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PDS Limited
Earnings Call Analysis
Q2-2025 Analysis
PDS Limited
In the second quarter of FY '25, the company reported revenue of INR 3,306 crores, showcasing a remarkable sequential growth of 26% and a year-over-year increase of 34%. This growth momentum has been bolstered by a strong order book valued at USD 620 million, which is 20% higher than the previous year. This positive trajectory aligns with expectations for continued robust performance in the upcoming quarters.
Despite facing pressures on gross margins, the company's EBITDA margins improved significantly, jumping from 2.8% in Q1 to 4.5% in Q2, resulting in a 103% sequential increase in EBITDA. The PAT (Profit After Tax) surged by an impressive 199%, establishing a PAT margin of 2.8%. On a normalized basis, the EBITDA margin reached 6% in Q2 FY '25, highlighting the company's capacity to capitalize on operating synergies.
The sourcing business generated INR 5,716 crores in revenue with a year-over-year growth of 29% and EBIT margins of 3.1%. The manufacturing segment showed exceptional year-over-year growth of 71%, achieving a revenue of INR 366 crores with EBIT margins of 4.7%. Management is committed to continued margin expansion, particularly within the manufacturing segment despite challenges in macroeconomic conditions.
Looking ahead, the company projects a revenue growth of over 20% and an increase in PAT by approximately 25% to 30% compared to the INR 205 crores PAT from the previous year. For FY '26, guidance suggests mid-teens revenue growth and even higher growth in PAT due to the realization of investment returns and economies of scale. Management anticipates upward momentum in profitability driven by recent investments in new high-margin verticals.
The acquisition of the Ted Baker wholesale business faced significant challenges due to some retail partners entering administration. Although this impacted Q2 performance, management remains optimistic, forecasting continued growth of at least 10% per year in the Ted Baker business over the next 1-3 years. Their proactive approach to realigning costs and enhancing wholesale revenue is expected to mitigate negative impacts.
In the first half of FY '25, the company invested approximately INR 36 crores in new verticals, down from INR 48 crores in Q1, indicating a tightening focus on cash flow management. The net debt ratio remains low, with a net debt to EBITDA at 0.3 and net debt to equity at 0.07, showing strong leverage ratios. The company plans to allocate INR 84 crores to repay debt in their U.K. entity.
Management acknowledged positive global economic trends with efforts to control inflation beginning to show results, although potential headwinds remain from geopolitical uncertainties and rising trade tensions. The outlook for emerging markets, particularly in Asia, remains stable, supporting growth opportunities for the company.
In summary, the company demonstrates solid financial performance characterized by robust revenue growth and improving profitability margins. With a strategic focus on high-margin verticals and a commitment to maintaining operational efficiency, the company appears well-positioned for sustainable growth, despite the ongoing challenges in certain partnerships. Investors can look forward to a projected continued upward trend in both revenue and profitability.
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Ladies and gentlemen, good day, and welcome to the PDS Limited Q2 and H1 FY '25 Investor Conference Call.
[Operator Instructions]
Please note that this conference call is being recorded.
I now hand the conference over to Mr. Diwakar Pingle from E&Y. Thank you, and over to you, sir.
Thank you, Sidharth. A very warm welcome to all the participants for the PDS Limited Q2 FY '25 earnings call. Our investor presentation and the financial results that are available on the company website and the stock exchanges. Please note that anything said on this call which reflects our outlook for the future, or which can be construed as a forward-looking statement must be viewed in conjunction with the risk that the company faces.
This conference call is being recorded and the transcript along with audio of the same will be made available in the website of the Company as well as exchanges. Please also note that the audio of the conference call is a copyright material of PDS Limited and it cannot be copied, rebroadcasted or attributed in press or media without specific and written consent of the Company.
To give you a brief business update and take the of the results from management team, we have Mr. Pallak Seth, Executive Vice Chairman; Mr. Sanjay Jain, Group CEO; Mr. Rahul Ahuja, Group CFO; and Ms. Reenah Joseph, Deputy Group CFO. I now request Mr. Sanjay Jain to provide you with a brief update for the quarter. Over to Sanjay.
Thank you, Diwakar. A very good afternoon and good evening to our stakeholders across time zones, and thank you for joining us. I also want to extend a very warm wishes to everyone for the Diwali festivities around us. And a very warm welcome to our quarter 2 and H1 FY '25 Earnings Call.
Before discussing our quarterly performance, allow me to briefly touch on the economic and industry trends that may impact our business in the short in near term. On a positive note, the global efforts to control inflation are beginning to show results. Although some regions are still facing price pressures, but inflation is nearing the central bank targets in many countries and thereby opening the doors for a potential monetary easing.
The global economy has proven resilient. One is witnessing growth in U.S. and modest recovery is expected in Europe. Emerging markets, especially in Asia, are holding a stable outlook. While this provides a foundation of stability, this provides a foundation that there could be more and more monetary easing supporting the spend. But if the high interest rate continued geopolitical uncertainties in some part of the world and also some rising trade tensions. They remain as potential headwinds to growth and could exert upward pressure on inflation. However, on the whole, we believe that there is positivity that is getting traction.
Now moving on to our performance for the quarter and the first half of FY '25. I'm very pleased to share with you that the growth momentum has been strong both over the previous year and also in terms of the previous quarter. Even going forward as well, at this stage, we are expecting the growth momentum to continue, which is getting reflected in our order book for the year. Our order for quarters ended September stand at about USD 620 million which is almost 20% higher as compared to the same period last year.
During our first half, the gross merchandise value crossed USD 1.1 billion which is 39% higher than the same period last year. We also achieved a 29% growth in our income from operations compared to last year with a top line of INR 5,927 crores. In the second quarter, the company recorded the highest quarterly sales of INR 3,306 crores at a growth of 26% versus the first quarter. And as I mentioned earlier, with the strong order book in hand, we believe that the growth momentum was 20% plus should continue and in fact in our two factories in Bangladesh, we're pretty much fully sold for quarter 3 and quarter 4, and we're beginning to get good order tractions for the quarter 1 of next financial year as well.
