PDS Limited

NSE:PDSL

Earnings Call Analysis

Resilient Performance Despite Market Disruptions

In the first 9 months of FY '24, the company's top line declined by 9%, yet it demonstrated resilience with a 19% increase in gross merchandise value, from INR 8,978 crores to INR 10,724 crores. Gross margins improved from 16.8% to 20.6%, thanks to higher-margin ventures and smart negotiations in core businesses. Employee and other expenses increased by 22% and 18%, attributed to the addition of new businesses such as Ted Baker and Gerry Weber. Interest costs rose due to an increase in the base rate from 2.60% to 5.23%, and taxation grew mainly due to profitable Ted Baker operations. For the quarter, gross merchandise volume soared by 31% and revenue remained flat at INR 2,580 crores compared to last year, but EBIT dropped to INR 67 crores from INR 120 crores.

Financial Year End Rebound Indicated

Despite a rocky start with a 9% decrease in top line revenues, totaling INR 7,157 crores for the first nine months, the company appears to be on a comeback trail as it enters the final quarter of the fiscal year. The resilience is evidenced by the gross merchandise value (GMV), which saw a robust 19% growth from INR 8,978 crores to INR 10,724 crores.

Solid Gross Margin Performance Amid Challenges

The company improved its gross margin significantly, from 16.8% to 20.6%, due to strategic moves like venturing into higher-margin areas such as sourcing-as-a-service and the successful incorporation of Ted Baker into its business. This growth has helped offset the top line decline and positions the company well as it seeks to capitalize on recovering markets.

Increased Costs Reflect Expansion and Investment

There's been a noteworthy increase in employee and other expenses by 22% and 18% respectively, attributed to the addition of new businesses, particularly Ted Baker and Gerry Weber, which were not a part of the platform in the previous year. While these investments have raised costs, the company considers them essential to bolster its market position and leverage upcoming recovery.

Navigating Higher Interest Rates and Tax Jurisdictions

The business landscape has been difficult with rising interest rates—a significant increase from 2.60% to 5.23%. The tax outlay has grown due to profits from the high-tax jurisdiction of the Ted Baker operations, indicating profitable integration despite the fiscal pressures.

Balance Sheet Stays Strong Amidst Increased Debt

Net debt rose from INR 27 crores to INR 253 crores, mainly due to the Ted Baker acquisition. Yet, the company remains robust with strong leveraging ratios such as a net debt-to-EBITDA of 0.61, and net debt to equity at 0.22. The company has invested wisely, maintaining a net working capital of just 2 days, highlighting efficient capital management.

Confidence in Recovery and Growth

Management emanates confidence in the revival of growth with positive signals observed in Q3, as sales decline was halted and the company is potentially entering a growth phase. Executives expect further enhancement in Q4, supported by positive customer inventory adjustments post-COVID and consumer uptick indicators during the Christmas period. This, coupled with industry consolidation and the gain of market share by PDS's customer base, paints a promising picture for the future.

Earnings Call Transcript 2024-Q3

[Operator]

Ladies and gentlemen, good day, and welcome to Q3 FY '24 PDS Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Diwakar Pingle. Thank you, and over to you, sir.

[Diwakar Pingle]

Thank you so much [Mishra]. Good afternoon. Good morning, everyone [indiscernible] to the earnings call. I welcome you all to the PDS Limited's Q3 and 9-month FY '24 earnings call. Today from management, we have with us Mr. Pallak Seth, Executive Vice Chairman; Mr. Sanjay Jain, Group CEO; Mr. Rahul Ahuja, the Group CFO; and Mr. Reenah Joseph, the Head of Corporate Finance, M&A and Chief Investor Relations Officer.

Please note that the copies of disclosure is available on Investor section of the website as well as the stock exchanges. Please do note that anything said on this call, which refers our outlook to the future, of which can be considered as a forward-looking statement, must be viewed in conjunction with risks that the company faces.

This conference call is being recorded, and the transcript along with audio the same will be made available investor the company exchanges. Please also note that the audio of the conference call is copyrighted material of PDS Limited and cannot be copied, rebroadcasted or distributed in press or media, without specific and written [indiscernible] of the company.

With that said, I'd like to hand over the call to Sanjay Jain, Group CEO for opening remarks. Sanjay?

[Sanjay Jain, executive]

Thank you, Diwakar. Good morning, good afternoon and evening to everyone. A very warm welcome to our quarter 3 and 9 months FY '24 earnings call. Before we dive into the quarterly and 9 months operating and financial performance, let's please take a few moments to discuss the current economic and [indiscernible] landscape that has shaped our journey so far during the year and which we believe would also have an impact in the coming few quarters as well.

As we step into 2024, the global economic conditions stand at a crossroad rending challenges with ways of optimism. While the World Bank projects a modest growth, there are very promising signs of improvement on the horizon. The ongoing geopolitical challenges, along with the recent Red Sea crisis is continuing to impact the global trade.

However, there is definitely room for cautious optimism. One back in our hope is the resilience demonstrated by the U.S. economy, which has proven to be a stabilizing force amid the uncertainties around. Furthermore, the inflation rates are gradually aligning with the Central Bank's targets worldwide, instilling confidence in the economic stability.

The potential for interest rate reductions adds an extra layer of positivity, offering the prospect of stimulating the economic activity. With these encouraging factors at play, there is a chance that in the coming months, to exceed the expectations, bringing about a more optimistic economic outlook on a global scale.

Overall, the industry will continue to see some demand headwinds but our discussions with our clients is suggesting a revival in demand -- is definitely there in the coming few quarters. Somewhere, we believe, while we also had first two quarters of a decline in sales, in quarter 3 we are flat, which means we're nearly bottoming out and we are heading for growth in the current quarter and hopefully thereafter as well.

While the performance of this quarter has been below expectations, we are confident that this is merely a temporary phase. At PDS, we had to take a call that, should we wait for investing into a robust performance to follow in the coming few quarters? Or should we kind of defer the investment? We made a decision to invest into people, people who are definitely enabling us, making inroads into the U.S. market and now also enabling us make inroads into the Indian market as well.

