PDS Limited (PDSL) Q2 FY23 Earnings Concall Transcript

PDS Limited (NSE:PDSL) Q2 FY23 Earnings Concall dated Aug. 02, 2022

Corporate Participants:

Sandeep Kumar Agarwal — Lead Analyst

Pallak Seth — Vice Chairman

Sanjay Jain — Group Chief Executive Officer

Analysts:

Chinmaya Bhargava — LSSB Capital — Analyst

Apurva Bahadur — Investec — Analyst

Dhruv Bheda — Jay Ram Stock Brokers — Analyst

Vineet Jain — Individual Investor — Analyst

Chirag Jain — Individual Investor — Analyst

Shirish Pardeshi — Centrum Broking — Analyst

Riken Gopani — Capri Global — Analyst

Krunal Shah — Enam Investments. — Analyst

Presentation:

Operator

Ladies and gentlemen. Good day and welcome to the PDS Multinational Q1 FY23 Earnings Conference Call, hosted by Edelweiss Securities Limited. As a reminder, all participant lines will be in the listen-only mode. And there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions]

I now hand the conference over to Mr. Sandeep Kumar Agarwal from Edelweiss Securities Limited. Thank you, and over to you, sir.

Sandeep Kumar Agarwal — Lead Analyst

Thank you, Lizann. Good morning, good afternoon and good evening, everyone based on the geographies you are logging in. On behalf of Edelweiss Securities, I welcome you all to PDS Limited Quarter One FY23 Earnings Call. We have with us today, Mr. Pallak Seth, Vice Chairman of PDS Multinationals. We have Mr. Sanjay Jain, Group CEO; and Mr. Ashish Gupta, Group CFO; and Ms. Reenah Joseph, Head Corporate Finance, M&A and Chief IR. Before I hand over the floor to Pallak, I would like to highlight that the Safe Harbor statement on that second slide of that presentation is assumed to be read and understood.

With this, Pallak, over to you. Thank you.

Pallak Seth — Vice Chairman

Sanjay, you will be giving the presentation, right?

Sandeep Kumar Agarwal — Lead Analyst

Yes. Sanjay can also start, if Sanjay wants to start.

Sanjay Jain — Group Chief Executive Officer

Very warm greetings to all of you who have joined us on this call today, and a very warm welcome to our quarter one financial year ’23 earnings call. The quarter one investor update and the financial results are available on the company website and the stock exchanges. I would just like to draw your attention to the disclaimer that the discussions today may have forward-looking statements subject to certain risks, uncertainties, the other factors that could cause actual results to differ from those contemplated by the relevant forward-looking statements.

We are pleased to share that we have kick-started the first quarter of the financial year with robust growth of 44%, reporting topline of INR2,340 crores. This was accompanied by a gross margin of 15.9% and if we compare it sequentially with the previous fourth quarter of last year, it is actually a 78-basis point improvement. We reported an EBITDA of INR73 crores during this quarter, which has translated into a growth of 113% over the same quarter last year.

The EBITDA margin of the company increased by 102 basis points from 2.1% last year to 3.1% this year. This was driven by operating efficiencies, wherein the employee expense declined from 8.3% of topline in quarter one to 7.5% this year and other expenses declining from 6.9% of topline last year to 5.2%. In the quarter one of FY22, which is the quarter of last year, the Company also had reported a gain from sale of real estate asset in UK, which led to a gain of INR41 crore. If we adjust for this in the last year quarter, so that we try and do our comparable operating profit to operating profit, then our EBIT reported at 128% growth to INR57 crores with 2.4% margins versus 1.5% margins this year.

And apart from the real estate monetization that happened in the last quarter, there are also other two items, which I would like to explain, so that we facilitate you having a normalized PBT assessment. What has been reported on the whole is that in the quarter over last year, Company made a INR62 crores PBT and in quarter one this year Company made a 47 crores PBT.

But there is, as I said, in the last year INR62 crores, there is an element of INR41 crores gain from sale of real estate asset, that is first point that need to be normalized. Last year there was a INR2 crore ESOP cost in the first quarter, this year there is an ESOP cost of INR7 crores in the first quarter. As you know, Company has embarked on an ESOP plan and we believe the entire senior management across all our functions and verticals that we wanted to incentivized have been taken care of. We do not anticipate any large or meaningful use of allocations to happen, barring the ones in the normal course of business, but this is where ESOPs allocated. There is INR7 crores charge this year versus INR2 crores last year.

Company has also been investing into new businesses and we had a INR6 crores investment in the new business in the first quarter last year and this year we have doubled up to INR12 crores in the first quarter. And as you know, in our business, unlike any other company, the new ventures or the new investments are on balance sheet, in our case they are expensed out from the P&L. So, if you allow me to adjust for the real estate gains, if you allow me to normalize for the ESOP cost and the loss on new business investments, then the normalized PBT of the Company was INR29 crores last year and the normalized PBT of Company is INR66 crores this year. So from a 1.8% PBT margin we have moved to 2.8% PBT margin and these normalized PBT is actually multiplied 2.3 times from INR29 crores to INR66 crores. That was for our results on the whole.

Now, if you allow me to get into the specific segments, our sourcing segment, which accounts for 95% of our topline, 42% growth compared to the same quarter last year, and we achieved a topline of INR2,216 crores. Our sourcing business reported an EBIT of INR60 crores with a 59% growth as compared to the quarter one of last year and then ROCE of 42%. In the third quarter of FY22, when we got to communicate with our investor through our investor release, we had mentioned about PDS’s on-boarded new business teams, the potential to generate $300 million in sales and 4% PBT margin in three years from that time frame. That was our new investment into the as part of the sourcing business.

In the three-year journey, FY ’23 was our first year, and we have set ourselves a target that we would get to 30% of the $300 million in the year one. And we are pleased to share that our new vertical reported top line growth of six times. They were at INR23 crore in quarter one last year and they are at INR141 crores in quarter one of this year. So we are basically quarter one achievement and the visibility that we have in the coming few quarters. We believe we are on track to meet 30% of the goal that we had set for ourselves in terms of contribution from new businesses.

Further PBT losses attributable to the segment, which is the investment in new verticals. They were at 27% of the topline in the first quarter of last year and let’s say, 27% of the new business top line. And as the sales are increasing, the losses/investment in the new vertical is now 8.6% of the topline. So this trend of 27% to 8.6% is also a trend towards gradually we getting into a breakeven situation from our new vertical investment and then it start meaningfully contributing to our aspiration of deriving 4% PBT in three years.