The growth was broad-based across categories and geographies. In line with our strategic initiatives, we have registered a remarkable 62% growth in sales coming in from North America customers. Amongst our customer base, our top 20 customers reported overall a 30% growth, it is underscoring the strength of our relationships and the widened service offerings, thereby having a larger share of wallet for the customers as we move along.
In terms of our business verticals, our Top 8 verticals on one hand, delivered 33% year-over-year growth in the first half of the year and achieved profit margin expansion with profit before tax margins improving from 4.9% to 5.1%. Our investments in new verticals, which, as you know, in our case, happens through our P&L has also started a business a downward trend. We invested about $5.8 million circa INR 48 crores in quarter 1, and it is now down to $4.3 million circa INR 36 crores in quarter 2. We've also seen green shoots in our design-led sourcing business, new initiatives wherein from a position of losses in the quarter 1, losses I mean in terms of the investment phase in design-led sourcing business.
These have actually turned profitable in Q2 largely driven by one of our recently launched knitwear businesses. We continue to closely monitor and scale these initiatives or implement corrective actions to drive profitability enhancements. Regarding our acquisition of the Ted Baker wholesale business, while we started on a very strong footing we encountered the challenges with some retail partners in the U.K., Europe and the U.S. entering into administration. When I say retail partners, these are the franchisees chosen by Authentic Brands Group where in their partners that we had chosen in U.K. and Europe and U.S. faced administration. But given our strong B2B relationships that have been in place. We laid more focus on wholesale revenue.
We also took corrective actions at the cost front, quickly realigned our cost base so that while as ABG appoints new franchisees, we are, in a way, not laying too much dependence on that and we created a plan that in line with our own wholesale relationships, we actually are feeling positive that this year, we should have a 10% plus growth in our Ted Baker business over last year and should continue to be profitable. What is good is that while there was a bankruptcy or administration of the U.S. partner, subsequently, ABG has announced a partnership, United Legwear and Apparel for the U.S. and Canada operations and the online operations across U.K. and Europe. So this should be an upside to the internal measures that we have taken. So therefore, we believe the tough couple of quarters that happened are behind us. and we remain positive about sustaining close to 10% growth in the next 1 to 3 years and also see a gradual augmentation of profitability.
During the quarter, very thankful to the support that we got from our existing stakeholders that have been there and the new investors who participated in our qualified institutional placement, enabling us to raise about INR 430 crores. We have allocated INR 84 crores to repay debt in our U.K. entity, and while the remaining INR 330 crores has been lying in fixed deposit pending deployment.
Looking ahead to summarize, enthusiastic about the opportunities before us and are confident in our strategy to deliver long-term value to our shareholders, customers and our stakeholders. We started the year on a cautious note, had put in a plan to remain ahead of the strong headwinds. But we've been so far ahead of it in terms of what we have foreseen as top line growth for the entire year. And we also believe that we should be in a position to achieve a better profitability than what we had foreseen in the beginning of the year.
With this, I would like to turn the call over to our group CFO, Mr. Rahul Ahuja, who will provide an overview of our financial performance for the quarter and for the half year.
Thank you, Sanjay. Good afternoon to all. Building on the momentum we saw in Q1 FY '25, I'm pleased to report that this quarter has continued to reflect strong growth. We achieved the top line INR 3,306 crores, looking at sequential growth of 26% and a Y-o-Y growth of 34%. Our gross profit increased by 19% in Q2 FY '25 compared to Q1. However, we did experience some pressure on gross margins. Despite this, the robust growth allowed us to capitalize on operating synergies with EBITDA margins expanding from 2.8% in Q1 to 4.5% this quarter.
Given the growth in top line and the cost optimization measures, as a percentage of income from operations, our employee expense declined to 8.8% from 10.4% in Q1. Our other expenses also declined to 6.3% from -- in Q2 from 7.6% in Q1. Which clearly shows operating leverage kicking in our business, given the robust growth in top line. When we look at the above -- sorry, this translated into a 103% sequential increase in EBITDA achieving margins of 4.5% this quarter with PAT increasing by 199%, resulting in PAT margin of 2.8%.
When we look at the above, excluding our investments that happened through the P&L that Sanjay spoke about, normalized EBITDA margin rose to 6% in Q2 FY '25 and to 5.5% in H1 FY '25. Adjusted for these new verticals, our PAT margin for Q2 FY '25 was 4.3% and 3.8% for first half.
As we drive scale, synergies and leverage. We anticipate that these new investments will start contributing positively to our bottom line over the coming quarters.
On segmental performance, our sourcing business posted a year-over-year revenue growth of 29% for the half year ended September 30, 2024, generating INR 5,716 crores in revenue, with EBIT margins of 3.1% and delivering a strong return on capital employed of 30%.
Our Manufacturing segment delivered a robust growth of 71% year-over-year, achieving a top line of INR 366 crores with an EBIT margin of 4.7%. We continue to focus on margin expansion in our Manufacturing segment and are pleased with the performance in spite of various macro challenges that unraveled in Bangladesh over the last few months.
Moving to the balance sheet. As of September 30, 2024, our net debt stands at INR 112 crores, which includes INR 330 crores of QIP proceeds which are yet to be deployed. As expected, with strong growth, our working capital has expanded. However, net working capital days remain steady at 10 days compared to the same period last year. We expect this to normalize as a portion is due to timing differences in timing differences. On leverage ratios, our leverage ratios remain pretty robust with net debt to EBITDA at 0.3 and net debt to equity at 0.07. Lastly, we are pleased to declare an internal dividend of INR 1.65 per share, amounting to 25% of our profits allocated to equity shareholders, aligning with our dividend policy.