The industry disruptions are presenting new opportunities for PDS to strategically partner with global brands and retailers. Our consistent efforts over the past 2 years are evident in our performance during these challenging times. The introduction of new service offerings, mainly sourcing as a service and Ted Baker design group has effectively helped us mitigate the industry decline.

We are pleased to report significant progress in both our sourcing as a service and agency businesses in 9 months of GMV for these business models recording 260% and 90% growth, respectively.

In the sourcing as a service model, our GMV has surpassed $350 million for the first 9 months of FY '24, which I just mentioned, is a 260% growth over the same period last year and the agency business clocking $118 million GMV in the first 9 months, a growth of about 90% over last year, reflecting robust performance and market demand.

And therefore, this performance was giving us an assurance and confidence that we should continue to keep investing into our efforts into U.S. market and Indian market. And it's a matter of time that this will start giving us results. Unlike any normal company, wherein the investments typically happen to balance sheet and then you reap the benefits until such time you get into commercial activity, it remains in the balance sheet. In PDS, it actually gets into the P&L. So therefore, when we are bringing senior resources, it's actually happened in terms of quarter 3, wherein when you observe an employee cost increase. From our perspective, that is an investment that we are making for winning business into U.S. and Indian market. Now the cost interest is now, but we feel that in about 4 to 6 quarters, one should see a significant impact of this investment coming back.

Of course, in the immediate next quarter and thereafter, one should see growth coming back in design web sourcing. But this investment that we chose to make in the third quarter is shortly going to add to more benefits in the subsequent few quarters as well. Aligned with our strategic objective to expand in the U.S. market, we are very pleased and excited to announce the target, a leading retailer in the U.S. has been added on a platform as a new client.

And we are very confident and positive that we just onboarded them this quarter. We'll be gradually nurturing this relationship like some of the U.S.-based clients that we've added in the last few quarters, there's Walmart, JCPenney and also Coles. In fact, to talk about Coles, for example, the relationship started with doing fashion business, and as the relationship is maturing, besides fashion, we're also getting into doing core line activity with our customers. So we believe this target onboarding is a major win for us in the U.S. market and therefore, should lead to scaling of the relationship in coming few quarters.

India, also, we have chosen to be a focus market for us. And India, as you know, India has bought $100 billion retail market fastest growing. But now India has prominent retailers who represent a size and scale, wherein PDS is well poised to start positioning a service offering to them. And recently, we solidified our presence in the Indian market by securing a [indiscernible] sourcing the service contract with Myntra.

And this contract is actually to enable them start outsourcing -- sourcing garment from outside India as well. So therefore, PDS is now able to bring its experience of successfully practicing sourcing as a service for brands like Hanes, brands like retail format like Asda, at the same time, having a global presence, for example, in Bangladesh and other countries. We are building these strengths now to Indian retailers, and while I mentioned to you about a major win of target onboarding in U.S., likewise, there is a signed customer contract with Myntra for enabling them source from markets out of India as well.

In fact, these developments underscore our commitment to expansion, innovation and strategic partnerships. We remain focused on delivering value to our clients and leveraging growth opportunities in key markets to sustain our upward trajectory. Therefore, as demand bounce back across various geographies, our existing businesses will recover. We believe this quarter, we should see growth bouncing back and we stand to benefit not only from the growth of our current ventures, but also from the disproportionate profitable growth of our new ventures.

Our confidence in the aforesaid mentioned outlook is evident in the investments we have made in enhancing capabilities, recruiting talent ain summer, as I mentioned. This quarter 3 as compared to the previous quarter 2, we made a decision to invest into the senior talent to enable us get business in India and U.S. market. We also chose to invest into Sri Lanka. And we believe in the current market conditions, given the global footprint, given our strong financial position, there is an opportunity to get partner factories on board. PDS will continue to be asset-light, but we spotted an opportunity to get about a 25% stake in our facility in Sri Lanka and with an option with us that at the same very, very low valuation that we got, we can at least step up our stake to nearly half in due course of time.

Notably, industry veterans, such as Mark Greene and Herald Tinman have recently joined PDS, bringing with them their extensive networks. We will leverage the connection to promote the narrative of customized solution that PDS can provide to global brand and retailers. We also recently acquired a new office in Watford U.K., which will house PDS operations close to key customers while showcasing our presence in U.K. PDS actually has got now a PDS tower in Gurgaon, which is primarily catering to our design capabilities to support the global operations. It is supporting to our commercial activities for the global operations, where we are using a few floors for our own consumption. Few, we are letting it out to reputed companies. So therefore, PDS tower in Gurgaon, we are running it as an independent P&L. We have an investment in real estate in our office infrastructure in Hong Kong, which is actually housing three of our businesses and global treasury activities.

And now we believe this presence in U.K., which is primarily housed at Poeticgem operations, and internally, this Poeticgem vertical, which is somewhere closer to $350 million in top line has itself got a trajectory to be $1 billion in about 3 to 4 years. We believe this office infrastructure that we have invested into U.K. will reflect a, the need of the verticals to grow and also the stature of the organization is positioning our services to reputed clients.

In conclusion, drawing from 25 years of experience in the industry, we have consistently observed disruptions that open service catalyst for new collaboration opportunities. Therefore, we strongly believe that the resilient business model we have cultivated has weathered these challenges, times and position us for recovery. In fact, our history tell us that whenever the tough times, PDS tend to grain manyfold in terms of size and a foothold in terms of relationship with our customers.

With that said, we now pass on the call to our group CFO, Rahul Ahuja, who will provide an overview of the financial performance for the quarter.

[Rahul Ahuja, executive]

Good day to all on this call, and thank Sanjay for setting the context by outlining the macro challenges and opportunities in today's world. Now let's delve into the financial performance for the quarter and 9 months ended December 31, 2023.

In the first 9 months of this financial year, we reported a top line of INR 7,157 crores with a gross margin of 20.6%, despite a 9% decline in top line, the value of gross merchandise we handled increased by 19% from INR 8,978 crores to INR 10,724 crores. This growth demonstrates our resilience and ability to thrive on its market disruptions.

Our gross margin improved from 16.8% last year to 20.6% in 9 months of FY '24, driven by higher-margin ventures like sourcing as a service and Ted Baker. Additionally, negotiations within our core design-led sourcing business contributed to expansion of the gross margin.

