PDS Ltd is a 24 year old almost debt free company engaged in trading of garments, investment holding, design, development, marketing, sourcing and distribution of readymade garments of all kinds and other consumer products worldwide.

PDS Limited

Current market price on the date of publishing this report-: 350 Rs

Introduction

Incorporated in 1998, PDS was earlier known as PDS Multinational Fashions limited. Company was originally engaged in trading of ready to wear apparels, providing services to group companies in exports and sourcing & distribution of their products. Now the company has diversified itself as a sourcing as a service provider.

The Company is a sourcing platform of design-led sourcing and manufacturing of consumer goods, catering to world’s leading fashion brands and retailers having its presence in over 22 different countries. From a single entity to a federation of entrepreneurs to a collaboration platform, the company had undergone significant transformation. It has three distinct business verticals involved in sourcing, manufacturing and PDS Venture Tech Investments.

PDS stands out as a unique platform in the fashion industry, offering unparalleled opportunities worldwide. Retailers are increasingly turning to PDS as a preferred choice to engage in strategic discussions and shape their strategies. PDS aims to become an integral part of retailers’ strategies rather than merely selling to them. This approach has created a vast array of opportunities for PDS in the sourcing business, as retailers seek to restructure their operations and entrust specialized players to manage their back-end processes.

Today PDS Limited (PDS) is a global consumer-driven manufacturing and sourcing platform serving the world’s leading brands and retailers. Company’s operations are spread across 22 countries, 3000+ employees, and a network of 50+ offices with over 150+ designers

Company’s Bangladesh facility launched a washing plant funded by the Good Fashion Fund, an impact fund initiated by the Laudes Foundation. This supports PDS’s commitment to implementing state-of-the-art technologies and promoting sustainable fashion practices.

Recently

• PDS has expanded its production capacity by opening a centralised cutting unit in Sri Lanka.
• The company intends to extend its production base in Egypt and India, with prospective acquisitions in India being considered.
• PDS has announced the purchase of Transport Partner Limited, a Bangladesh-based logistics company.
• PDS, as a platform company, provides design-led sourcing, brand management, production alternatives, and shipping services, which increases client loyalty.
• PDS may hold strategic conversations with Fortune 100, S&P 500, and DAX 50 firms to match their strategy and future roadmaps.
• PDS Indian and Sri Lankan subsidiaries are certified also as Great Place to Work.

Strategic Partnerships

PDS, a trustworthy sourcing partner, provides worldwide sourcing solutions while maintaining financial stability and a strong balance sheet. Their sourcing as a service model has gained popularity, with contracts totalling more than $1 billion in retail value inked. This year, PDS hopes to manage roughly 50% of the merchandise value.

Furthermore, John Lewis, a well-known UK retailer with a $10 billion revenue, has collaborated with PDS affiliate Spring Near East in Turkey for sourcing management.

• John Lewis contract is expected to generate revenue of approximately $10-15 million, with agency commission included.

PDS has established three distinct revenue streams with a UK-based customer. The design-led sourcing business generates an annual revenue of approximately Rs. 800 crores. Furthermore, PDS secured a sourcing-as-a-service contract worth around Rs. 3,200 crores, expanding the scope of their business relationship. Recently, the company also obtained a contract to handle the home category for the same customer, with an annual potential revenue of about Rs. 1,000 crores. These multiple revenue streams showcase the breadth and depth of PDS’s partnership, solidifying their position as a comprehensive solution provider in the industry.

• Revenue streams from Ted Baker include handling global design with an estimated merchandise value of 90-100 million pounds (1.2x in dollars) and a 10% commission, as well as a wholesale partnership with an annual potential of 60-70 million pounds and a projected 35% margin.
• The sourcing-as-a-service contract, with a target of 50% fulfillment, could result in handling Rs. 4,000-5,000 crores of sourcing, translating to revenue of Rs. 160 crores.
• In total, the estimated annual revenue visibility from these contracts is around Rs. 1,600-1,800 crores, indicating a 15-16% increase compared to the current annualized top line.
• These figures reflect the company’s growth and scaling up of new contracts.