In summary, our performance this quarter reflects the resilience and scalability of our business. We are focused on maintaining this growth momentum to achieve sustainable, profitable growth, delivering value for all our stakeholders.
With that, I would like to invite the moderator to open the floor for questions, and we'll be happy to address them.
So I just wanted to add, Rahul, that while we're opening up, our Vice Chairman, Mr. Pallak Seth, has also joined. He's in Hong Kong. So among the three of us, we shall be taking your questions, please.
[Operator Instructions] Our first question is from the line of Pritesh from Lucky Securities.
Yes, sir, my question is on gross margins. So if you look at the last 8, 10 quarters now, we're about 300 basis points lower gross margin. Can you highlight the key reasons for these lower 300 bps? And what will be the future trajectory on this gross margin projection?
Yes. This is Sanjay here. I think if I talk about our medium- to long-term horizon, then we are confident about the gross margin projection to improve on the factors like we've been investing into Sourcing as a Service business that is good traction. So therefore, the contribution from that high-margin business, likewise manufacturing is growing rapidly. Our brands initiative, a lot of our new initiatives, new investments are in brands as they start firing in. Our Ted Baker business in the last few months got impacted because of the reasons we mentioned. So therefore, this high-margin business as it gained traction. So we believe from a portfolio that we are building in our medium- to longer-term trajectory, the margin should head upwards.
But in a -- when you observe it over near-term quarters, then they may go a little up and down depending on how the market situation is. We have witnessed close to 15%, 16% volume growth. We also witnessed close to 14%, 15% average sales price growth in the first 6 months. So at present, I think the entire value chain, whether it is a retailer in the front end and we supporting them are focused on supporting the sales section momentum that has got built in customer is coming back, sales traction momentum is built up. That has happened at the expense of price. But I guess these are short-term quarterly phenomenon.
In about 2, 3 quarters, you should once again see upward trajectory of margin. And one more thing that I want to add here, which is that on our cost optimization with respect to procurement initiatives. We have started investing, and next quarter is going to be the first quarter wherein we believe we should significantly benefit from it. To summarize, medium- to long-term upward trajectory, in the short term to support the growth, we may observe for 1 or 2 quarters the margin to be under pressure. At the gross margin level, not at the operating margin level.
Yes, help me understand, first of all, why has it shrunk, so is it that the supply in the system is higher and hence, the brands are able to squeeze a lower GP number for the suppliers? Is it that way? Or is it that PDS themself have taken some business at an [ increasing ] gross margin than usual?
PDS, as terms of philosophy always believes that we are into a strategic relationship with our customers, and we should support their growth. And now the fastest account that we have seen in terms of growth in the first 6 months have been Primark as an account. And as you know, Primark is close to about $10 billion to $12 billion retailer, growing very, very efficiently, growing very strong. They were growing and we decided to grow along with them. That means in my portfolio, a business which is very, very cost competitive and therefore, giving you high growth but for the interim 1 or 2 quarters has put a pressure on margins. So therefore, I don't think PDS has kind of resorted to lowering prices. PDS have decided to go in line with this customer.
One more factor, tactical factor, as I mentioned about Ted Baker, which if I go a little deeper into that as well, that our -- in the last 4, 5 months, as the retail franchisee of ABG went into administration, they were the ones who were generating agency income for me, you know, while on one hand I have wholesale, which is my direct billing to retailer, but agency income was my commission about 10%, what I was getting from the retail franchisee. Tier operations almost ceased last 3, 4 months. The ABG has just announced the appointment of their partner for U.S. market and also for the online market of U.K. So as this gained traction, I think what we lost as a margin on the agency commission should come back as well. So we would not let the business go away. We would get it into our fold, and then we will work towards in the 1 quarter, 2 quarter, 3 quarter, how through my synergies cost optimization, I get my margin trajectory back.
Okay. And my last question is Sourcing as a Service. That piece of the business, what is it in half yearly, in terms of revenue that you have booked in your P&L? And what is the growth on Sourcing as a Service?
Yes. I'm just going to answer you in one minute in terms of the specific numbers. Yes. So our GMV in the first half has been at about USD 400 million which has been 100% growth over the same period last year. The revenue that we booked in SaaS over this $400 million GMV is about USD 9 million in the first half and the contribution that gives this has generated to our bottom line is $3 million, almost 33%. So therefore, $400 million GMV with 100% growth, $9 million of revenue in the first 6 months and $3 million of PBT contribution, which is almost 33% of the revenue.
What is the growth of the $9 million? Is it also 100% or lower?
It is also circa close to 100%, the answer is yes.
Okay. Do you want to share the outlook on this Software as a Service what you see as a revenue, this $9 million, what you see in FY '25 and FY '26?
So, I guess, as of now, when we are talking about 100% growth over the same period last year, I think a more sustainable number, if you talk about the next 2-year horizon is more in the vicinity of 30% to 40% because right now, we're going from a low base. The customers are beginning to see the benefit of that some of the very, very large retail customer like Sainsbury, even Primark as well are beginning to engage with PDS to start evaluating Sourcing as a Service. So therefore, if these engagements turn into tangible results, one could at least see 100% growth year-over-year. But notwithstanding these engagements, we believe in the next 2 years, 35% to 40% is a maintainable growth rate for this new offering of ours.
[Operator Instructions] Our next question is from the line of Ashutosh Somani from JM Financial.
My question is on the cash flow. So I see a negative cash generated from operations. I need some clarification with regards to two line items. One is change in other assets and the other is the change in trade payables. So can you specify what is there is change in other assets.
So are you talking about a $33 million number?
You have published a cash flow statement and it says net cash generated from operating activities is a negative number. Just if you could clarify the change in other assets, which seems to be a larger amount and the other -- the negative number, I guess in change in trade payables. Just some color would be great..