The employee and other expenses, costs have shown a year-over-year increase of 22% and 18%, respectively, like Sanjay mentioned, it has been largely on account of the new businesses we have added on to our platform, which is Ted Baker and Gerry Weber. And these obviously didn't exist same time last year.

Despite demand pressures in the core business, we have refrained from any drastic cost containment measures as we believe the recovery is around the corner, and we should retain and we need to retain our talent and capabilities to capitalize on this opportunity. It's important to note that other income in 9 months of the previous financial year included a onetime gain on the sale of real estate, which affects the comparability of EBIT and PAT year-over-year.

Interest costs also rose due to an increase in the average base rate, which is so far from [2.60% to at 5.23%]. While taxation is higher, it's largely attributed to the Ted Baker operations, which have been profitable from day 1 and those profits accrue in a high-tax jurisdiction.

Coming to the performance during the quarter, we clocked GMV of INR 3,868 crores versus INR 2,950 crores last year, translating into a growth of 31%. We arrested the decline we witnessed over the last 2 quarters of this fiscal, that is in Q1, revenues declined by 10% and in Q2, they declined by about 16%. In Q3, the reported top line of INR 2,580 crores is flat as compared to the same period last year.

Gross margins in Q3 FY '24 increased by 333 basis points to 20.8% is showing the trends observed in the 9 months. Similarly, increases in employees and other expenses are consistent with year-to-date figures. This translated into an EBIT of INR 67 crores versus INR 120 crores reported during the same period last year.

During the quarter, the base interest rate, which is so far increased from 3.82% last year to 5.32% in the current year translating into higher interest cost. The increase in taxation, as I said, is largely linked to the Ted Baker business, which is in a higher tax jurisdiction.

Turning to our balance sheet, the net debt has increased from INR 27 crores to INR 253 crores year-over-year, whereas in the previous quarter, which is September, this debt was at INR 178 crores. This increase is mainly on account of the Ted Baker acquisition, which was financed through internal accruals and was partly replaced with an over [indiscernible] facility.

We have now got a nonrecourse factory limit from our prime bank, which is BC, which would help reduce the debt further. Further, we also invested in the U.K. property like Sanjay mentioned in his conversation. While working capital days increased from 9 days this year, excluding the Ted Baker component, our net working capital days stand at 2 days aligning with our historical performance.

The implementation of the nonrecourse factoring line that we a recently got [indiscernible] fall is expected to reduce receivable days, particularly for Ted Baker. Despite these dynamics, our balance sheet continues to remain robust with strong leverage ratios of net debt-to-EBITDA at about 0.61 and net debt to equity at 0.22.

In conclusion, the resurgence of demand and the promising performance of our new ventures bolsters our confidence in achieving growth in the upcoming quarters and driving steady progress in quarters to come.

With this, I request to open the floor to questions, and we will reply to those amongst us.

[Operator]

[Operator Instructions] And the first question is from the line of Akshay from Sam Capital.

[Unknown Analyst]

Can you hear me?

[Sanjay Jain, executive]

Yes, please.

[Unknown Analyst]

So I just wanted to hear from the management because last quarter on the call, Mr. Jain sounded very confident that growth will pick up quite a lot in the second half of the year. So I just wanted to know the details of what's happening at the customer-end, as most of the destocking over. Just wanted to delve into a little bit more detail because Mr. Jain was really confident that we will end the year with, say, single to double-digit growth rates. That's the first question.

[Sanjay Jain, executive]

Yes. So allow us to answer this in two parts, while I will reflect on the discussion we had in the past. We also have the benefit of our Chairman Pallak Seth, who's dialed in. So I'll be requesting him soon to share his perspective on interface with the customers. But yes, we did anticipate that the growth would be once impact in the second half of the year and somewhere we are witnessing that traction. As I mentioned in my opening remarks, from a decline of sales of 14%, 15% in the first 6 months, it is flat now in the quarter 3. And we are confident that there would be a growth in quarter 4.

So therefore, yes, there is a lag of growth returning back by a quarter or so, but we believe the growth is now there. The mix cautions, I mean, I'll continue to be cautious. But this quarter, we are witnessing growth traction. And let me request Pallak, you want to add in terms of -- yes.

[Pallak Seth, executive]

Yes. Good afternoon, everyone. So I think the customer inventory issues which were there post-COVID in the last year have more or less been taken care of, and this Christmas has been positive for most of the retailer we are working there. So we are definitely seeing the uptake on consumption in these markets we are operating, but more importantly, the customer base we are working with.

So there's been a lot of team up, a lot of the small, medium-size retailers in the last 12 to 18 months have gone out of business. Whichever retailers are remaining, which is predominantly the customer that PDS works with is beginning to see growth as well.

So a combination of growth coming from consolidation industry, existing retailers we are working with, getting a higher share of the market along with cleaner inventory, which I think definitely going to drive our growth coming to next year. In order in Q4, we have seen that impact in our order books.

[Unknown Analyst]

Okay. So my second question is more related to the American market. I mean, as we mentioned, due to quite a few hirings in that market. But still, I mean, despite being the biggest market, it only contributes about, say, 12% to our -- of our business. And also, we had our plans to acquire a factory in and around Egypt to service the American markets. I mean also, do we have any acquisitions planned in the United States market? Or will this higher from the ground up, and like build business from the ground up? Or is there any acquisition in the United States market in specific?

[Pallak Seth, executive]

Yes. So next year's budget already we have seen U.S. market share percent of turnover going up to almost 20%. Sanjay just mentioned Target U.S., which is a second or third big retailer in the U.S., which is hundreds of billions of dollars, evaluating close to 150 vendors in the last 18 months to bring onboard. I'm very proud to say out of the 150 vendors we have evaluated, only one was bought in, which was PDS. So PDS is a asset-light business model, where all the other groups accepted for the large asset-heavy businesses. The reason PDS has bought in is because target U.S. as the whole for moving to sustainability innovation and this sought PDS as a perfect partner to provide them not only design development, FOB IDT option, so also partnering with them in the genetic sustainability innovation. So that account alone could be hundreds of millions because they don't add $1 million, $2 million business. The other one that has to be scale.

