, taking more time, trying to go back to more decision-making in the head office. And #3, now the retailers is beginning to see value in a company like PDS, wherein they can take responsibility on top of retailer for sourcing.That's why one has seen increasingly more traction of sourcing as a service contracts or sourcing solution contracts. So the third is a more structural shift that is happening on the first and second is a more responsive shift, immediate responsive shift to retailer to the current situation.

[Akshay Chheda, analyst]

And sir, on the sourcing side, like is it that this China plus 1is happening, are you seeing that? I mean, are they looking out for other geographies action such on the -- I mean are they preferring so India, or Vietnam or Bangladesh. So sir, do you see that also happening?

[Sanjay Jain, executive]

Yes, I think that's also happening as well. Whether the motivation is China plus 1 or the motivation is near shoring, therefore, reducing the lead times. So as a result, the other locations, as I mentioned earlier, Egypt, for example, Turkey, while the costs have been rising in Turkey, but still there continue to be good, strong interest in sourcing from Turkey. Sri Lanka and India are also benefiting, Bangladesh also benefiting from a China plus 1 scenario.So two factors here, China plus 1 and the near shoring. And I think somewhere when governments like government in India is paying a lot of attention to make in India and giving a lot of benefits to manufacturing a garment. That is also improving the attractiveness and ability of the Indian manufacturer to be able to meet the global demand.

[Operator]

The next question is from the line of Sagar from Sameeksha Capital.

[Sagar Fulwani, analyst]

Sir, my question was, as we know that textile industry has a fall as a demand update and that's why our design led sourcing has a higher gross margin. Do you think that once the demand comes back, our margins, our gross margins will reduce?

[Rahul Ahuja, executive]

There are a 3 factors that always are bearing. Yes, in our scenario wherein there are lesser orders. So therefore, our ability to sit across the factories and get a better margin yes that ability exists. 12 months back, all of us were adversely impacted by input price increase in cotton and yarn, which has now been at a low level. So therefore, the demand has a bearing on the ability to get better prices, the input prices were gearing.And the third thing, which is specific to our company is that are you able to get the benefit of size and scale. At the end of the day, you are somewhere procuring commodities when it's come to cotton and yarn or fabric. So therefore, when we are very humbly getting bigger in size, our ability to then get better prices. So a combination of these 3 things, but enough silos as to answer the question.Yes, the strong demand tend to -- the benefit that we got in the gross margin, a strong demand should lead to growth in sales. The margins could be again a bit on pressure. But then I think on a portfolio basis, our other engines are already beginning to fire in terms of sourcing as a service and then for complete brand management. So I guess there was one single factor correlate to a of factors that would -- but on a silo basis, yes, stronger demand may mean that somewhere a benefit that we get on margin may a little bit wean away.

[Sagar Fulwani, analyst]

And so my last question is that as we know that interest rates are increasing. So our account receivable factoring the financing cost is higher, what would be our strategy on this front?

[Rahul Ahuja, executive]

Sorry, I didn't get your question. Could you repeat that?

[Sagar Fulwani, analyst]

Our financing costs [indiscernible] are high. And what will be our strategy on that? Will we still continue to use account receivable factoring?

[Sanjay Jain, executive]

So you need to understand what constitutes our debt. Our debt is working capital, right, which is trade-based. And currently, the interest rates are at all-time high in due course of time, maybe, let's say, anywhere between 2 to 4 quarters from now, if there is a downward trend given that this is largely working capital lending to market benchmarks.And if there is a downward trend, we should stand to benefit from a reduced rate of interest on an absolute basis. Given the growth that we are projecting, yes, our -- if you talk about a number, it will increase in line with our growth. But if you're talking about the percentage as such as interest rates come down, the interest should come down for us in the payment.

[Operator]

The next question is from the line of Madhu Rathi from Counter Investments.

[Madhu Rathi, analyst]

Sir, I just wanted to understand why would our clients from design solution -- design-led sourcing [indiscernible] I mean what kind of benefit does you have by onboarding of other source?

[Sanjay Jain, executive]

Sorry, what's the last one thing, what kind of benefit?

[Madhu Rathi, analyst]

Sir what kind of benefit does this client growth have for like onboarding of the solutions providing as a sourcing segment of operations?

[Sanjay Jain, executive]

So if I get your question right, and try and answer it from the lens of a customer wherein they have been using our services, design-led sourcing and wherein customer feels that while they would keep engaging with PDS, keep putting their designs and they can keep placing orders, they have also been dealing in many other factories. They've also been having their own office in Bangladesh and other parts of the world.They don't want to run those offices. They want to bring down their cost structures. And as they do that, they were looking at credible counterparties. So therefore they are looking at now PDS to run those operations. So one, this new sourcing as a service is in a way of helping you get a larger share of wallet of the customer. And the other thing is that our design led sourcing is, for me, is like I'm designing and taking the complete responsibility.I'm acting as a principle but in sourcing as a service we have running the office of the retailer, any factory who wishes to do business with the retailer, while they will bill it directly to the retailer, but they would all -- the model agency managing the traffic. So therefore, I would say that just to put numbers in perspective, I was trying to handle, say, $60 million, $70 million plus of design-led sourcing from Asta as my customer that is the business I was doing.Now they have given me another contract that we were procuring $400 million from the Eastern region. Can you please run our office in the Eastern region and manage this $400 million worth of procurement as a risk I will do that. That's where circa between 3% to 5% I get. So it's an additional wallet share.

[Madhu Rathi, analyst]

Sir, in future, is there an outlet where most of our design-led sourcing there will be a few that will be converted into those high-margin segment for us?

[Sanjay Jain, executive]

I'll let Mr. Rahul to answer.

[Rahul Ahuja, executive]

These are for us -- we would always aim them to be mutually exclusive. And in fact, in response to one of the questions, we have said that at the end of FY '22, we aspired that can be aimed for doubling our self. And then I said that even at that set of time, close to 80% plus of our revenue would keep coming in from design-led sourcing, and it's about 8%, 10% that would come in from sourcing as a service. So it would be a new line of activity, which is being scaled up. But our main core business of design-led sourcing continue to exist and thrive and grow as well.

[Operator]

We take this as the last question. So I would like to now hand over the conference over to Mr. Sanjay Jain for his closing comments.

[Sanjay Jain, executive]

Thank you Nuvama team. Thank you, E&Y to help us coordinate this call. And thank you, ladies and gentlemen, for participating. And we have a lot of festivities ahead, Diwali and wish you all and everyone at home Happy Diwali, and we look forward to connecting with you at the end of quarter 3 and the earnings call thereof. Thank you, and stay safe all of you.

[Operator]

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