Yes, yes. So as far as change in current taxes or other assets is concerned, this has three, four components. There is a inventory receivables and payments payables component of about $15 million, which is about INR 120 crores, INR 125 crores that is coming in here. And then there are advances to vendors given the robust increase in our order book and performance. So there has been an uptick as far as engagement with our vendors is concerned. So that's a number of about $14 million, which is again similar to about INR 115 crores to INR 120 crores. So these are two large components. Another one being direct taxes paid during this period. Of close to INR 26 crores. So these three are the key components of this line item.
[Operator Instructions] Our next question is from the line of Rahul Bhansali from Rami Capital.
Yes. I wanted to ask about the -- yes, sorry. So I wanted to ask about the SaaS contract with Hanes that was discontinued. So I just wanted to understand whether that will hamper any plans that we have with Hanes in the design-led sourcing business?
So I think a bit of backdrop to this is Hanes sold off the Champion brand and therefore, the sales emanating from Champion went to a third parties. And as a result, their own factories, Hanes also owns factories. There was probably an imperative for them to fill up their own factories. And as a result, they wanted to reduce dependence on third-party factories. Therefore, the Sourcing of the Service business that we were running for them in Bangladesh has been decided to discontinue. And this in the first 6 months, there has already been a declining trend that we have observed in the Hanes business. Going forward, as the partnership comes to an end in the H2 part of the year.
On one hand, we would be fully recovering other costs that we have invested. Secondly, there is also a termination cost recovery more than the cost that we have incurred. So therefore, this relationship from our start to finish would be a profitable relationship. We do not see that this is in any manner linked to a small design-led sourcing business that we do for Hanes. These are two de-linked activities. The in Sourcing as a Service business is coming to an end not because of relationship. It is because the customer doesn't need to fill up their own factories. So these are two mutually independent. And in response to the previous question I mentioned, notwithstanding the Hanes contract, we believe the traction that is building up in the Sourcing as a Service business shall continue going forward as well.
Got it. Got it. And sir, we also -- I think we had -- we also planned to get the Hanes brand in India. And I think we had also mentioned about the Champion brand coming to India or getting the brand management rights for the Champion brand. So if you can give some update on these two deals, please?
I'm going to request Vice Chairman, Mr. Pallak Seth, to please give his initial views on this, please.
So Sanjay just mentioned about the Hanes relationship with PDS. We are -- after the Champion brand was sold, we are in touch with the other operating partners they have got in Europe and U.S. and Australia to continue some kind of relationship. So that discussions are going on in the next 4 to 6 weeks, we'll have some confusion. So we'll probably end up becoming a vendor to Champion for other markets where the licenses have been sold to third party. Coming to our India license business, we are evaluating several brands including Champion, Hanes and two others.
So hopefully, in the next 6 to 8 weeks we'll make a decision, which is the right brand to go ahead with. We have done a Kantar report study. We engaged Kantar currently to do a market assessment, and we've given them around 4 or 5 brand names, including Hanes and Champion to see the customer -- connecting customer preference. Which brand they feel would be the right one to -- for PDS to launch on the essentials and lingerie market in India. So once the study is out, then we'll pick and choose which is the right partner for us to take for the domestic distribution for underwear and essentials brand.
Got it. Got it. Okay, sir. And just...
We have a term sheet in hand already. We have a term sheet in hand [indiscernible] pending this Kantar report coming.
Understood. And so we are also having our own brands now. And I think we've also partnered with certain brands like ROKSANDA is, I think, one brand that we have partnered with. So I just wanted to understand yes, like how much do we plan to spend for this segment in particular? And what is our differentiation here? Because we've actually helped our customers to source garments, whereas this seems to be a completely different segment altogether. So how much do we plan to spend here? And what exactly is our differentiator here?
So, thing is PDS will continue to remain a B2B business. We don't have any ambition to start opening shops and become direct to consumers. It's very different and very capital-intensive business to be opening shops and selling direct to consumer. So any branded strategy we have, either taking on licenses or acquiring brands like ROKSANDA which is one of the most respected brands in U.K. currently. One we are acquiring brand at almost no value or very little net asset value. So we're not paying huge goodwill and premiums for these labels and brands that are available.
Second, if you're acquiring any brand it is with a clear wholesale strategy with a creditworthy retailer. So for example, if you have Ted Baker or ROKSANDA, we have got creditworthy retailers who we first consult with and taking their confirmation that they would like to wholesale this brand and buy PDS from PDS as a wholesale without any inventory risk brand in terms of buying the product from us, then only we go about acquiring these brands. So any brand we do, we have a wholesale angle, presold, without any inventory. So, we're not really digressing from our B2B strategy. We are actually becoming more strategic to our customers because from one side, we are designing into their private label and supplying them. On the other side, we are trying to run the sourcing operation in Asia.
And third, we're giving them a full solution through branded offers by offering them strong brands, which they can then also retail in their shops.
The line for the participant seems to be disconnected. We'll move on to the next question. [Operator Instructions] Our next question is from the line of Shrinjana Mittal from RatnaTraya Capital.
Firstly, can you help me with the sales numbers for the Ted Baker business for this quarter?
Pardon me, we could not hear you clearly. Could you kindly repeat again?
Yes. So I was asking that for the taker business, what would be the revenue in this quarter?
Which business you said, ma'am? Which business are you asking, ma'am?
Ted Baker.
Ted Baker business. Sorry, yes, okay. So I think right now, in the last quarter, it has been pretty much flat as compared to the same quarter last year. And -- but for the entire year, as we said earlier, we feel positive that as compared to the revenue of '23, '24 we're positive that we should get closer to 10% growth for the entire year of '24, '25.