Similarly, Walmart is also one of the largest retails as we know in the world. It's early looking at PDS and various options. So we feel very confident that the way we are positioned in the U.S. market right now, and there's restructuring happening in the U.S. market where there are a lot of cost cutting happening at the regional level and service providers required to fulfill those requirements because the retailer doesn't have that cost, that means someone has to take on the cost to service them.

The combination of having these large U.S. accounts, which typically recurring [indiscernible], we've been trying, we were not able to get when the last success we've had these well is definitely going to help drive our U.S. business. So our current approach is more organic because there's a lot of good talent available, we will bring them on board and organically grow with them. This is a cheaper back way for us because then you don't have to take on debt and you have pressure on our balance sheet.

But saying that if you find some small, medium-sized companies, which we can get a net asset value of almost acquire teams and even pay them on the platform, we will continue consuming those as well. So just lastly, that spend the time in the U.S. and had met is seen large retailers. PDS is the only company which in the vendor base gets upon at the [indiscernible] level, you're leading the CEO that we large S&P 500 and Fortune 500 companies, which are seriously talking to periods and various opportunities.

No other vendor globally have this option that we are getting, to engage at the senior leadership level of the retailers and not only talking or supplying products, to provide services that we offer as a company. Either being a vendor in design or becoming a service partner or help launch that for them.

So Sanjay mentioned about Coles as well. So we are a [indiscernible] to Coles right now, but now our recent discussions with the management of Coles has been saying that, can you guys take Coles one of their existing brands, which is a $40 million brand right now to the end-to-end design development and sourcing which has a potential to become a $200 million brand in the next 3 to 5 years. The all periods higher design team and do the whole brand from end-to-end. So it is a very light up on the retailer side.

So I feel very confident that the U.S. business could probably because 50% of our turnover at a very high base of European to growing as well in the next 3 to 4 years.

[Unknown Analyst]

Last question, if I may. So just a follow-up. I just wanted your industry-wide view on the threat from a lot of the ultra fashion guys such as Shein and Temu on some of our incumbent customers and our industry as a whole. Just wanted your view on that.

[Pallak Seth, executive]

Yes. It's a very good question, very valid question also, basically Shein, just for Information, Shein is very closely associated with PDS at this stage in terms of the senior leadership is talking to us, about doing some brand business and other things. Because they see PDS is also a global partner for their needs, especially in the [indiscernible] China-based company and they need to launch brands that they're talking to us and they help them in develop brand, launch brand.

So that [indiscernible] just association, not previously as a competitor or they see us as a competitor, but as a potential collaborative for future opportunity. But I think a business model that develop is very fascinating, because they're almost a zero inventory model. They are putting small quantities on that side, seeing the customer reaction then go into bulk production within 2 to 3 weeks.

So Shein is definitely impacting other online retailers globally. We see in U.K. alone and European alone company like Boho, misguided, [indiscernible] which were the large online or the online retail is getting really impacted. We're also seeing companies which are in fast fashion, like New Look and a few others, which were taken to the young customer segment also getting impacted. But PDS does not play in that segment. So our customer base are not these value fashion retailers, all these two of the online retailers.

So we are not directly seeing the impact of any reduction in demand where these retailers in the rest are seeing. Our customer base have predominantly the large volume retailers who also supply value like the supermarkets in Europe are the large big box leaders in the U.S. are also these kind of specialty retail like [indiscernible]. So at that level, we have not seen too much market share being taken by people like Shein and Temu, but there's definitely something to watch and also to keep a careful eye on.

Another point I want to mention is that Shein supply chain today in China has almost become a commodity. Then there are 10,000 factories in China, which are now active suppling Shein, but we have excess capacity to offer that to other retailers. So PDS China operations has also launched a product of ultrafast fashion delivery to its customers, where we are able to create a software program, which is plugging in many of these out of 10,000 members, we feel around 500 or 800 vendors are factory [indiscernible] are compliant to previous standards.

So that software platform, taking those 500 or 800 factories on evaluating the final number at compliance requirements can be onboarded on PDS platform to provide the same sourcing that shein gets for its direct-to-consumer business for PDS to offer to its retail partners as well. So we are piloting that with one Indian retailer to begin with, but also some of the European and U.S. retailers started showcasing this other product.

So yes, there is some disruption, but as you've seen we start PDS to collaborate, that gives you just some perspective as well.

[Operator]

The next question is from the line of from Pritesh Chheda from Lucky Investments.

[Pritesh Chheda, analyst]

Sir, from your initial slides of the presentation where we have given GMV. So is it fair to assume that these new models of Software as a Service and agency business is where there is this whole interplay between revenue and GMV. So had you not done, let's say, the SaaS or the same clientele, if you had not done the SaaS or the agency business, then the GMV would be a part of your revenue being the better design sourcing on design of your sourcing. That's how we should interpret this?

[Sanjay Jain, executive]

Yes. I think if I understand your question rightly, we have reported for 9 months ended December '23, INR 10,724 crores of GMV. Yes. And the revenue from sale of goods is about INR 6,829 crores, and there's other operating income of INR 327 for revenue, INR 7,517 crores. Now specifically to answer your point, the agency sales have been INR 982 crores for the 9 months, and the source, which as we said, is about 90% growth over the same period last year.

Sourcing as a service sales are at INR 2,912 crores, which is a GMV that we handle a growth of 262%. So on the INR 981 crores on agency, on the sourcing as a service of INR 2,912 crores, it is an average 4% to 5% that we get if that gets booked into our revenue. So therefore, to answer your question, this is a difference of INR 38 crores in the GMV and in the revenue for the 9 months period.

[Pritesh Chheda, analyst]

Okay. And the same way when we look at the GP number, so you have a gross profit to your revenue decline of 9% is there, but your GP has grown in 9 months and GP has grown in the quarter 3. So now that's a function of the fact that the SaaS and the agency business has grown which wouldn't have the revenue, but only would have the GP as the profitability element to it. Is that interpretation correct, sir?

[Sanjay Jain, executive]

I think there are, yes, partly right. There is Ted Baker that got added in the current quarter -- current or the full quarter of Ted Baker business, and that is relatively speaking a high gross margin business. That is one factor to gross margin enhancement. And yes, secondly, for me, both the sourcing as a service and agency business are much, much higher gross margin business. And whatever pretty much is the revenue actually gets falling into gross margin. Yes, partly what you said is the reason, partly Ted Baker is the reason.