Now moving on to our manufacturing segment. This segment reported a growth of 78%, with a top line of INR169 crore in quarter one this year as compared to INR95 crore in quarter one last year. The segment turned profitable in Q4 of last year and continues it’s profitable journey with a reported PAT margin of 1.6% in the current quarter. We believe now the manufacturing business will contribute to Company’s overall return profile, given our order book in hand, given our engagement with the customers. We feel positive that the business will continue to make money for all the quarters to come.

From a geographical footprint perspective, our US business has been continuing on a growth trajectory and it constituted about 18% of the top line in the current quarter, as compared to 11% last year. During this quarter, we had a net debt of about INR77 crores in quarter one, when the net working capital days were at three days. For the same period on June ’21 last year, the working capital days were two days, the slight increase of one day. This is a seasonal business as you know, the one-day increase from two days to three days is mainly on account of on one hand we have growth of 44%. We’ve also been trying to avail as much possibility of offering early payment discounts to our vendors and therefore while this benefit goes to our gross margin, but there is an increased finance cost. And this quarter end also coincided with Eid holidays in the first week of July and whenever there is a need, as I said, seasonality of the business, it lead to an accelerated payout to vendors as well. So these are some of the reasons Company would continue to remain focused barring the seasonality of the quarter, continue to remain focused at operating at nil or negative working capital.

The Company because of the operating performance that I just summarized for you, delivered a 30% return on capital employed versus 26% in quarter one of last year. And I’m saying 26%, this is normalized from the core operations. So as compared to core operations, there’s a 4% increase in return on capital employed. And the return on equity of the company is 28% in first quarter this year versus 22% on the normalized earnings of last year first quarter.

We have been, while we our efforts led to monetization of our real estate asset in first quarter of last year, Company believes there is potential for further monetization of one or two assets in the ensuing near future our efforts are continuing, while this non-operational, non-recurring, but as part of our balance sheet optimization, wherever there is an opportunity, we will continue to remain focused on that as well. And the financial position continues to be strong, providing a strong backbone for the Company to grow our net debt to EBITDA stands at about 0.3.

Now, moving onto certain corporate actions, the shareholders of the Company have approved a stock split in the ratio of five shares for every one equity share, and a final dividend of INR23.85 per share for the financial year ended March 31, 2022 in the AGM of the Company held on July 29, 2022. The record date of the stock split will be 29 August, 2022 and we believe basis the planning being done, the shares should tentatively get credited by the end of October ’22 subject to required regulatory approvals.

Lastly, there are various factors that have an impact on our business from rising cost, inflation, increased freight costs, macroeconomic and geopolitical factors impacting both developed market and also the developing markets. But we believe we have a robust platform and we have been well poised to face these challenging times by continuously identifying opportunities that are around us in ecosystem. We launched sourcing as a service, a customized and exclusive service offering and have already gained good traction with marketing retailers being on-boarded with long-term contracts. At present the contracts that we have in hand and the active engagement that we have with our customers should enable us handle for these customers incremental revenue of about INR8,000 crore. While we are providing this as a service to our customers, so what we get to taken a P&L as a service charge but as an important partner to our customers, besides the topline of the Company in the normal course from design as a service, brands and manufacturing, this additional activity that we strategically added in our portfolio have already enabled the Company logged in or very close to about INR8,000 crore of annual volume of business handling for our customers.

And given our platform-based approach and agile business model, we would always be gear up to cater to the diversified needs of our customers and hope to garner more traction with this new service offering. And while we believe in the short term, there are some headwinds, but the commodity input prices, the freights, have been kind of softening a bit and this quarter in our journey that we had shared with you, our four- to five-year journey, wherein we aspired to be a $2.5 billion enterprise, $1.2 billion, we believe this quarter has been a stepping stone towards four- to five-year journey.

And now our Vice Chairman, Mr. Pallak Seth and myself, along with our CFO and Reenah would be happy to take any questions you may have, please.

Sandeep Kumar Agarwal — Lead Analyst

Thank you, Sanjay.

Operator

Should we open up for questions? Hello.

Sanjay Jain — Group Chief Executive Officer

Yes, please. Go ahead, please. Let’s open up for question and answers, please.

Questions and Answers:

 

Operator

Thank you, ladies and gentlemen we will now begin with the question-and-answer session. [Operator Instructions] The first question is from the line of Chinmaya Bhargava from LSSB Capital, please.

Chinmaya Bhargava — LSSB Capital — Analyst

Hi, thank you for taking my question. Am I audible?

Pallak Seth — Vice Chairman

Yes, please.

Chinmaya Bhargava — LSSB Capital — Analyst

Yes. So I have a few questions. The first is on our US expansion. It’s very impressive seeing that it forms about 18% of our pie now, given that a few years ago, it was in the low single digits. So I know we got specific people to spearhead our expansion here, but could you tell me more about what led to our success?

Pallak Seth — Vice Chairman

Sanjay, I can take this.

Sanjay Jain — Group Chief Executive Officer

Yes, please. Go ahead.

Pallak Seth — Vice Chairman

Yes. So there’s a big migration of US business out of China at this stage. Most of the details are looking at China Plus One strategy and PDF has large strength of manufacturing sourcing various regions like Bangladesh, India, Turkey, Egypt. So lot of that business migration from China is helping us to get the business into these geographies that we have a lot of strength. Plus, secondly also we’ve identified and hired some very key resources in the US. We’ve got relationships with the large most professional retailers in the US like Walmart, Kohl’s, Target, Hanes, so some of those management team that joined us around 6 months to 12 months back are showing great results. So the structural shift in business moving from China to new regions, plus the right deal from PDS engaging with these people in the US on their doorstep has caused that business to increase, and we continue to grow in the years to come.

Chinmaya Bhargava — LSSB Capital — Analyst

Okay, brilliant. A follow-up here. This makes a lot of sense, but my question on our drive in this China Plus-One and the management team, is that are we winning market share from other sourcing companies or is it still the case where our major competition is the in-house sourcing teams of all of the clients that we serve? Could you tell me how much of the landscape is in-house and how much of it is currently outsourced?