Understood. And so it would be around INR 150-odd crores, that's what I remember from last quarter, and this would be entirely the wholesale business because the agency business, like you mentioned previously that part of the business has not come this quarter?
So I think the last full year revenue in Ted Baker was circa INR 523 crores, and if you talk about the quarterly number, then in quarter 2 of this financial year, it is approximately USD 13 million. And in quarter 1, it was approximately $12 million. So therefore, from a Q2 over Q1, it is about 10% up. But as I said, as compared to the same quarter last year, it is flat. So does that answer your question?
Yes, yes, that does. Yes. Second, I wanted to understand the movement in the debt number. So we have raised some INR 400-odd crores in the QIP. And in the presentation, it's mentioned that we have also repaid some long-term debt, right, of INR 80-odd crores but if I look at the balance sheet number, the long-term debt number has still increased a little bit by say 70-odd crores. Can you just throw some light on that?
Sure. So firstly, as far as QIP concerned, we have utilized about $10 million of those proceeds to repay our working capital loan that we have taken for Ted Baker business, and that has been repaid with HSBC. So no term debt has been paid with that proceeds.
The reason you see an increase in term debt from of about INR 65 crores, $6 million to $14 million is largely on account of the office property that we have bought in U.K. There, we have taken a mortgage from State Bank of India, which we drew down during the quarters of this year. So that's what's reflecting an increase in the term loan.
And we wanted to clarify to all our stakeholders that the QIP money that we've raised INR 430-odd crores circa $50 million. Rahul just mentioned, $10 million has been used to repay the debt. The remaining $41 million is lying after the issue expenses lying in the fixed deposits. As per the loss of land, PDS Limited is a Indian company will be injecting these funds into the overseas subsidiaries. And we have insignificant borrowing, not too many borrowings in India. The borrowings are largely in our overseas operating subsidiary. But for this money to move from PDS India to the overseas subsidiary, this would be done basis the PDS Limited audited accounts for 30th September. The audit has been done, and in the next 10 to 15 days, this money under RBI regulation of ODI norms, basically 400% of the net worth would now be injected.
And then in line with the stated objectives, wherein a part of this money is going towards debt repayment would be done. And the remaining would be kept in safe and liquid happens to, eventually went into growth objectives. So therefore, it's not by choice that you've decided to park in fixed deposit, there is a technical process that underlays before it actually goes overseas to repay the debt.
Understood. Just one last question from my side. On the [indiscernible] contract, so where are we currently like as far as I remember, it was about GBP 90 million to GBP 100 million is what we used to say the potential of that contract. So currently, what are we generating on that? And where do we see that?
I think this business has actually shaped very, very well for us. And if I talk about in the first half, we have done USD 33 million of sales that is approximately close to INR 270 crores. And we believe we actually to be better. So what we have foreseen that this account in 2 years should do an annual run rate of $100 million. Basically H1 performance, we are confident that we should be ending the year at about $70 million plus for the entire year and then gradually scalable to $100 million level. So we are on track with respect to what we are foreseeing on this account.
[Operator Instructions] Our next question is from the line of Mohammed Patel from Care Portfolio Managers Private Limited.
So I have a couple of questions. Can you give me some details on Fashion Nova and PDS Asia Star. What is the update and what could be the size for us in the next few years?
Pallak, would you please like to take that?
Can you repeat the question, please?
Yes. What is the outlook on Fashion Nova business and also the PDS Asia Star and this aspect going forward as well.
So Fashion Nova, we have got now where is Fashion Nova is predominantly doing apparel currently. So on an apparel front, we have got 2 PDS subsidiaries supplying them, one is specializing on kids and lingerie and other on the fast fashion business. So we have seen very fast traction and healthy margins coming from the Fashion Nova business because the current sourcing is all from domestic importers sitting in L.A. and New York with a very high overall structure. Having direct teams sitting in Asia servicing the Fashion Nova business, you've seen a lot of traction and healthy order books trading.
So I think in the first 2 months of our selling teams already more than INR 150 crores business have been booked. So the apparel continue to grow and it could reach that to $100 million potential in the next 2 years. Plus, we have now started adding new categories to them like home. They currently don't do any home business. So we set up a home business for them and also on the tech accessories and other accessories, which are not related to apparel.
So it's a very strategic partnership open all the doors, even now PDS teams are sitting in the Fashion Nova office. In L.A. we've got 3 people from PDS, sitting in their office constantly working with the bank deals and helping drive business forward. So PDS has set as a fast production business model, EXIM. so what Fashion Nova wanted was a fast production business model. So these companies like PDS online enterprise is actually a fast production business and not only seeing the success of Fashion Nova and all other retailers are forging PDS can you do a similar model for us also. No minimum quantities, high amount of SKUs from a global sourcing banks. So this is a new line of business has started. Being an agile platform, we're able to set up a new business line and see a lot Fashion Nova, but also excited many other customers wanting to use this service we have set up. Hope this answers your question.
And apologies if I may add, there was an angle of PDS Asia Star to it. So as we all know that China has been a geography as they were big fulfillment to online-led demand. Our subsidiary in Shanghai PDS Asia Star has been largely into design-led sourcing. But given their proximity on ground, as we got this new line of activity created, PDS Asia Star was able to quickly in a very agile manner getting back to whether to start fulfilling. So that's how PDS Asia Star and Fashion Nova relationship is enabling us to deliver this very, very fast.
This $100 million in 2 years, a big [ DLS ], right?
Yes, designer sourcing.
Okay. And my second question is, so what part of the business has contributed to the good growth in North America and Europe? And is this growth expected to continue in upcoming quarters?
I think as we said, the overall global economic factors are beginning to look good. I think most of us are keeping fingers crossed in U.S. collections. But in the near term, we believe this traction will continue at the 60% growth that we have witnessed. This trend should continue in the coming few quarters as well and Europe as well. In U.K., if at all, our growth is 10%, 12% that because 1 of 2 of our accounts are like Matlin is facing a sluggish trend, but we remain positive that on a portfolio basis, 20% plus growth and U.S. would still keep driving the pack for the coming few quarters. Yes.