[Pritesh Chheda, analyst]

Okay. My second question is, sir, with respect to your operating profitability, a lot of the GP has got consumed in two heads, the other expenses and the employee. I heard your comments about your people increase in U.S. and Indian markets. But if you could just give a little bit more elaboration in terms of what kind of teams you have increased, because the increase as a percentage of sales in both these heads is fairly high. So we need to understand that part.

And second, you were running your business earlier at about, let's say, 3, 4 or between 3% and 4% EBITDA margin. And at that time, the cost of borrowing in the system was less than 1% or 1.5%, whereas the margin is still the same, but the cost of borrowings have gone up for the same business, the ROE has become different. So how should we now interpret your business considering the cost of financing? So these are two different questions.

[Sanjay Jain, executive]

Yes. So I think on the first one, both Pallak and I would -- because besides giving the names, want to make use of benefit of Pallak there, in terms of the utility and the value that people are adding. But firstly, on the number bit on the first part, I think if I have to attempt -- for example, our -- there is approximately between the quarter 2 of this financial year and the quarter 3 of this financial year, there is approximately about INR 60 crores to INR 70 crores element of cost increase that has happened, and mainly about INR 12 crores to INR 15 crores in the other expenses, the remaining INR 45 crores is in the employee cost. So that's the increase that has sequentially happened.

And I think in the other expenses, there is a bit of travel that has gone up because we are increasing our engagement with the customer, we should see as a part of investment, that is what I mentioned. And other expenses are INR 177 crores in Q2 versus INR 191 crores in Q3. I think somewhere the midpoint is a sustainable level as we go ahead.

And I'm giving you answers more on Q2 versus Q3 because that is more like-to-like as compared to the same period last year, because same period last year, Ted Baker was not there. Same period last year, Gerry Weber was not there. So Q2, Q3 are comparable. So therefore, in the other expenses, from the INR 176 crores to INR 191 crores, somewhere closer to that is a sustainable level.

Employee costs increased from Q2 to Q3 of about INR 45 crores. I would tend to break it up in three parts. There is an element of about INR 3 crores, INR 4 crores, which is the wage increase that nearly happened for a month in quarter 3, in both our factories and greenland progress, and it takes a while for us to pass it on or engage with our customer when you engage with the U.K. and European customers, which is predominantly the ones that are occupying the two factories. One sees a decent possibility of passing it on.

But it's a bit of lag in the month of December, I had a INR 4 crores to INR 5 crores of element of that. Then there is an element of about INR 8 crores to INR 10 crores. Typically, whatever is the performance of last year, we make our best estimation, wherever feasible and we try and look for the incentive of people. But we always have some lags in terms of what you accrued and what you actually pay. There's an element of about INR 10 crores of incentive in that, which is a onetime that happens because of the high profitability.

As I said, we make our best estimation to accrue. But then there is a large element of about INR 25 crores to INR 30 crores, which is pertaining to the new people that we have actually got on board, and that is where before we go to the second question on finance cost. So this INR 25 crores to INR 30 crores that has happened because of the new people coming on board, I'm requesting Pallak to chime in and give you an insight into what -- who these people are and what are the potential benefits.

[Pallak Seth, executive]

Yes. So you've got two very senior industry veterans who joined PDS recently. A gentleman called Mark Green, who was the Director of Sourcing for Walmart for Victoria's Secret and most recently for PDS recently. So he's been in the industry 25 years. He just left PDS -- to join PDS look at as a U.S. strategy and expand increase our network in the U.S. Our new board member lady called [indiscernible] again, based in New York, she was the President of Centric Brands and for global brands for some other large U.S. companies, and has experience on network in the U.S., you see with all retailers. So she also benefit from joining us.

Another very strong industry veteran, a guy called Krishantha, he was the CEO of Epic, Epic is one of the large manufacturing groups in Hong Kong being $700 million. He was there for the last 4 years. Before that, he was in Walmart for the last 15 years. He's also joined our company to help this time in U.S. business in network. So PDS is finding opportunities with some of the most well-regarded, respected, female industry leaders who have multiple offer letters on the table from various companies globally. Choosing PDS as the right company because of our culture, because of our products that we offer, because of the infrastructure and ecosystem we have created, to come and join our business and help expand our services to U.S. retail end customers.

We also are planning, I think some in the Board meeting, we discussed about bringing one large American brand into India on terms of a wholesale basis. So we have another industry veteran who is [indiscernible] also joining us to take that large U.S. under the brand opportunity on a wholesale basis into the Indian market.

So we are very proud. PDS has become a platform not only for the best retailers and brands in the world, also for some of the banks who want to reduce the [indiscernible] small, medium size companies wanting to give us additional limits as a platform company to provide working capital financing to factory line customers, also some of the leading talent in our industry globally wanting to join us and offer services to the network, be the product PDS platform.

[Pritesh Chheda, analyst]

Sir, which means these costs are an ongoing cost, right?

[Pallak Seth, executive]

Yes, they are ongoing costs without any revenue. So once we keep going each of them, they are talking about $1 billion revenue, like Mark Greene, who's got a target that the U.S. business of PDS should become $1 billion in the next 3 to 4 years. Obviously, we're building blocks toward that. So yes.

[Pritesh Chheda, analyst]

So the operating leverage is then flowing, right now you were hit by the operating deleverage because of the cost. That's how we have to interpret these costs, right?

[Pallak Seth, executive]

Exactly. Because of the talent is available, this is once in a kind of tenured industry shift happening, because there are a lot of maybe suction happen in the U.S. retailer level? So the top talent getting available, there's a lot of cost cutting at the U.S. retailers that we are doing to require a company to provide services.

For example, I was in New York had a meeting with Tommy Hilfiger himself, the guy who basically is one of the most successful and obviously, valuable retailers globally. And his that comment to Pallak, have not seen -- he has not seen a company like PDS in his career. He's one of the most formidable retailers around the world. He said the services and the kind of product offers we are giving, you've never seen it, and we see there's a huge potential for PDS to do many things and even he's like, let's talk we just see an opportunity coming on a regular basis. Because PDS is the first companies who will get in touch to take care of those opportunities.

