PDS Limited Q2 FY26 Update

• Q2 FY26 revenue was Rs 3,419 crores, up 14% from the previous quarter.
• During H1 FY26, we reported an 8% growth in the top line of Rs 6,419 crores.
• During H1, our existing verticals grew 6%, while our new verticals clocked 46% growth with revenues of ₹469 crores.
• During the 2nd Quarter, gross margins expanded from 19.4% in Q1 FY26 and 19.6% in Q2 FY25 to about 19.9%.
• Employee expenses, which are our largest OPEX cost, have been flat compared to Q1 at ₹312 crores.
• All of this translated into an EBITDA of 3% in Q2 versus 1.7% in Q1.

The performance this quarter has been a bit shaky when compared to the same quarter the previous year due to:

• UK Businesses (Poetic Gem and Simple Approach): These two are the biggest revenue-generating businesses for the PDS. Sales have increased 13.2% and 12.3% respectively, but PBT is down 15.8% and 24.8% YoY based on H1, FY 26.

The management has engaged BCG to help reduce costs and help in turning around the businesses, which may include decreasing UK headcount and other steps. These two businesses are also facing margin pressure due to challenging economic & industry factors.

In the case of Simple Approach, one of its largest customers, Primark, gave an upcharge of nearly a million USD last year due to wage increases in Bangladesh. This upcharge is not available in the current period, and hence, the decline in PBT is exacerbated further.

Poetic Gem restructuring is also nearly complete and it should provide better results moving forward. One more factor to keep in mind for the future is that the margins for summer and spring lines are lower than the winter line.

• Europe Business: Based on the Geographic split, Europe has been the only region that has seen a fall in revenue. The major reason that can be attributed to this is Gerry Weber’s bankruptcy last year. PDS did a business of nearly $70 million in the last financial year, and that whole business is now gone. Gerry Weber’s sales were from Techno Designs, and it is one of the worst-performing verticals with sales down ~43% and PBT down 140%. However, Techno has signed on new customers to replace atleast some part of the revenue loss. The management provided an update on this:
• • “It has already signed up new customers, but the revenue buildup is only going to start from December-January onwards.”
• Investments in New Verticals through P&L: The company has been investing in new business lines and is not capitalizing it but rather moving it through P&L. This is one of the reasons why revenues are up YoY but profits are down significantly. PDS has been investing nearly 40-50 Crores INR each quarter through P&L. Here’s what the management had to say:

“So, we expect that going forward as well, once we have come to steady state, an amountof ₹40-50 crores, this was close to ₹160 crores. But an amount of ₹40-50 crores is an important investment that we will continue to make into growth initiatives, whether it is adding a newcategory or new customers. But we accelerated that to ₹160 crores and we should come down toa steady state of ₹40-50 crores. And that is where in line with the past, we see our margin trajectory should inch up to closer to 3.5% in terms of PBT margin.”

PDS has been growing significantly in the US as the economy tends to move away from luxury clothing to discounted ones. The Americas have seen 25% growth in revenues YoY which is significant. However, there are two factors to consider:

• US-India tariff: US applies 50% tariff on garments from India. The management estimates nearly 2,500 crores revenues from the Americas. However, PDS has “the ability to feed into US market from Vietnam, from China and increasingly now from Egypt and Latin America is helping us maintain this growth momentum of 25%...With a footprint spanning Bangladesh, Vietnam, Sri Lanka, Turkey, Egypt and expanding presence in India and Latin America, we believe we are well-placed to mitigate the concentration risks.”

Out of the total US business, only 40% is where PDS has to pay tariff as per the shipping agreement. Even for that 40%, the customers have been able to pass on the tariff by increasing the prices. So again tariffs have been mitigated to a significant extent.

• US demand: The US alone saw a 36% rise in revenues, which is more than the UK. With large retail chains opening up account with PDS, an even higher growth is not out of question. This demand will have a slight effect in the next half year, but FY 27 is expected to see a high surge in revenues from them. Here’s what the management had to say:

“ Big ticket customers have opened the account in the last 2-3 months alone,TK Maxx - US, Ross Stores, Target, Walmart, some of these existing accounts have grown in a good pace. PVH, which is the owner of Tommy and Calvin, is onboard with one of our subsidiaries as a vendor”

Revenue growth is good, profits have suffered but are likely to pick up in the near term.

• Consulting with the BCG and reducing investment through P&L will enhance profit, although it did not negatively affect the financial situation.
• Order book as of early October stands at ₹5,308cr, a 15% increase Y-o-Y, and it remains stable.
• Good cash flow in the first half of FY26 of INR 593 Crores with total cash of INR 1,007 crores.
• Enhancing efficiency using Coupa e-auction and implementing SAP HANA. This will help in sourcing raw material at a lower cost and revamping the costing and master data management tools.
• Using ESOPs and profit profit-sharing structure to further incentivise top management and business heads. It also includes provision for recouping part of losses if performance is below par.