Gerry Weber, a big German retailer, has developed a strategic cooperation with PDS. PDS will take over Gerry Weber’s sourcing activities in Asia and manage their business through its German subsidiary Techno Design. This relationship has the potential to generate more than $100 million in sourcing volume, which will help PDS’s bottom line in the future years. PDS’s successful SaaS approach enables more customised solutions.

• Contracts with Ted Baker and Gerry Weber combined represent around Rs. 1,600 crores in revenue.

PDS has also just formed a strategic alliance with Authentic Brand Group, a major US company with over $30 billion in retail sales.

Furthermore, PDS bought Ted Baker in the United Kingdom and now acts as a strategic partner, overseeing the Ted Design Group, which encompasses the Ted Baker headquarters and wholesale operations in both the United Kingdom and Europe.

Before we understand the PDS’s Business Model..

Q: What is the difference between design-led sourcing and sourcing as a service? A: Design-led sourcing is an order-to-order vendor model providing design, development, and sourcing services, while sourcing as a service involves running the retailer’s offices and managing their entire business in a specific market on a long-term basis.

Q: How does PDS facilitate sourcing as a service? A: PDS acts as a platform, providing high governance standards and operational support, running the retailer’s offices, handling sourcing operations, and managing the entire business in specific markets.

Q: How does PDS’s sourcing as a service differ from design-led sourcing in terms of customer engagement? A: Design-led sourcing involves a six-month strategic relationship for new product development, while sourcing as a service establishes a long-term partnership where PDS takes over the retailer’s operations, providing comprehensive management.

Q: How does PDS’s sourcing as a service benefit retailers? A: Retailers can expand into new geographies without establishing offices, as PDS becomes their representative, or outsource the management of existing operations. PDS ensures high governance standards, attracts top talent, and provides efficient and reliable sourcing operations for retailers.

Q: Can a retailer avail both sourcing as a service and design as a service from PDS? A: Yes, it is possible for a retailer to utilize both sourcing as a service and design as a service from PDS. Typically, around 60% of the retailer’s business is handled through sourcing as a service, while the remaining 40% involves third-party design. PDS offers a menu of services, and retailers can choose the combination that suits their needs.

Business Products

PDS offers four main services: own manufacturing, vendor model (design-led sourcing), running the retailer’s offices (sourcing as a service), and brand management. These services cater to different aspects of the retailer’s business, allowing them to choose the specific solutions they require.

Sourcing

PDS provides a wide range of products, spanning from apparel to home and everything in between, offering a comprehensive solution to our retail partners. By capitalizing on its global strengths and diverse product offerings, PDS delivers end-to-end services from design to production. Its portfolio includes

Apparel: Offering an eclectic mix of clothing options for women, men, essentials, children and babies. Team of designers across the globe identifies the latest trends turns them into highly commercial designs.

Footwear:High on quality as well as style, wide range of footwear options drawing in design expertise from Asia and Europe.

Accessories: Cater to a wide selection of accessories for women, men and children. Extensive range includes but is not limited to bags, belts, hats, scarves and winter warmers.

Home goods: Creating beautiful, functional and affordable products for the home. PDS’s concept of home is truly global as it select, design, develop and source products from all over the world.

and more.

Brands

By providing a range of services, PDS positions itself as a comprehensive solution provider rather than just a factory in Asia. This approach increases the company’s penetration and stickiness with retailers, as they see PDS as a strategic partner capable of addressing their various needs in the fashion industry.