So I think our U.S. business has not happened last many years, but with the structural changes happening with the investments and the quality of people we are making, it could overtake our European and U.K. market in next 3 to 4 years -- 3 to 5 years, that we have to be cautious but -- the building blocks are the fine.

[Pritesh Chheda, analyst]

ROE?

[Sanjay Jain, executive]

Sorry, just to -- one point to add, I think, pertaining to your previous question around difference in GMV and our own revenue from designer sourcing. I don't think we're cannibalizing our own business. When we, for example, Asda as a client, what we have been into doing with them in design-led sourcing and which is continuing healthy. Of course, the market conditions have impact quarter-to-quarter, but the relationship is well intact.

And it is that tech pack business, tech pack means the customer is actually giving designs to factories. And this is a tech pack business that actually typically we are taking over under our sourcing as a service contract. Where we are supporting the retailer reduce your cost structures of running their own offices or having people onboard in management factories.

So tech pack, I am taking over gradually from retailers under my offering sourcing as a service. My design like sourcing business is very much intact, and it's going to grow as well in line with the market. Just to clarify on that particular point. And I think on the finance cost, if I got, and I'll also request Rahul to chime in.

Our debt utilization levels typically haven't gone up on an average basis as compared to the same period last year. It is the increase in the finance cost. So far, the base rate that has actually gone up. And in my opening remarks, I mentioned that one is probably also observing that the infrastructure witness a decline. So therefore, we should start benefiting in a quarter or two from the declining trends in the finance costs as well. Rahul, you want to add anything?

[Rahul Ahuja, executive]

So I guess, Sanjay you covered it, you're absolutely right. The base rate has almost doubled from the same period last year to where we are today. And even if you were to see during the year, there is a difference of almost 170 to 180 basis points of increased rate that we are witnessing. But as we do the journey during the next year is anybody's guess, sooner than later, this trend should reverse in the global markets, and we will then start to benefit from that as well.

[Pritesh Chheda, analyst]

May I ask [indiscernible] my clarification?

[Pallak Seth, executive]

Yes, please.

[Pritesh Chheda, analyst]

I understand the rate has gone up and the cost increase, but actually for the same business that you do and for cost that increases because of the financing, the ROE comes down. So is there a way to mitigate this? For the same business, our profitability becomes lower, right, our PAT margin because lower because in post. Is there a way to mitigate all this?

[Sanjay Jain, executive]

Yes. I think as Rahul was mentioning that we wrote a check of about INR 150 crores, INR 160 crores business in terms of working capital that we got into a whole, take the design group and so that's the one investment we made. And now a few months into getting this into a fold, we have got a nonrecourse factory line up and running soon in a month's time, but we got a line sanction from one of our leading banks, that would actually reduce the capital that we deployed by half. And therefore, from a return on capital employed, which eventually translates to return on equity, we believe whatever we invested, the numerator has started to happen in terms of EBIT. The nominate of the capital employed, we clearly see now an opportunity in at 30 to 60 days to try and squeeze it down by what we plan on the nonrecourse factoring facility.

[Pritesh Chheda, analyst]

Okay. Sir, I'll take this offline.

[Operator]

[Operator Instructions] And the next question is from the line of Rishi Modi from Marcellus Investment.

[Rishi Modi, analyst]

Sanjay, can you hear me?

[Sanjay Jain, executive]

Yes, please.

[Rishi Modi, analyst]

So Sanjay, just a couple of questions. Firstly, on the Ted Baker piece, right? So if you could just give us the economics of how it's going in this quarter, how do you envision it going? How much is the GMV, how much revenue and gross profit, what are the costs sitting fixed cost -- sitting in there how much is our capital locked out there? And how will this flow over the, say, next 1 year or so?

[Sanjay Jain, executive]

So Rishi, as far as the Ted Baker business is concerned, like we have said earlier as well, it's been profitable from day 1. The business is largely has two components, which is the wholesale and [indiscernible] piece and it's been ramping up well since we got it on our platform around mid of June. We have -- in the 9 months period ended December, done about INR 345 crores of top line in Ted Baker with a bottom line PAT margin of about 7.1%.

As far as the split of the business is concerned, it's largely between wholesale and agency slightly 50-50. In agency, we get a fee of 10% of the business that goes through us. So we feel that as the market rebounds, it should have a rebound effect on this business as well, going forward. and it should perform consistently for us, both as far as top line and bottom line is concerned.

[Rishi Modi, analyst]

Okay. And...

[Rahul Ahuja, executive]

Capital required is concerned, I think Sanjay mentioned that -- it's actually capital employed is kind of a misnomer because basically, what we did was pay for the working capital, which is inventory and receivables, which was around $18 million from our internal approvals. And as our factory lines get into place, about half of that will be replaced by the factory lines.

So effectively, the net capital employed in this business from our side, which is working capital should be about $9 million to $10 million.

[Rishi Modi, analyst]

Okay. And what -- recently you write an article that the retail chain, which operates the stores of for over 21 in U.K. and Europe, right? They have gone under some issue that happened to the ABG and that retailer. So just if you could give an understanding of what's happening out there, Forever 21 or Ted Baker either these guys, the retailer has gone into some trouble or some premium to the ABG Group. So if you can just shed some color there?

[Pallak Seth, executive]

I think just a couple of points. Sanjay, sorry. I think the Ted Baker case study, we should I think the investor community. Yes, intake that this case study on how PDS what was paid for the asset by the New York IT company? What PDS can you pay for it after the recourse factoring? What is the bottom line we're expecting in the half in a we're expecting on this business?

So as Rahul has mentioned, from $18 million are working because of without recourse factoring, which could take some time to bring on board. And net capital will be down to $8 million, $9 million. And the profit or business is $2 million to $6 million, so in a $9 million capital employed between $5 million to $6 million for the year, the profitability of this kind of business model. So it's a highly profitable business model that can we multiplied into where is brand management opportunities around the world? Because New York IT companies are continuing to acquire various brands and you need operators like PDS come and wonder.

[Rishi Modi, analyst]

Yes. So I'm talking about the issue between authentic brands and AARC, it's a debt company which is running and that...