Pallak Seth — Vice Chairman

I think most of the large retailers are setting up new offices earlier in China and Hong Kong, but for them to operate out of regions like Bangladesh and even in Egypt and Turkey and some of the other markets like Sri Lanka, where we have large presence for US business. It’s strategically not in their intent and also they do not culturally understand those markets as well as their past established relationship with China, which is going back 20, 25 years. So when they are looking at new geographies, they are trying to partner with the likes of PDS and very few companies like us exist globally, because of which we are finding them coming to us and partnering with us to set up manufacturing and sourcing in these regions.

Chinmaya Bhargava — LSSB Capital — Analyst

Okay. Has there been a large vacuum in the years, after Li & Fung, the various issues that they faced in the last few years, is there a large vacuum that we’re seeing?

Pallak Seth — Vice Chairman

Yes. Yes, there is a large vacuum because the traditional sourcing companies globally were based out of Hong Kong like Li & Fung, William E. Connor, Newtimes, some of these. So culturally they’re very aligned to China and Vietnam region, but globally, other parts of the world, it’s not easy for them to operate and also have the right relationship with the vendors and the management team to bring in the right people in other markets outside China and Vietnam. So there PDS has emerged as one of the strongest players in the industry, which are partnering with the best retailers to give them transparency and the right supply chain and working with them closely. So there is a big vacuum gap in the current landscape of companies providing these services to the large retailers who are trying to migrate the business out of China because of China Plus-One strategy…

Chinmaya Bhargava — LSSB Capital — Analyst

So our advantage is that we are present in these geographies that they aren’t in at all.

Pallak Seth — Vice Chairman

Yes. Present in these geographies long time with deep established route for many years. So that’s definitely helping us, plus we are also talking more strategic relationships, as Sanjay had mentioned, we a new business stream in PDS called sourcing as a service, that business being basically act as the retailer’s own office in these geographies. So we signed with Hanes Brands around six months back now and we started seeing great results. So there’s a big migration of business happening from China into countries like Bangladesh, where we are open exclusive offers for the retailer and all the business of the retailer in that region will go through their office.

Chinmaya Bhargava — LSSB Capital — Analyst

Am I correct in assuming that this helps them also in terms of compliance that they have everything in one place?

Pallak Seth — Vice Chairman

Yes. The reason these retailers want to partner with PDS because they believe that our governance standard on environmental social and also overall corporate governance is in line with the big retailers around the world. So if you see predominantly PDS customer base are the FTSE 100, S&P 500, DAX 30 retail businesses. So these companies are high governance standard, high compliance standards and they trust that company like PDS which is global in nature has been established for many years, it is a professional player in the global fashion supply chain industry is in line with what they would expect themselves as well. So we believe that if are passing their supply chain to PDS, their brand risk reputation is being managed as well if not better than trying to do it themselves.

So every retailer wants the financially stable partner to form an ESG. And honestly a very few company with our global size and scale exist today because of which we are getting huge traction. Another big retailer in the US called Kohl’s. They wanted to set up operation in Bangladesh to challenge Li & Fung’s operations, so PDS has chosen as a second partner. So very quickly in our business as soon as we have established its office, we would be more than $50 million, $60 million within the span of less than a year, which is going to continue to grow in the next couple of years.

Chinmaya Bhargava — LSSB Capital — Analyst

Okay. So we should be expecting more wins like this. I have one last question from my side. So Mr. Pallak, I’ve heard interviews of yours from the past, where you spoke about how during periods of headwinds, particularly in 2008, for example, PDS emerged stronger winning businesses from other companies that went bankrupt or lost market share. So even though we’re seeing headwinds currently in, possibly in the second half of 2022, is there any difference or what strategies have we taken on now after our learnings over the last decade to capture more market share?

Pallak Seth — Vice Chairman

I think PDS is in a very unique position. So the consolidation happening in the industry is really benefiting us. And if you see already in our first Q1 results, you’ve seen the big growth that has happened. So we see to a certain extend that trend continuing because some of the large agency deals that we’re discussing with retailers on sourcing as a service has also big traction on design-led sourcing business where lot of small-, medium-sized factors across Asia are struggling on working capital to finance the goods themselves. Retailers have the confidence, companies like PDS is on the doorstep providing them design, providing them the service, and also partnering with the right factories in Asia, providing working capital to those factories. So this kind of unique formula is not existing in our industry overall.

So for large retailers, we have becoming a global solution, one-stop shop from design to delivery. And with full EHV compliance and governance and large working capital limits with the large bank across Asia, and all that is leading to consolidation and growth from — typically whenever recession happens, PDS ends up doubling in size in next two to three years. This is what we saw in 2008 as a trend.

Chinmaya Bhargava — LSSB Capital — Analyst

Thank you so much for taking my questions. I’ll get back in the queue.

Pallak Seth — Vice Chairman

Thank you.

Operator

Thank you. The next question is from the line of Apurva Bahadur from Investec. Please go ahead.

Apurva Bahadur — Investec — Analyst

Hey, hi, sir. Thank you for the opportunity and congratulations on very strong set of numbers. Sir, wanted to understand, I think in last quarter when we spoke, you had highlighted that there would be margin headwind, right, given the global commodity and exchange rate situation. What’s your take now? Do you see the headwinds to continue in the current quarter of Q2, Q3 as well or is the situation improving now?

Pallak Seth — Vice Chairman

So I think there are two things, one, yes, there were margin headwinds because of commodity price increase, especially in cotton, polyester and obviously, energy, but the key in our industry is about gaining market share and getting more important to the retailers and becoming more aligned to their long-term strategy. So when headwinds come, a lot of small- medium-sized companies are not able to handle the pressure and will fall by the wayside. But PDS being a company which is global in scale and size and also has a ability, financial ability to withstand short-term pressures, retailers recognize this very well. They know that if there is challenging time, a lot of other companies also, a lot of other supply dealing will, probably will not be able to sustain or even deliver the goods in these times. So, our strategy was very clear, we should continue to align closer with the retailers, understand their pain points and become closer and make sure that we’re able to solve them. That is why we are seeing a big growth in the whole market share that we are gaining.

On the other side, commodity prices are cyclical. So we have already seen softening of a lot of commodity prices with some interest rate increasing, we have seen cotton prices reduced a lot and energy prices have also started slowly coming down. And also there is a big currency devaluation that has happened in a lot of the markets where we export from, for example, Sri Lanka, Bangladesh, even India, there’s currency devaluation happening. So we feel that with increased market share and lost turnover that we’ve gained plus commodity prices and all these currency devaluations coming together, our margins have started improving in the second part of the year.