Okay. In the top 10 sourcing verticals, Norlanka, Spring, KSL, Twins Asia, Zamira, they have experienced negative PBT growth. So what explains that?
But there have been some -- for example, Norlanka is more an internal matter that while we had a 20% growth, some inverse supply chain snags led to some incurrence of freight costs. And in our business, there is flexibility, because all our contracts are back to back than we are able to recover these incurrence of freights from our partner factories. So pending that, these are the costs that we have incurred. And we have done some internal corrections to fix up the supply chain. So therefore from Q3 onwards, Norlanka should put this behind itself.
On Spring, which is our business based in Turkey, but there has been -- while they enjoy a very strong relationship with Ralph Lauren, Sainsbury, now we have opened up Tesco as an account. So therefore, from a relationship perspective, very well in place. There has been tremendous cost pressures. As you know, in Turkey, the inflations are upward of 60%.
So therefore, there has been cost pressures. To offset these cost pressures, we actually invested into a sampling room and a small cutting facility, whereby we felt that if we take our own designs to the factories, designs in the sense that rather than working on tech pack business, if I choose my own fabric, choose own trims, then my ability to influence the value chain as a result, minimize the impact of cost increase only.
So therefore, to answer your question, this impacted me in the past, but with good customer base with Tesco account recently opened up and the sampling room and a small cutting facility, allowing me a better handle on value chain, we believe we should be able to reverse this trend going forward.
Okay. What about other 2 Twins Asia, KSL, Zamira?
Yes. Twins Asia has been designed or Twins Asia has been serving the customer Matlins. And Matlin has seen a change of management and ownership whereby the bondholders took charge of the company by converting debt to equity. And as a result, the entire focus shifted on cost, cost, cost. And thereby, they started engaging with us to keep driving down the price, in fact, in one of the earlier questions, we said we would never let the sales go away.
But when somebody tries to drive price too much down, then I think we also have to hold our ground. So therefore, there has been a 34% decline in the revenue, largely because of this account shrinking. And in the meanwhile, the design hub and field management have adopted Twins strategy. On one hand, they have realigned the cost structure, which will lead to benefits coming in the later half of the year.
Secondly, they have also hastened up the efforts to start doing business with more customers beyond Matlin as well. But in the interim, we have got hurt. Zamira and other account, they lost business with one of the customers. They are into sustainable denim and which I think, again, the management team is by the end of quarter 4, beginning to get more orders from new customers. So these were some specific issues, the reason we wanted to highlight the [ first 8 ] and the next 2, these are 2 issues that have hurt. We are realigning the cost structures. We are getting more customers, and we believe in about 2 quarters, these businesses also should be back on track.
Okay. And my last question is, so you've pioneered a green finance. So how much that can help in reduction of P&L interest costs in near term?
Sorry, could you repeat your question?
So you've pioneered sustainable green financing. How much that can help in reduction of P&L interest costs in the near term?
So sustainability and green financing, I guess, is the flavor with banks these days. Everybody wants to participate in the sustainable journey given this is a very sensitive topic. So we have partnered with our primary banker, which is HSBC and also ENBD in UAE on green financing. Now as far as your specific questions of how much will it lead to reduction in interest costs, these guys usually set up certain KPIs. They will monitor us over a period of time.
And in case that delivery is there anywhere between 20 to 25 basis points is what can come as a way of reduction. So green facility should not be viewed as a facility which will lead to cheaper financing. But yes, it has many other benefits because it's fast track. We monitor it very closely. And then there are those benefits attached to something new that the bank is trying to do. But on a P&L basis, 20, 25 basis points over 18 to 36 months.
Our next follow-up question is from Rahul Bhansali from Parami Capital.
So our sourcing is closed towards Bangladesh right now. So I think around 55% to 60% of our sourcing is from that country. So do we have plans to have a more diverse sourcing base, let's say, in 2 years -- in 2 to 3 years, let's say?
So two things there. One is notwithstanding the disruption that happened in quarter 2, especially on 2 occasions for consecutive 3, 4 days. Your company has been able to post a record high sales growth -- highest sales quarter. We believe in Bangladesh, given that RMG exports are the single largest exporting item for the country and the country is heavily dependent on that.
The country was able to quickly get its act together and put whatever happened behind. That's number one. But on an incremental basis, we believe that we are working very carefully as we had also mentioned earlier when we met our investors at the time of QIP that we are looking at ownership of a manufacturing unit in India, wherein we believe the world is looking at India for increasing their sourcing and our relationships with customers are well in place.
This ownership of small to midsized asset would allow us to have a base in India and thereby have more sourcing from India. That is number one. We're also carefully evaluating Latin America and Egypt. The American markets and some part of Europe are also looking at nearshoring. And Egypt also get the benefit of our duty-free access to the U.S. market.
So therefore, to answer your point Bangladesh is stable, but from an incremental capital deployment perspective, we believe we are closer to taking a decision in India and keeping a close evaluation of Egypt and Latin America. That would automatically take care of diversification of our partners and sourcing base.
Sure. Sure. And do we also partner with some of the big players such as, let's say, Gokaldas Export or KPR Mills or such companies or do we actually -- do we generally partner with smaller companies? And if there is a -- if, let's say, a few years down the line, the bigger companies tend to get bigger. Is that going to hurt our business? That's what I wanted to know.
Pallak, would you like to take that? I will take the first two.
our concern is -- yes, on our design-led sourcing business, we tend to partner with the medium to large players. Like, for example, in India, there are thousands of factories, maybe 10 large groups are capable of dealing with the large retailers, but another 50, 60 manufacturing groups, which have similar facilities in terms of infrastructure, compliance standards and quality standards, but they do not have the front-end SG&A costs or design teams and the customer reach to reach these customers.