[Pallak Seth, executive]

Yes. I'm coming to that -- so I'm just clarifying the business model and the multiple on that income on a similar basis. So AARC was basically PDS [indiscernible], we basically, as a B2B business, decided that we're not going into retail e-commerce or concession, we will just take care of running the head office against which we get a commission of anything these retail offices buy from the factories, as a fixed commission of 10% on the FOB value and we run the wholesale, which is predominantly presold, so there's no inventory risk.

So PDS brought this business down into various -- maybe 10 global franchises, the retail operators in India with AARC China, there's someone in U.S. some in U.K., Europe, there's an operator called AARC. So AARC was unable to even get the financing in place to offer the retail stores and e-commerce and the concession that they were supposed to. So ABG basically has replaced them and come in themselves as an operator of the business. Which is a good news for PDS because in terms of having a counterparty like us, which is not a properly funded business, ABG has decided to run the business themselves for the time being. So we are now capitalizing the business so they're putting close to, I think, GBP 18 million into the retail operation to staple it correctly and then we will make it more stable and invest in a plan to grow.

ABG is a $40 billion today in retail IT banner. So for them, any brand to acquire the stability of the operation is key. They cannot have any issues in other operations. So ABG is the right decision than the counterparty in U.K. and Europe was not able to operate the stores correctly with the financing required. So they replace them and took over equity and running it themselves. So we are in a more [safer position] than we will refer to.

[Rishi Modi, analyst]

Super. Second question I had was on the deal wins that we've done on Myntra, Target and the Indian retailer whom we have tied up with. So how big you know opportunity in each one of these?

[Pallak Seth, executive]

These will all take time. But I think Myntra, probably for year 1 is around $15 million to begin with. Based on the business, obviously, can double, triple in the next 2, 3 years, depending on how the business goes. Target U.S. obviously is onboarded PDS. So we're expecting by Q4 '24, '25, we will start shipping the first orders in the first onboarding some factories right now. The Target U.S. is not going to onboard a company to do $1 million, $5 million, $10 million. The onboard of will be $50 million, $100 million. So that can ramp up pretty quickly.

So the discussions are happening multiple engagements are happening with them at various levels. So as I said, about $100 million [indiscernible] be valued last 18 months in the [indiscernible] average. So we feel it could become 1 of our top 10 accounts in the next 2 to 3 years.

[Rishi Modi, analyst]

Right. And this Indian retailer that you all tied up with who start and how big of an opportunity is that?

[Pallak Seth, executive]

That is still under you were discussing in the one of finalizing [indiscernible].

[Rishi Modi, analyst]

Thirdly, the Noble acquisition that we've done, right, what's the FY '24 revenue run rate EBITDA PAT? FY '23, I can understand it looks cheap on FY '23, but things are not the same since last year. So just trying to get a hold of how in the -- of the...

[Pallak Seth, executive]

While Sanjay can tell the figures, we just mentioned from my perspective, Noble has been seen as a top maybe 5, 7 manufactured in Sri Lanka right now with a very good customer base and a very high reposition. So the halo impact on [non-Lanka] operation by business and there's stake in a company like Noble has already added more accounts for [indiscernible] social business. For example, so be a big U.K. retailer supermarket was not currently engaging with PDS after that acquisition is now on wired or other vendors see the option or PDS also having some [indiscernible] manufacturing assets.

Similarly, Primark, which is obviously one of the largest volume retailers in the world, is under discussion with PDS to basically become the exclusive vendor or in Sri Lanka with a potential volume of $100 million in the next 2 to 3 years. So all these building blocks we do as a company, to in small sites in businesses that are very low value compared to a book value has a very good [indiscernible] impact on our overall operation.

So coming to the steps of Noble business [indiscernible] mentioned.

[Sanjay Jain, executive]

I was on mute from my end. Yes, I think that Pallak also touching upon that the ROI for us from such an investment is not just into the factory for we're acquiring a stake also the effect. So -- but to answer specifically, we believe current year profitability of the factory would be under pressure. I think it did an EBITDA of about INR 15 crores in FY '23 and about INR 11 crores PAT in FY '23.

And from the current quarter onwards, if I have to paint a picture of next 4 quarters, we believe we should be running the factory almost at the same level, in the last 3 quarters have been a bit troublesome because of the factories running at low capacity because of the global conditions, but we are positive that from current quarter onward to next quarter, we should be running the factory at the same level at which we acquired the profitability, of course.

[Rishi Modi, analyst]

Okay, super. So finally, just to clarify you said, INR 30 crores you have spent in bringing in, I think, three people, one Mark Green, second Sandra Campus and one other guy from Hong Kong. So these guys are getting paid like USD 4 million per year? Or how is the working out there like this USD 4 million sounds a bit huge for an annual compensation?

[Pallak Seth, executive]

Yes, I think there is an element of joining bonus or an onboarding bonus, which get expensed off. And then what we have shared with you are the people who are the leaders that typically been their own team of 2, 3 people or we give them 2, 3 people. So therefore, INR 30 crore is not just the impact of these people. But it's a team that one has taken on board.

[Operator]

The next question is from the line of Varun Gajaria from Omkar Capital.

[Unknown Analyst]

I just had a question on the Ted Baker and Gerry Weber integration. Now it didn't seem like in this quarter, our costs went up substantially because of the integration of these businesses. So how are the costs expected to miss in the coming quarters? Like are we balanced full integration? How is it faring and how will the margins look like?

[Sanjay Jain, executive]

I think as Rahul gave you an insight into overall Ted Baker financial, and you also mentioned that we expect the traction to continue. In quarter 3 that we reported I think it will be fair to say that both the Gerry Weber getting into a full and Ted Baker, the cost structures have now have actually been captured into the P&L. So it is now normalized in terms of Q3, Q4 onwards, we don't anticipate any incremental costs getting added up.

For example, if I have to speak the Gerry Weber revenue is like 9 months is close to about $22 million to zero. But now on a quarterly run rate to stay close to the portion you ask, the cost of fully cash set, we should see the benefits now flowing in on top of it.

[Operator]

The next question is from the line of Tiraj from Ratna Traya Capital.