The worst thing would have been that if you had lost business and led business go, which was clearly not the intent. So we gave clear instructions to all our companies, we have partnered with the retailers, think long-term, bring in as much business as possible, and then this temporary phenomena will go and we’ll become — emerge stronger with a much bigger order book, plus the ability to get back margins and [Indecipherable]

Apurva Bahadur — Investec — Analyst

Right. Sir, I think you briefly touched upon the next question as well which I had in mind, and that is on the demand situation for the end market. So are you seeing any impact of these headwinds on demand, especially in Europe, I think because that’s much more impacted due to the energy and commodity inflation.

Pallak Seth — Vice Chairman

So, I will answer this question in two ways. One is the US retailers are normally buying longer cycle. They are buying almost goods 12 months in advance. So their forecast obviously done on the demands they are seeing from COVID time and because they have already placed large commitments 12 months in advance, they had to get out of those commitments and buy less for the next few months.

Whereas on the European side, retailers are used to buying on a four-month cycle. So they were able to adjust themselves and they didn’t have too many cancellations and push backs, like some of the large American retailers had to do globally. Because of the life cycle of product and order placement these people do differently, that is one point. Second point is also on the whole cycle of the pricing. At the end of the day, we feel that we are in a strong position to withstand the special and work with the retailers and provide them the service that they need on this side.

Apurva Bahadur — Investec — Analyst

Sir, you said that US retailers typically plan 12 months in advance, so wanted to understand the structure of the contract. Do we fix the prices at the beginning of the year? Or is there any scope for renegotiation in case the commodity prices rise up?

Pallak Seth — Vice Chairman

So normally with the retailers, especially with the US, we are fixing the prices, but if there is a big adjustment in cotton, then the suppliers are normally going back like this time happened and getting up charges as required. Most of the details are accommodating if there is a situation, which is going to impact and as a one-off situation.

Apurva Bahadur — Investec — Analyst

Fair enough. And we are not seeing any demand in Europe, especially. It continues to stay strong…

Pallak Seth — Vice Chairman

No, we’re not seeing much demand there. We are seeing a consolidation happening because of which retailers are trying to work closer with us. And it’s a slide to safety, whenever uncertain times happened a slide to safety, that’s helping us. Plus secondly also, one of the important points is PDS customer base is a lot of the supermarkets and the discounters around Europe. So these guys typically in a recession, people are trading down and that helps us even gain more market share and business from these retailers. The demand hit is mostly coming in the middle segment of the market and some online players. So luckily, our business with middle segment has not been there for last many years. We focus on the discount and the supermarkets, which are the large S&P 500, FTSE 100, DAX 30 companies. So typically in a recession people trade down and the discounters sales improve, and that definitely has a positive impact on PDS overall.

Apurva Bahadur — Investec — Analyst

This is very insightful. You briefly touched upon again on our customers being largely departmental stores, so would you like to share the ASP of our apparel that we source, typical average selling price?

Pallak Seth — Vice Chairman

I think our typical average selling price is around $5, between $4.5 to $5. Woven garments is obviously — yes, FOB. Woven garments is much higher, jersey garments is much lower. But also we do lot of baby wear commodity, we do socks, we are multi-product company. So I think average selling price across categories will be different. So we do jackets and outerwear, which could be $25, $30, we do knitwear, which is $10 to $15 and woven bottoms will be $8 to $9, but a lot of Jersey is $3 and baby body suit, night suit will be of $1.50 kind of pricing. So it’s spread across the board.

Apurva Bahadur — Investec — Analyst

Okay. Where are you…

Pallak Seth — Vice Chairman

It’s between $4 to $5 will be the average. Yes.

Apurva Bahadur — Investec — Analyst

No, I think this is great. Sir, just one last question, if I may. And this is on — I think you’ve touched upon the contribution of new business with topline. I missed the number. I think it was INR141 crore now versus, if I’m not wrong, INR39 crore earlier.

Pallak Seth — Vice Chairman

Sanjay, [Speech Overlap]

Sanjay Jain — Group Chief Executive Officer

INR141 crore first quarter the year versus INR23 crores in the corresponding quarter of last year. It has actually grown nearly 6 times in terms of sales volume in rupees crores.

Apurva Bahadur — Investec — Analyst

And sir, what was the contribution from our new businesses of Hanes and S.oliver?

Pallak Seth — Vice Chairman

Hanes is beginning to contribute from this quarter. So as of now, it is not a very significant contribution. I think as quarter two, quarter three unfolds, we should get more, but I think the important thing here is for Hanes, it is a service charge that we are recovering, while on my sourcing, design-led service business, we get to the entire FOB sales with an average 15%-16% gross margin, in this business, we would be getting a service charge. And S.oliver, wherein the first year volume was expected at $30 million and due to the journey of $60 million that we are foreseeing in three years. We had locked in run rate of $10 million as of now in the last four months. So we are on track to do a billing of $13 million in this entire year. The first — last three months, rather last four months, because when we signed the contract it actually became active from February end of 2022. So we have clubbed in about $10 million of sales on S.oliver.

Apurva Bahadur — Investec — Analyst

Great. Sir. Thanks a lot. I’ll get back in the queue if I have more queries. Thank you so much.

Pallak Seth — Vice Chairman

Yes.

Operator

Thank you. The next question is from the line of Dhruv Bheda from Jay Ram Stock Brokers. Please go ahead.

Dhruv Bheda — Jay Ram Stock Brokers — Analyst

Thank you for taking my question. Can you just throw some light on what kind of arrangement that’s Poetic brands have with Forever 21. And how will it affect or how will it benefit PDS as a whole and what the risks associated with this partnership?

Pallak Seth — Vice Chairman

Sanjay, you want to take it or?

Sanjay Jain — Group Chief Executive Officer

No, you please go ahead, Pallak.

Pallak Seth — Vice Chairman

Yes. So, basically, Forever 21, there is a master licensee in the US with Authentic Brands Group, and they will searching for a partner for Continental Europe and UK. So PDS has become that one of our subsidiaries Poetic Brands has become a master franchise license holder for Forever 21. So, our strategy was some online sales, but predominantly selling through our wholesale channel which is going to be 90% pre-sold with the large retailers we work with. So we’ve basically got Brand in hand and then we talked to some of our large retail partners and looked at their appetite, that if PDS subsidiary was holding this brand, what would be their interest to buy goods from us under that label for them. So looking at the whole positive feedback, we decided to take the brand agency for Europe and UK. So we see very low downside risk because we are not taking much inventory there. But on the other side with these key retail partners where we already sourcing private label products will be also offering them a branded service, where our gross margins will be much higher.