So typically, they are the next -- not the first 10, but the 10 to 50 vendors in each country tend to become PDS vendors. So the point you made, the big end up becoming bigger in manufacturing first business, the CapEx to do growth turnover is 1:2. So to grow to a $200 million top line for a garment manufacturer, they have to put $100 million CapEx almost, right? So it's a huge investment and their ability to scale up is very limited. Whereas the PDS is known in the industry for being a solutions company, as soon as we find opportunities, we are able to get the vendors on a asset-light model.
If you see our turnover, how much we're able to clock without having to invest much in fixed assets and keeping the asset-light nature of the business alive are scalability factors is much more. Whereas the manufacturing group is limited to how much they can scale, not only because of the CapEx requirement, but also because you have to hire huge amount of manpower and labor, creating future liabilities for themselves as well. So I'm not concerned as manufacturing group scaling up and becoming competitors as to be honest.
Our next question is from the line of Vivekkumar from Bestpals Research & Advisory LLP.
Sir, am I audible, sir?
Yes, please go ahead, sir.
Yes. My question is on U.S. How -- are we facing -- I know it's going very well. So in the long run, how different it is from Europe in terms of clients' preferences and how easy or how challenging it is to crack here because U.S. is much, much larger than all other markets put together. So I just wanted to understand because if U.S. is cracked then -- like it's a very big opportunity for us. So I just wanted to understand, it's easy or there are challenges. And what are your dialogues with your clients giving the indication on? How is it looking for you for the next 3, 4 years, I'm not saying next -- because base is low, you will grow, but to scale. I think I made [ my message ] clear.
I think U.S. versus Europe is quite different markets. Europe is very product-driven and also very bottoms up. So you have to have relations with the buyers, the merchants and then the senior leadership can give like support. But Europe is, you have to have product-first approach, and you have to have a relationship with the teams first, whereas in U.S. to do the business, it comes from top down. The relationship has to with the CEO of the company. Then the directive was given below and then below teams have to be satisfied. So it's a different approach how you approach the U.S. market versus the European market.
Also U.S. is a very strategy-driven, whereas Europe is product-driven. So PDS invested in resources currently, where we have the right people in place now, who have those relationships at the senior level at retail. So at least doors are getting open, right? So most difficult thing today is to open the door. As soon as we meet the CEO of a large American retailer, they see PDS Group presentation, our business model, our venture fund feeding innovation, they ultimately end up opening our door, which is one of the hardest pass. One of the door is opened then it takes 1, 2, 3 years to build the business to a scalable level, right?
So the good thing is, any customer you approach, 9 out of 10 have agreed to open a PDS account, which is the biggest pass where most companies fail. So it's fundamentally different both markets. I think with Fashion Nova, we have seen we have the right discussion at that senior leadership owner to owner level. That business -- they starts building up. Target U.S. is another retailer, where we've seen a huge traction in building up. Sitting in Hong Kong, meeting with Walmart leadership also today. So that continues to grow in terms of traction what they're seeing in our business model. So it takes time, but I think the hard part is to open the doors, which PDS has succeeded in doing in the U.S. markets.
So whether we'll be able to scale is -- we will be more confident in 1 to 3 years, we'll know whether we'll be able to scale up. You're very confident that you'll scale because the doors have opened?
See, if U.S. retailer is opening your account, they are definitely looking a strategic relationship, where the European retailers opening account if [indiscernible] they might not buy. In U.S., if they're opening account, they want to plan 3 years, 5 years strategic growth, so a different approach. So I think with Kohl's, American Eagle, Walmart, Target U.S., Fashion Nova and then some of these large retailer accounts being opened, we already feel there's a big place to do hundreds of millions of dollars of business in the next 3 years.
But is that a function of time, can I understand -- can I get it that way?
Yes, it's a function of time. Because first account is open, they'll have to then approve the factories, which is currently ongoing. When product selection meeting happens twice a year as Europe is buying 6x a year, 8x a year. U.S. predominatly buys 2x a year. If you miss 1 season, then you are waiting for the next season to start.
Got it. Got it. So you're not seeing any big -- sorry. You're not getting any [indiscernible]?
No, we are seeing positive traction only.
Our next question is from the line of Aditya from Ak Investments.
I just wanted to know regarding the brand management deals, it's been quite some time, we have not heard any of the deals in the brand management. That is my first question. Can you throw some light what's happening there? Any U.S. related deals?
We have recently signed a deal, which probably is in the final stages of paperwork with one of Hollywood largest actress called Reese Witherspoon. So with her, there is a back-to-back arrangement with Kohl's in the U.S. So Kohl's is running her shops and she is a direct-to-consumer business also.
So when New York private equity firm had acquired that business and now PDS is getting to complete brand management similar to [indiscernible] business. So first, your volume is around $20 million, but that is more than direct-to-consumer side, because Kohl's business is a couple of hundred million right now. So in the next 18 months, that whole Kohl's business will transition to PDS as well.
To be honest, every -- getting a New York IT company approaching us like 2 days ago, Reebok entire European business has offered to us. Another French sportswear brand called Le Coq Sportif. So there is a lot of movement in the industry where brands have been sold to New York IT companies. So PDS is now getting the deal for whenever some movement happens, we get to see the deals.
We are carefully evaluating, looking at the learning from Ted Baker also, which is the right way to approach them and what kind of exposure you want to take. So -- I mean our brand business will -- is already an up to, I think, $400 million between what we're doing on our current wholesale customers or proprietary brand we are doing for retailers as well.
So there's a lot of activity, probably we're not putting announcements like we used to earlier, but all that data, I think can be made available under that site. All the brands we own in terms of either ownership of brands or licensing of brands or proprietary brand deals we are doing with our customers. And then we can make that access even in the chart.