Manufacturing

The company’s in-house manufacturing facilities, which include over 130 well-defined production lines, are strategically placed in Bangladesh and Sri Lanka. Its facilities prioritise adherence to tight norms and compliance requirements in sectors such as formal tailoring, blazers, school clothing, shirts, softs, and kidswear. The company ensures that its buildings, equipment, and engineering/fabrication processes are safe, including fire and electrical safety design in line with ACCORD/ALLIANCE/BNBC requirements. Its facilities are accredited by WRAP, SEDEX, and BSCI, and have LEED Platinum and Gold certifications, demonstrating our dedication to compliance, ethical practises, and health and safety procedures. With a capacity of 5,000 machines, the firm can produce around 36 million pieces each year.

PDS Ventures

PDS Venture Tech Investments plays a crucial role within the group, driven by a strong belief in the power of innovation. PDS actively invests in early-stage startups, either directly or through partnerships, particularly in their Seed and Series A rounds. These investments are focused on innovation, sustainability, technology, and direct-to-consumer digital brands. PDS seeks strategic alignment in the fashion, technology, and sustainability sectors, investing based on key parameters that align with its overall vision and contribute to future solutions.

Notable collaborations and direct investments include the

True PDS Fund, which emphasizes sustainable and digital-first fashion retail brands;

the Apex Black VC Fund, supporting AI/ML-backed deep tech companies driving scientific breakthroughs and disruptive business models; and the

PDS Impact Fund in association with Yellow Octopus, a Circular Fashion Impact Fund dedicated to investing in sustainability throughout the fashion supply chain. These initiatives aim to enhance customer engagement, improve retention, and foster new business development opportunities.

Capex

• Company is expecting in total $10 million outlay for the year FY24.
• The reason for not opting for a full greenfield capital expenditure (capex) is that setting up manufacturing in Egypt would have taken five years to break even and generate revenue of $25-30 million. However, by investing in an existing business with strong customers and a large asset base already generating over $100 million in sales, the company can achieve faster growth and cost savings. The low valuation of the business and the option to increase the stake over time make it a mutually beneficial opportunity for both the company and PDS.

Financials

For the year ended March 23

• PDS achieved a 20% growth in the financial year ending on March 31, 2023, with a top line of Rs. 10,577 crores.
• Gross margins expanded by 53 basis points to 16.7% compared to the previous year.
• EBITDA grew by 40% from Rs. 327 crores in FY22 to Rs. 459 crores in FY23, with EBITDA margins expanding by 64 basis points to 4.3%.
• EBIT increased by 25%, including gains of Rs. 36 crores from the sale of real estate property in FY23 and around Rs. 41 crores from the sale of real estate investment property in FY22.
• Profit before tax increased by 15% despite an increase in interest costs during the year.
• Total gross debt decreased from Rs. 623 crores in the previous year to Rs. 601 crores this year.
• Interest costs rose from Rs. 33 crores in FY22 to Rs. 74 crores in FY23, attributed to the increase in borrowing costs.
• Net debt remains in a comfortable position, being negative.
• Sourcing segment, accounting for 96% of top line, achieved 19% growth with a top line of Rs. 10,105 crores.
• Sourcing business reported an EBIT of Rs. 366 crores, an 18% growth compared to FY22, with a Return on Capital Employed of 48%.
• New verticals contributed Rs. 614 crores to the top line, with a PBT loss of Rs. 51 crores due to their gestation phase.
• Manufacturing segment achieved 28% growth with a top line of Rs. 703 crores and reported a PAT margin of 2.6% in FY23, marking the first full year of profitability.
• Net debt remained negative, with net cash of Rs. 128 crores compared to Rs. 41 crores in the previous year.
• Operating with negative 2 days of net working capital days, with a focus on optimization.
• Company delivered a Return on Capital Employed of 44% and Return on Equity of 29% in FY23.

Management’s comments

With its unique platform model and a wide range of services, the Company is strategically positioned to engage with retailers on a global scale. The immense opportunity for growth in the mid- to long-term outweighs any short-term demand slowdown concerns. Although there may be some softening in demand over the next 6 months, the Company’s current initiatives are not factored into the next financial year’s budget, indicating their potential for significant impact in the coming years.