Dhruv Bheda — Jay Ram Stock Brokers — Analyst

Okay. And can you just throw some light on the risks and what kind of revenue are you expecting in this segment, like specifically with Forever 21 over the period of, say, four to five years? If possible, if you can just throw in a number.

Pallak Seth — Vice Chairman

So there will be two risk in this business. One is inventory risk, which as I said, we are not going to be taking very — there’ll be very minimal sales them through online predominantly will be to pre-sold wholesale channel. And the second, this is minimum royalty that we have to pay to Forever 21 master holder in the US of around $2 million over five years. So it’s quite a small royalty considering the grand scheme of things, plus the back-to-back almost kind of commitments we have from all our retail partners. At the end of the day, I would say the risk is quite limited. It’s no large minimum royalty guarantees plus we’re not carrying any inventory at this stage. And the revenue potential, obviously, the royalty is around $2 million is around 10% in this kind of deals. So we need to do $20 million sales over five years, annualized, not I mean aggregated over 5 years, $20 million sales, pay the minimum royalty. But we are expecting these double or triple of that.

Dhruv Bheda — Jay Ram Stock Brokers — Analyst

Okay. Thank you, sir.

Operator

Thank you. The next question is from the line of Vineet Jain, an Individual Investor. Please go ahead. Vineet, we are not able to hear you.

Vineet Jain — Individual Investor — Analyst

Hi. I hope I’m audible.

Operator

Yes, sir. Please proceed.

Vineet Jain — Individual Investor — Analyst

Yes. So mine’s more requests than actually and then the management is very generous with answering all the questions, sharing a lot of details about the business so far. I wanted to request if it would be possible for you guys to share some more granular information on the important subsidiary, maybe the top eight or 10 in terms of contributions to topline. Because when we look at the performance of the different subsidiaries, there seems to be wide variation and some of them have gross margins as high as 40%, 45% whereas there others in single digits. So if it would be possible for the management to share some broad matrices on important subsidiaries, maybe the top 30% or 40% in terms of contribution to top line on a quarterly basis that would be wonderful?

Sanjay Jain — Group Chief Executive Officer

So, Vineeth, this is Sanjay here. I think, point well taken. We will on a half yearly basis try and facilitate foreign investors further insight into the top 10 verticals of PDS. At this stage, to answer your question, if I answer in $10 million, we had a top line of $1.184, around $1.2 billion last year. Our top 10 verticals contributed to 76% of the topline and almost the entire PBT and I’d say it has reported PBT which means there were smaller businesses, whose profit and my investment that went into new businesses gotten utilized. But net-net, 76% of the topline of the company came in from our top 10 verticals like Poeticgem, Design Arc, Simple Approach, Techno, Norlanka, but I’ve noted your data request and we will facilitate on a six-monthly basis, a further insight into our top 10 verticals in terms of sales and in terms of the contribution to the overall profit of the company as well.

Vineet Jain — Individual Investor — Analyst

Thank you very much.

Operator

Thank you. The next question is from the line of Chirag Jain an Individual Investor. Please go ahead.

Chirag Jain — Individual Investor — Analyst

Hello. Am I audible?

Operator

Yes, sir.

Sanjay Jain — Group Chief Executive Officer

Yes.

Vineet Jain — Individual Investor — Analyst

So firstly, I had some question on the venture capital investments that we do. So firstly, do we have a dedicated team for that venture capital investments that we do?

Sanjay Jain — Group Chief Executive Officer

The answer is yes, we do have a dedicated team who has got no allocation of resources for the day-to-day operations and fully dedicated resource. The answer is yes, we have a team.

Chirag Jain — Individual Investor — Analyst

Okay. Also further on that, so what parameter, what industry do we have in mind while investing in the venture capital investments that we do?

Sanjay Jain — Group Chief Executive Officer

I want to request Pallak to take that. Yes.

Pallak Seth — Vice Chairman

Yes. Sure. So basically today’s gain is any industry or any business to succeed, you have to win the ecosystem. Right. So one, we have to be a platform, which PDS already is a platform because of this we can onboard so many businesses. Second, you have to be in the ecosystem of all the innovation disruption happening. So PDS ventures was set up five years ago with a view that we work with the top universities around the world like Harvard, Stanford, MIT, Cambridge, Oxford and some of the leading universities in India and other parts of Asia. And we see what are the innovation coming out of there. And our entire focus is around retail tech, fashion tech, some direct-to-consumer brands who have sustainability focus and business around sustainability and circularity and fashion and new raw material research. So businesses coming with this top universities, we’re normally investing with them at a key stage, but we are partnering with retailers who we feel will back these ventures and other global Tier-1 retailers. So that is how we are basically going as a strategic [Technical Issues] in these five fields. The business is coming from the top universities around the world.

And this is a big reason why we see a lot of the big retailers wanted to further partner their business with PDS because the typical vendor today is struggling to survive, struggling to take care of even supplying the goods, there is a company like PDS, global in nature, having large working capital limits with the top bank, having a very strong ESG focus, plus a venture arm feeding innovation and newness and a lot of sticking points for the retailers who migrate business and work with us rather than a factory in middle of Asia somewhere for a small sourcing company maybe with a single location.

Chirag Jain — Individual Investor — Analyst

Okay. So I understand that. So is it be possible for you to give some kind of color that investment that we do because we have always — or you have already given a guidance of 6% to 7% of capital employed being invested into that. So if you can give a brief about it in the presentation provided by you, it will be much better. It’s a request from my side. Also can you provide some update on Sri Lankan exposure that we had?

Pallak Seth — Vice Chairman

So, yes, on the venture we can provide, we have an internal presentation that we pitch to our customers all the time. So you can share that with the investor community at the right time, if it’s allowed as per SEBI. Second thing is on the whole Sri Lankan exposure, I think, overall it’s a very sad situation for the country but fortunately for a group like PDS where most of banking is done out of Hong Kong and part of it from Dubai, it’s actually become advantage because at the end of the day most of the factories in Sri Lanka banking with local banks are having a very difficult time opening raw material as they used to import goods from China, India and other parts of the world, because the banking is big crisis. But the big, the PDS kind of business, most of our banking, 95% or plus is running out of Hong Kong. So the retailers are seeing is a great advantage that if they are migrating business to PDS for Sri Lankan manufacturing, raw materials are being able to paid on time and goods delivered from Sri Lanka on time.