Okay. And Sanjay, regarding the guidance for this year, would you talk about 20% growth on the revenue terms and some 15 terms growth on profitability, it's on the base of INR 200 crores or what you're giving that guidance for FY '25? And how do you see FY '26 as a guidance in terms of revenue and profitability, both?
So I think last year, we were circa INR 205 crores or so in terms of PAT. We started the year at about 10% top line guidance and about 15%, 20% PAT. We are ahead of curve, almost double in terms of top line growth. We should, therefore, see the benefit of that in much higher profitability than what we had foreseen in the beginning of the year. We are inching towards more 25%, 30% growth at this stage in terms of PAT as compared to 15% we have foreseen earlier.
We've been also into as you know, investment mode this year. In terms of FY '26, we believe mid-teens. I'm talking about a sustainable rate, mid-teens should be the top line growth and one should see a higher PAT growth in the next year because in FY '26, two things will happen. The investments that we would have made in FY '25 should start giving results, plus the economy of scale of the existing running businesses. So therefore, the '26 PAT growth should be faster than the '25 PAT growth.
That sounds good. And currently, the employee expenses, whatever we are incurring, it's more doors opening to the U.S. side, right? And how do you see this panning out this full year and next year? I mean, it's INR 290 crores, right, we are currently having in a quarter.
So right now, we have seen about 7% increase in head count in the first half as compared to the same period last year. So this kind of head count increase, plus a 6% to 7% merit increase is a sustainable number if we keep growing in mid-teens basis. We believe the heavy lifting, the heavy weights that we wanted to bring on a board, I think the impact is fully captured. There could be slightly, because 1 or 2 people we brought in towards the end of quarter 2, but the heavy lifting has been done. So quarter 4, you should see a kind of steady-state employee cost. That's where we are.
So just to add on that, what Sanjay mentioned, on the numbers front, employee cost has gone up by 6% quarter-over-quarter. If we were to exclude the investments that we have made, which will bear fruit down the quarters, for our existing businesses, this growth is only 1% quarter-over-quarter.
So this -- whatever the investments we are doing, it will be -- I mean, what should be the steady state we should take or it will be cooled off? I mean this is onetime expenses or this is -- how should we say, the INR 38 crores, whatever we have done?
So like Sanjay mentioned, quarter-over-quarter is coming down more towards the end of this quarter and start of next financial year. This should be down to negligible levels.
Our last question for the day will be from the line of Deven Kulkarni from Marcellus Investment Managers.
So how big was the Hanes contract in FY '24 and in Q2?
So in terms of the contribution of Hanes was approximately -- I'm just -- it's about in $43 million in FY -- Reenah would want to add?
So in FY '24, Hanes for us is around $24 million from a GMV perspective, which in the first half is around $12 million.
Is it reduced by half?
Yes. Full year, this is yes.
Okay. Sir, $12 million in H1 FY '25, right, compared to $24 million last year?
That's correct.
Okay. Got it. And second question, sir, in your investor presentation on the Ted Baker slide, you have mentioned that you have moved your office to Frasers office. So what's the deal here with Frasers?
Pallak, would you like to take that, please?
Your voice is not clear. On the Ted Baker, what -- can you repeat, please?
The fact that we have got co-located ourselves at Frasers office. So he wants to understand what's the rationale of that. Yes.
So basically, Frasers is getting into a strategic partnership with PDS and they see Ted Baker is a great brand now, which unfortunately, doesn't have physical retail stores in the U.K. But Frasers themselves between their ownership of House of Frasers, [ USE ] their own online platform and many other channels, they are like a USD 5.5 billion almost USD 8 billion retailer in New York and U.K. They feel like Ted Baker through their distribution channel can quadruple and do a lot of business.
So given almost a strategic move that PDS goes into their head office into one of the separate floors, still operate as independent companies. There is no financial relation between them and us in this business, but it's a strategic relationships. And we've given some kind of indication that up to GBP 25 million a year, they can buy from us for the Ted Baker brand.
So considering the current volume, they're buying at 3 million from us that desires to do 25 million. There is huge upside where they think they can use the Ted Baker brand where the stores don't exist in U.K., which is the home market, but distribute through the channel and be closer to us through this deal. There is a strategic intent. Ted Baker was the first brand that they are having many of their own brands also that Frasers owns. They want PDS to take some of the other brands that Ted Baker team has got and elevate those brands and help distribute with the Frasers network. These are all strategic relationships like as I mentioned, PDS team now sitting in Fashion Nova office. PDS team sitting in Asda's office. Now PDS team sitting in Frasers' office. We cannot get more strategic than that, where a retailer comes and says, come into my office, put your teams and do as much business as you can with us. That is the power of PDS as a company, which is respected and also trusted by global retailers to partner with them strategically where no one else in the industry has this kind of reach or reputation like we have got.
Okay, understood. And finally, Sanjay, any impact of, let's say, the Bangladesh crisis you want to call out in Q2 numbers? Or was there no impact at all?
As I said, we -- in our own factories, 3 to 4 days production got lost. But despite that, we had overall 70% growth from our own factories. From our own partner factories, yes, 3, 4 days got lost there as well. But I think the entire ecosystem later on, then work towards catching up. I would say we're keeping a close watch on ground realities. For now everything is stable and under control.
ladies and gentlemen, in the interest of time, that was the last question for the day. I would now like to hand the conference over to the management for closing comments.
Thank you so much, everybody, for taking the time out and participate in the earnings call. And once again, we would like to extend to all our stakeholders across geographies, Happy Diwali. A lot of festivities ahead to all of you, outside their home. And we look forward to interacting with you for our quarter 3 earnings call. Thank you, and stay safe all of you.
Thank you. Happy Diwali to everyone. Thank you.
On behalf of PDS Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.