[Unknown Analyst]

Just one clarification question. The new members were been brought out the senior members, they have basically been brought out on to our goals? Is that how we should understand this, or is there a different sort of a commercial understanding there?

[Sanjay Jain, executive]

So one of them is on our board, wherein the payment is through a sitting fee, overall of they're playing a role on the listed company board as well on the subsidiary boards for example, the new Board member is also on the board of the U.S. subsidiary to support the U.S. business. So that's on the board part. But beyond that, the others are actually in the capacity of employees or consultants, mostly employees that are in the view of employment there on board.

[Unknown Analyst]

Got it. Understood. Just a couple of clarification questions. One, on the factoring side, is it probably correct to understand that once the factoring comes in, that would have a commensurate impact on the gross margins, your realization should go down a little bit there, given that you would get that money earlier and get it factored? Is that right? Or am I missing something there?

[Sanjay Jain, executive]

In fact, it's an interesting point that to [two factors] to actually -- the factoring cost is actually get into my finance cost. So to that extent, it does not impact the gross margin negatively at all. And when I said two factors, in fact, there's a potential upside to gross margin because I am able to get factoring money much sooner, and then I'm able to sit across the table with my vendors and pitching for early payment discounts.

And to the extent that I am actually able to get EPDs, which are actually much higher than the financing cost, that EPD I get a benefit in the cost of goods sold, which are adjusted from there. So therefore, increased factory gives me a leverage to actually negotiate better and therefore, improve my gross margins.

[Unknown Analyst]

If I just summarize that, essentially, the gross debt would go down. Finance costs also would come down by a little bit, not by a large one, but you'll also get maybe some benefit on the gross profit. Is that the three effects of the factoring?

[Sanjay Jain, executive]

Correct. The finance costs may partially go up because when I'm availing the nonrecourse factoring, then I'm actually raising money, which has a cost, so the finance cost could go up and the capital employed would come down, the debt would come down. And now that I have more money into my account, my flexibility to sit across the table and get an EPD goes up. So gross margin accretive, yes, capital employed reduction, yes, finance cost goes up because I'm really more [factoring].

[Unknown Analyst]

Finance cost in comparison to the base quarter right now where instead of factoring, we were actually drawing down an overdraft. So in that comparison...

[Pallak Seth, executive]

Correct. So you're right, if you compare it with the overdraft getting replaced by factoring, then the impact is not there on the finance cost. However, if you were to compare it with internal accruals funded deal getting replaced by factoring, then my interest cost will go up.

[Unknown Analyst]

Incentives that you pointed out that we might have sort of proportioned a smaller amount. Is the right understanding then this INR 10 crores should have been around INR 2.5 crores each quarter for the last 3, 4 quarters. That's what -- that's what would have been instead of the INR 10 crores this quarter, maybe INR 7.5 crores should have come in the last 3 quarters? Is that the way we should get that?

[Sanjay Jain, executive]

Yes, we can at least say that one could have -- as I said, we try and use the best efforts to factor it in. But to the extent there is any gap and it gets paid off. It got paid off as a one lumpsum in this quarter, and therefore, it correctly should typically get amortized over the entire year.

[Unknown Analyst]

Understood. Understood. So last question, the Gerry Weber business, can you elaborate a little bit more about how should we look at that business that they fall into wholesale agency -- can you just talk a little bit more about that business and going forward, how that would look like?

[Pallak Seth, executive]

Well, there is one like of design like sourcing where we make a design, get the orders and sourcing of the services, I get the designs and I'm actually running an office on behalf of the retailer and charging my fee for handling volume for them. And now there is a third category, which is the carryover business is complete sourcing solution. The retailer is saying, I have got nothing to do with designing or sourcing or anything, you please 100% take it over. And that's how we actually got this contract from Gerry Weber in Germany. And we, of course, when we have taken this contract from a credit assessment perspective, we've done our management of risk by way of an escrow account with the customer of heating some deposits, which reflects typically the inventory that we may have in transit or run our books before they get passed on to the customers. We also kept the right with us but I can use this inventory for others as well. So we've mitigated our risk when we have entered into doing completely outsourcing for retailer.

[Unknown Analyst]

Just on cash, how would this be from normal brand management that we would do, say, in other scenarios like Ted Baker,what would be the difference between this contract and a brand management contract?

[Sanjay Jain, executive]

As Rahul was answering that 50% of revenue stream of the Ted Baker is -- for example, the agency business wherein -- while there are agents appointed or franchisee appointed by Ted Baker -- ABG for Ted Baker business, for example, a name that resonates everybody in India is a retable fashion who's running Forever 21 and run Ted Baker as a franchisee. So there -- now to answer the question, Ted Baker group exactly is facilitating the designs for the government that they are getting sold in the stores. Ted Baker do that PDS is running is also facilitating the management of the factories, facilitating. The factories are billing directly to the retailers there. So for performing the service of designing, for performing the service of managing the factories or managing that traffic and actually getting a 10% agency fee. So that's a difference. So I'm not buying and selling inventory. It is being directly billed and while it is getting paid for my service. That's the difference between part of the Ted Baker business, which is the agency business versus a complete sourcing solution.

On the Ted Baker [indiscernible] bit, the wholesaling wherein I am actually buying goods on my books, and I like selling it while there is the case of [an inventory bill]. But again, in line with PDS philosophy, it's a presold kind of situation. A, it is a wholesale business. It is not a B2C business. I'm not running retail stores there. I can take it to the greening retailers who actually allocate space for Ted Baker brands to be laid out.

And then typically, we tend to engage into presold orders so that I know that there is a visibility, and that is where I'm getting into an inventory that I'm buying on the books and then selling it to the retailer.

[Operator]

Ladies and gentlemen, due to the time constraint, we will take this as the last question. As that was the last question, I would now like to hand the conference over to Mr. Sanjay Jain for closing comments.

[Sanjay Jain, executive]

Thank you, team for supporting us on the logistics of the call. Thank you so much, ladies and gentlemen, for joining into our investor call, and we look forward to once again engage with you at the end of the quarter of earnings call. And have a good afternoon and all of you, and stay safe. Thank you.

[Operator]

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

[Pallak Seth, executive]

Thank you. Bye-bye.