Secondly, a lot of small-, medium-sized factories are now coming to PDS and saying, can you please take over our capacities, we’re not able to work directly with the retailers because of our financial constrain, Norlanka, which is the PDS subsidiary in Sri Lanka finance the business and take on the order book and even work together with us to manage their supply. So we are actually going to budget growth in Sri Lanka this year compared to last year budget got that.

Chirag Jain — Individual Investor — Analyst

Can I squeeze in one more, if I may? So I had — last question was on my supply chain issues. So do we see resolving them by this quarter or this year financial year, so what is the update?

Pallak Seth — Vice Chairman

I think lot of it depends on macroeconomic challenges that we’re seeing, but, I mean, it’s difficult to judge, but if any company globally is in a position to manage the supply chain challenges, PDS is probably the best place.

Chirag Jain — Individual Investor — Analyst

Sure. Thanks. That’s from my side. I’ll join the queue.

Operator

Thank you. The next question is from the line of Shirish Pardeshi from Centrum Broking. Please go ahead.

Shirish Pardeshi — Centrum Broking — Analyst

Hi, good evening, Pallak. Thanks for the opportunity. Good evening, Sanjay ji.

Pallak Seth — Vice Chairman

Hi Shirish.

Shirish Pardeshi — Centrum Broking — Analyst

Yes. I have three questions. The first question is that you mentioned that you have a very strong order book for sourcing business, if you can give some color, what is it that and how long it is going to be serviced.

Sanjay Jain — Group Chief Executive Officer

Yes, Pallak, let me take this one. We had, Shirish, in the beginning of year at foreseeing a 12% to 15% sales growth, as the guidance for the entire year. And this was basis of our engagement with the customers, basis of our actions, basis of our active engagement as Pallak answered as part of one of the questions in terms of active engagement we have managed to grow 44%. We believe the overall numbers that we have foreseen are quarter two, quarter three is well poised basis the orders in hand and engagement with the customer, with a strong upside to the growth traction. Typically from a sourcing business, at this stage of the year, when we talk about, which is in say, August early, we would have 80% to 90% plus of the entire year budgets of all our verticals having totally booked. So therefore the order book is strong. We are feeling very, very confident to maintain and meet our overall guidance for the entire year, notwithstanding the 44% growth, I’m still little bit cautious because of the overall geopolitical situations. Order book in hand, our engagement, we are well placed.

And for our factories, which typically are about 6% to 7% of topline, we are for quarter two 100% booked in terms of capacity, in quarter three, we already have firm orders upwards of 75%, and in about a month’s time, we should be able to lock in the quarter three 100% as well. So we are in good shape for now in terms of order book and engagement with the customers.

Shirish Pardeshi — Centrum Broking — Analyst

That’s really helpful, Sanjay. Just one follow-up, this order book, what we are having is enough that we can supply within our factories or we will have to go outside.

Sanjay Jain — Group Chief Executive Officer

See, when I mentioned about the factory order book, then I’m talking about two Bangladesh factories of ours, which contribute to 6%, 7% top line and we are very cautious that we don’t over book, so before our endeavors to take orders that we can service from our factory Green in progress, for the sourcing business order book that I mentioned that we would be serving to our 600 plus vendor network across the globe. And as we have clarified earlier in the previous conversations, every vendor that is on-boarded is through a rigorous process and it is also an approval, prior approval of the customer to whom we would be supplying with the factory, so there is a robust process. So pre-approved by the customer and selected through a rigorous process is the vendor base that we’ll be using to service our sourcing vertical customers.

Shirish Pardeshi — Centrum Broking — Analyst

Okay. That’s really helpful. Sanjay ji, my second question is on two brands, Lilly and Sid, we have introduced in India through Reliance marketplace and the other one is Turtledove London, which we have partnered with First Cry. Any update, any color how it’s panning out, what is the thing, whether the revenues have started coming, contributed to the topline.

Sanjay Jain — Group Chief Executive Officer

Yes, I think it’s got good traction because of the needs of the product that we have. But as Pallak mentioned, we continue to be careful about the risks we take. So we are carefully watching in terms of the order inflow and wanting to stay away from locking in too much of inventory from our low sale perspective last year as it is a new offering our sales are actually multiplying four times this year. We had sold less than half a million and we are seeing a 2 million annualized volume coming in from our effort of sales in India but cautiously taking ahead. From 0.5 to 2, we are well poised, if the caution continues to minimize our inventory risk as we take it ahead.

Shirish Pardeshi — Centrum Broking — Analyst

Okay. Sanjay ji, my last question is on, sometime back, we were trying to set up our office in Vietnam, and we said that Vietnam is going to be strategic. So is the plan has gone as per the process or we have taken a stop there?

Sanjay Jain — Group Chief Executive Officer

I’m going to request Pallak I have the benefit of hos presence today, since it’s more related to strategy, Pallak, would you like to please answer that.

Pallak Seth — Vice Chairman

Yes. So Vietnam overall business is progressing in the right [Technical Issues] we are seeing a lot of traction, again because of China Plus-One sourcing strategy of big retailers, they are looking at Vietnam as established market. PDS to certain extent is a bit late in the game in Vietnam, because we just came there and that market has been established for last four, five years, seven years. So I think probably close to seven, eight years business from China was starting to migrate but whichever customers we are offering Vietnam, especially the European retailers, they are finding it as attractive proposition and wanting to work with us out of there.

Shirish Pardeshi — Centrum Broking — Analyst

Wonderful. Thank you and all the best to you and the team.

Sanjay Jain — Group Chief Executive Officer

Thank you.

Operator

Thank you. The next question is from the line of Riken Gopani from Capri Global. Please go ahead.

Shirish Pardeshi — Centrum Broking — Analyst

Hi, sir. Thank you so much for the opportunity. I have two, firstly on the overall business forecast that you’ve shared in the presentation, you do expect the manufacturing segment also to sort of grow faster than the overall company. So I wanted to understand what are the strategic plans for the manufacturing operations and what kind of outlay are we expecting over the next three to four years in this segment and which geographies will be sort of ability focused on India itself or what are the plans on the manufacturing segment. Yes.