Despite having signed multiple partnerships and having a strong outlook, the company predicts single-digit revenue growth in FY24. The prudent approach to this counsel stems from a desire to be prudent and careful. While its management is optimistic about its prospects and wants to exceed this prediction, it is keeping its expectations low for the time being.

Despite market volatility, the Company retains its bullish view and confidence in doubling its top line by FY27. The current hard climate has created interesting prospects, which the Company is translating into long-term contracts. As a result, the Company is committed to attaining a twofold growth in turnover during a five-year period from FY22 to FY27.

The finance cost for the year increased by Rs. 40 crores, with 25% attributed to an average gross debt increase and 75% due to higher LIBOR or SOFR base rates. The decision to increase gross debt utilization by 25% was driven by the opportunity to obtain early payment discounts from vendors. Additionally, the analysis shows a 50 basis points improvement in gross margin, with approximately 25% of this increase resulting from the early payment discounts. If interest rates decrease in the near future, 75% of the interest cost is expected to be positively impacted. The management’s focus is on optimizing cash utilization to reduce borrowings and maintain positive net debt.

In Q4, Company handled a sourcing-as-a-service merchandise value of approximately $125 million, equivalent to around Rs. 1,000 crores. For the full year, the total contract value was Rs. 8,200 crores, out of which PDS handled this amount. Going forward, PDS aims to scale up and approach the 50% level in the current financial year.

PDS is being approached by top global consulting firms like Bain and Alex partners for strategy and restructuring partnerships. These firms are aligning with PDS’s long-term objectives and referring clients to the company. PDS’s focus is on managing growth using internal cash flows, avoiding inventory and credit risks. Therefore management reinvest its profits cautiously without taking on debt or tapping into the capital market for expansion. The company has no long-term debt and maintains a low long-term debt-equity ratio.

Going Forward

The company achieved a remarkable top line of $1.4 billion in the past 12 months. Additionally, securing a sourcing-as-a-service order of over a billion dollars, along with the recent deals with Ted Baker and Gerry Weber, highlights the significant volume of fabric and trims that PDS handles. This scale of operations is expected to yield substantial purchasing efficiencies, positively impacting company’s gross margins in manufacturing. It’s important to note that any variations in quarterly results are likely due to a specific mix of factors and not indicative of a broader trend.

Buyers are actively engaging in discussions with PDS regarding manufacturing locations such as Bangladesh, Sri Lanka, India, or Turkey. As a result, for the upcoming spring-summer collections in February-March ’24, orders are expected to be placed by September-October ’23. While the immediate and next quarters may be slightly affected by global circumstances, positive signals indicate that the second half of the year will see significant improvement compared to the first half. This positive outlook is particularly relevant for our ongoing design-led sourcing business.

Conclusion

In conclusion, PDS Limited a 24 years old company, with its extensive experience in the apparel industry, global presence, and in-house manufacturing facilities, has positioned itself as a formidable player in the market. The company’s strategic investments in technology, such as the implementation of a costing tool, showcase its commitment to operational efficiency and staying ahead of the curve. By leveraging the combination of cutting-edge technology and skilled personnel, PDS is well-equipped to handle increasing business demands. Furthermore, its strong financial performance, focus on optimizing working capital, and track record of delivering growth demonstrate its potential for long-term success. PDS Limited’s impressive 20% growth, combined with its remarkable achievement of negative working capital and improved inventory, receivable, and payable days, underscores the company’s effective utilization of technology and strategic investment in working capital optimization. These factors coupled with management’s vision of doubling the turnover by 2027 position PDS as an attractive prospect over long-term exploration.

A WORD OF CAUTION: While the management’s optimistic outlook, potential reduction in interest rates, and margin improvements suggest long-term prospects for PDS Limited, it is important to note that the company operates on narrow profit margins. In the worst-case scenario, this could significantly impact the company’s financial stability. Therefore, it is advisable for investors to exercise caution and avoid excessive exposure to PDS or any similar dark horse stocks.