Pallak Seth — Vice Chairman

Sanjay, you want to take it or?

Sanjay Jain — Group Chief Executive Officer

Yes, sure. Yes, I’ll take Pallak. So I think, before I specifically answer your question, the largest strategic intent that we have shared with you was to double our size from $1.2 billion to $2.5 billion over four to five years. And as we travel this path, the manufacturing contribution to our sales will be circa about 8% or so. So from, I just annualize what we have been achieving, we are looking at about $100 million, $90 million to $100 million top line coming in from our manufacturing this year. And then about four to five years we look at $200 million plus coming in from our manufacturing operations. While there is always a use of 25% to 30%, which means from a $90 million to $100 million this year, you can extract 25%, 30% capital efficiency, but there is a $70 million to $80 million that we believe will be required to be generated through our incremental investment in the capacity. That is number one.

Having identified this strategic gap or the need to fulfill, our focus right now is to make sure that the profitability we have achieved in our operations are well-entrenched, number two, we derive more efficiency. We do have space land parcel joining to our, one of our factory for the top. It’s been in green internally, we have a land parcel adjacent to it. There is scope to expand. We are adding a wash plant to our Progress factory as well. So there is going to be incremental investment to get beyond capital efficiency.

And I think India is emerging as an attractive country given the mega textile park, given the PLI scheme that has been launched and especially as we are learning about an active dialog, our government is having with developers for the restoration of FTAs that India has been enjoying and with China Plus-One, on one hand India’s own manufacturing attractiveness, FTAs in China Plus-One, India is emerging as a country wherein PDS is actively evaluating that for the extra $70 million to $80 million beyond our existing capacities that we need to generate some manufacturing. I think India is an attractive country. Now the capital outlay, we believe our internal accruals that we have given our balance sheet is very comfortable with our overall net debt to EBITDA leverage of 0.3. We believe our accruals balance sheet in parts sufficient accruals for us to fund this.

Riken Gopani — Capri Global — Analyst

Right, sir. That is very clear. Thank you for the detailed answer. Secondly on the design-led sourcing part of the business, that also you expect a reasonably strong growth over the next five-year vision plan. Is it going to be primarily driven by acquiring market share from the existing clients or will there be new categories? If you can broadly, help us understand how do you expect to achieve this growth over the next five years in the sourcing business.

Sanjay Jain — Group Chief Executive Officer

And the question to answer. Pallak, would you please take it?

Pallak Seth — Vice Chairman

Sure. I think it’s going to be a combination of existing customers consolidating and giving us more of their business because you know lot of the design-led sourcing business has done from domestic companies in markets like UK, Germany, US and many of those small-, medium-sized companies are starting to survive. So we are going to get more market share from them on those basis. So I think that’s the reason of the major consolidation happening in this segment. Did I answer your question?

Riken Gopani — Capri Global — Analyst

Also just to add to that, will there be — do you see you entering into other categories as well, which will drive this growth? Let’s say from apparel to non-apparel categories, or this will be primarily be focused or achieved from apparels as the category.

Pallak Seth — Vice Chairman

Hello?

Sanjay Jain — Group Chief Executive Officer

Yes, Pallak, we can hear you.

Riken Gopani — Capri Global — Analyst

Am I audible, sir?

Sanjay Jain — Group Chief Executive Officer

Yeah.

Riken Gopani — Capri Global — Analyst

I had a follow-up which was if you can highlight it, it would be achieved primarily from apparel or will there be new category additions that we will also try to export?

Sanjay Jain — Group Chief Executive Officer

So allow me to take this one, I think the connection with Pallak’s line in UK seem to have some disturbance. So our larger focus would continue to be apparel. But we are augmenting our offerings in home as a category. This is one of the, when you talk about new vertical investments, home is a category that we’re focused on, and it is gaining traction. Then accessories is another category that we are focusing on as part of new verticals. So these want the largest share of our offerings. They would at best be about — it will be sub 10%. So we would largely be apparel focused and while we continue to strengthen our position in existing markets where we operate with our existing retail customers, Plus offering them new services through new vertical of sourcing as a service, but we are also coming across interesting opportunities of providing strategic capital to companies which are in the sourcing business of this size of $40 million to $50 million in markets where we haven’t operated.

So, as you know our model is joined hands with an entrepreneur, requisite category or industry experience, and then provide strategic capital for growth. We also been now spotting some similar opportunities in markets where we don’t — with our top not been operating. So that also would be something that we are going to actively pursue and we believe while answering the first part about 8% to 10% of our five-year evolution of topline might coming from new offerings. These new geographies, for example, Australia, we started our efforts one year back, and it’s a small number, but we have multiplied our sales to Australia five to six times over the corresponding quarter last year. We believe new geographies have potential to contribute another 4% to 5% of our topline.

Riken Gopani — Capri Global — Analyst

Understood. Sir, thank you so much. Just one clarification, if you could basically help us understand the seasonality, is Q1 typically a seasonally weak quarter and what’s this kind of seasonality that you typically see across the quarters, if you could help us understand?

Sanjay Jain — Group Chief Executive Officer

Yes, I think typically the second half of the year, as we say, the winter collection and then the spring collections for Feb, March month is always stronger, more stronger traction. On an average you can say 55%, 60% of what we aim to do annualized basis, what actually coming from the second half of the year. So what we sold was summer collection but we’ll sell in the fall collection. But then we would be — when we get into winter and spring-summer then sales are typically 55%, 60% of the entire year as compared to 40%, 45% in the first couple of years.

Riken Gopani — Capri Global — Analyst

Right. Q4 is the strongest. [Speech Overlap]

Sanjay Jain — Group Chief Executive Officer

So that’s historically the case that — in fact in a normalized PBT as part of our investor release, we have tried to compare ourselves sequentially with quarter four. But then we hired sales lead to further operating efficiencies in Q4.

Riken Gopani — Capri Global — Analyst

Understood, sir. Thank you so much for the answers. That’s all from us. Thank you.

Operator

Thank you. The next question is from enough Krunal Shah from Enam Investments. Please go ahead.

Krunal Shah — Enam Investments. — Analyst

Yes. Hello, thank you for the opportunity.

Operator

Sorry to interrupt, Krunal, we are not able to hear you.

Krunal Shah — Enam Investments. — Analyst

Better now?

Operator

Yes. Please go ahead.

Krunal Shah — Enam Investments. — Analyst

Yes. Hi, thank you for the opportunity. Two questions, first one is on the PDS venture tech segment. So if you see segmental for the quarter, we had a INR5 crore loss. Could you explain the reason for the same?

Sanjay Jain — Group Chief Executive Officer

Actually, when we talk about the third segment sourcing, manufacturing and others, then it actually has three pieces, just broadly speaking, one-third is the real estate from which we monetize last year’s profit of 5.5. That’s why I mentioned our effort is continuing to further monetize that one-third piece. The second one-third is actually the venture tech investment, which Pallak explained the strategic rationale as part of the previous questions. This is the last one-third, which is our treasury investments, which is not per se liquid liquid, which is kind of a little medium to long-term investments. They are in bonds, they are in equity as part of our treasury portfolio. And it is there in that segment that on a mark-to-market basis, given the interest rates have gone up, therefore, MTM of the bonds come down. Or otherwise, because of the investment in some cases being held in GBP or Hong Kong currency, that we have approximately $600,000 of MTM loss, which is the currency in the interest rates improve if you held — hold to maturity, should go away. But there is also a close to $200,000 realized loss, wherein the logged in, whatever was the realizable value. So it’s largely the notional loss of about a net of $600,000 out of the two in this one sub-segment of the others that got reported. That’s the nature. That’s is the answer to your question.

Krunal Shah — Enam Investments. — Analyst

Got it thanks. My second question is regarding currency as you mentioned that there has been a lot of volatility in the currency market even euro and pounds has if you see the rupee and the dollar get appreciated so how do we manage this kind of situation because lot of our exposure is again in Euro and pound?

Sanjay Jain — Group Chief Executive Officer

I think, allow me to answer that. Let’s break a P&L in two parts. Anything in respect to sales and the cost of goods sold is largely US dollar denominated. Barring our operations in Turkey, which are of the size of GBP15 million to GBP16 million in the currency of putting GPP. The rest is almost US dollars. So to that extent, we have a natural hedge, number one, in fact our top line has grown 44% this year. But if I talk about dollar-to-dollar growth and they are actually grown 37%. So the company has benefited with the dollar strengthening against rupee in terms of growth becoming 44, that is number one.

Now if I go below COGS, then we do have OpEx payments. For example, in UK operations, the salary and some admin-related payments are in GDP that we tend to take a hedge basis the available instrument and board-approved risk management policy, but that’s a small portion of the OpEx, which is on the UK-centric. But when I talk about OpEx in Bangladesh, in Sri Lanka, in India, then they are typically denominated in Bangladeshi Taka, or Sri Lankan or Indian rupee, there — since our earnings are in dollars, the local currency depreciation is actually helpful to our case.

So, on the whole, barring this instance of a translation exposure on the investment that helped to balance sheet which I answered as part of your initial question and some OpEx that are in GBP or 50 million, 60 million topline in GDP in Turkey. We are largely having a natural hedge and our principal currencies, US dollars.

Krunal Shah — Enam Investments. — Analyst

Great, thank you so much.

Operator

Thank you. The next question is from the line of Chinmaya Bhargava from LSSB Capital. Please go ahead.

Chinmaya Bhargava — LSSB Capital — Analyst

Hi, thanks for being generous enough to take another question from me. So this is actually a follow-up to a request Vineet had made earlier in the call about subsidiaries. And I just wanted to ask if I look at the business sustainability report that we had put out for 2022, we highlighted the 10 subsidiaries that made up 70% of our pie and also spoke about some that we expect to focus on in the next couple of years. So like Jcraft, Array or Styleberry, I wanted to ask if you can just share a little bit of details about these businesses because not a lot of information is available to better understand what they do. Thank you.

Sanjay Jain — Group Chief Executive Officer

Yes. I think as I’ve said in response to the previous similar questions, the top 10 verticals, when I say verticals, these verticals might be conducting business in more than 10 legal entities, which we will facilitate as part of the next quarter release. And more importantly top10 businesses are contributing 76, but the new verticals that we mentioned about 18 new verticals that we are currently operating, they are in the remaining ones. Then there are some businesses which are in the size of 10 million, 15 million, 5 million as well. So they are in growth phase, while the ones which are five-year plus typically are in the top 10, but the ones, which was started three, four years back, are running about $10 million, $20 million. It is the remaining ones. And wherein, of course, we through our internal performance review processes as part of the original budgets and then the performance reviews, we gradually keep supporting them to get to a 4% to 5% PBT of the topline as a sourcing business.

So that’s how — that’s the answer I can give you. But I think at the same time, we will for sure endeavor to try and get you more smarter way of getting a clarity about top 10 contribution to topline and PBT and how many legal entities are engaged in top 10. And then beyond top 10 which are the next ones and then the third category is the new verticals. We will endeavor to get this clarity to our stakeholders with this part of the next quarter release. But I hope I have answered your question. But otherwise I can clarify more at this stage.

Chinmaya Bhargava — LSSB Capital — Analyst

No. Thanks so much. I’ve actually seen that a lot of the newer ventures have PBT margins of higher than the 4% that we’ve set. So I’m happy. I just would like more granular details on next thing. So that’s all from my side, and all the best.

Sanjay Jain — Group Chief Executive Officer

Sure. I think, when I answered — I am answering on an average about 4% to 5%. But of course there can be some outlier exceptions, wherein the margins are higher, but we would endeavor to clarify more, rather not clarification, rather include data as part of the next quarter we will see.

Operator

Thank you. Ladies and gentlemen, as there are no further questions I now hand over to Mr. Sandeep Kumar Agarwal for his closing comments.

Sanjay Jain — Group Chief Executive Officer

Let me take this. Sanjay Jain here. I guess, there is some connectivity issue, some of us are facing, including Pallak from London. So on behalf of Pallak, Sandeep from Edelweiss, thank you everyone for joining us today. It was a pleasure to have an engaging audience like you and taking the time to join us. And we look forward to connecting with you again after the next quarter earnings release. Thank you everyone and stay safe.

Operator

Thank you. Ladies and gentlemen, on behalf of Edelweiss Securities that concludes this conference call. We thank you for joining us. And you may now disconnect your lines. Thank you.

[Operator Closing Remarks]