Creative Newtech Ltd
NSE:CREATIVE
Creative Newtech Ltd
NSE:CREATIVE
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Earnings Call Transcript
Other Earnings Calls
Ladies and gentlemen, good day, and welcome to the Creative Newtech Limited Q4 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Ketan Patel, Chairman and Managing Director, Creative Newtech Limited. Thank you, and over to you, sir.
Good afternoon, everyone. Welcome to Creative Newtech Limited Earnings Conference Call for the fourth quarter and full year ended March 31, 2022. Our company, as all would know, was formerly known as Creative Peripherals and Distribution Limited. I would like to start by thanking all of you for taking the time to join. On the call with me today is Mr. Abhijit Kanvinde, our CFO; Mr. Vijay Advani, our Whole Time Director.
Before we get into the business and financial performance of the last quarter, I would like to share some brief insights and recent developments regarding the company. Starting with some key developments over the year. As we are all aware, the past fiscal year was also impacted by the continued effects of the pandemic, especially in the first quarter. In fact, our annual performance practically represents operations was less than 11 months as the initial month of the financial year was affected by the lockdown. Looking at the present situation, markets have opened up and consumer confidence is firing up well. This year has definitely been better than the last year, which was more seriously hampered by the lockdown in the 2020.
The year-on-year growth has come in from a recovery in overall markets, coupled with our company's diverse product portfolio. In the post-pandemic lifestyle with standards such as working from home and online educational classes, demand for IT and lifestyle products has been on the rise. Our business and region far exceeds beyond just distribution. Today, we are all -- we are a service brand licensing, with a long-term agreement with Honeywell and are beginning further on this line of business. This also garnering attention of other global brand, which are looking at brand licensing as a beneficial approach.
With Ckart, we have entered the online B2B marketplace vertical, and we see this as a key turning point in our business. On the distribution front, we recently rearranged our segmental structure to better align with our business structure and strategy. Our brands are now categorized into the following 4 segments. Fast moving social media goods, FMSG. This compromise new and niche products that are filled through the younger demographic and have a fast turnaround. The brands are driven by social media penetration and wide adoption. This is one of the fastest growing in higher-margin segments.
Fast-moving consumer technology. This segment includes established and fast-moving consumer products that cater to personnel as well as organizational demand such as Samsung, iBall and ViewSonic.
Enterprise business. This compromise products which are supplied to enterprise and are high volume. Some brands in that category include MSI, Printronix and Philips.
Fast-moving social media good. This segment covers our alliance with the Reliance through which we offer home appliances, bulbs and lights from brands such as BPL and Kelvinator. This segment better represents our brand portfolio and give better clarity on higher -- high-margin and high-volume products. We expand and refresh our portfolio period of [ tally ] with new niche brands and products, which are relevant to our time. Some of our most recent brand addition including Insta360, Fujifilm and Hyperice, a U.S.-based company specializing in technology-based muscle recovery and massage product, well known in the wellness and fitness category.
Our tie-up with Reliance retail covers a wide rank of Marvel and Disney branded products, including audio entertainment products, personal grooming products such as hair color and straightener and small home appliances like toaster and sandwich maker. This tie-up gives us access to huge market across multiple product verticals and expand our geographies coverage.
We also have light, bulb, fan and home appliances from BPL and Kelvinator through this portfolio. Having such household mix in our portfolio also broadens our market reach.
In terms of brand licensing, our association with Honeywell continues to grow stronger. We have got required certification to launch in various countries across the Middle East and APAC region. The benefits of this association are gradually showing effect now, and we scale up the line of business.
Our distribution network covers all 3 channels: online, retail and general trade, thereby giving us strong leverage to each reach out to a wide market base. Furthermore, our portfolio covers a wide spectrum of products. From enterprise goods to fast-moving consumer products. Association with Insta360 and Fujifilm are example of social media-based products, which target a young demographic and are high-growth potential products.
Overall, our focus is on the 3 main growth figures, offering exponential products and emitting niche global brands to enter and establish in new markets, expand our Honeywell business and become an online platform for all eCommerce through Ckart.
Ckart is doing well since launch and have a good adoption rate on our channel partners. We expect Ckart to expand our customer base without much additional cost. Overall, the company is gaining wider recognition as the go-to specialist for many niche brand, which benefits from our value-added service model.
I now hand it over to Mr. Abhijit Kanvinde, who will take you through the financial highlights for quarter 4 and FY '22. Thank you.
Thank you, and good afternoon to you all. I will share the highlights of our consolidated financial performance, after which we will be glad to respond to your queries. Our financial reported are as per Ind AS guidelines.
Looking at the Q4 results. In the quarter ended 31st March 2022, the company reported a total income of INR 268.36 crores, growing 50.03% year-on-year. This was partly since last year's corresponding period was impacted by COVID-induced slowdown. Growth was also supported by Enterprise business and FMCT segment and the demand for products from Samsung, Honeywell, Cooler Master, PNY, amongst others.
EBITDA stood at INR 9.28 crores as against INR 7.56 crores in the previous corresponding period, an increase of 22.75% year-on-year. Benefits from changed product mix was offset by higher sales promotion expenses, leading to contraction in EBITDA margins.
The net profit for this quarter is INR 5.23 crores as compared to INR 4.39 crores in Q4 FY '21 and year-on-year growth of 19.18%.
Coming to full year's results. In the year ended 31st of March 2022, we reported the total income of INR 947.81 crores, growing 80.08% year-on-year. This was partly since last year was more severely impacted by the nationwide lockdown. Growth was also supported by Enterprise business and fast-moving computer technology segment and demand for the products like Honeywell, Cooler Master, Samsung and PNY amongst others. It is noted that this represent operations of less than 11 months due to lockdown across several states in India during the first quarter.
The EBITDA stood at INR 32.62 crores as against INR 18.73 crores in the previous corresponding period, an increase of 74.15% year-on-year. The EBITDA margin dipped slightly, mainly due to higher promotional expenses and freight charges. The net profit for the year stood at INR 19.26 crores as compared to INR 9.41 crores in FY '21 and year-over-year growth of 104.61%.
This is all from our side. We can open the floor for further questions.
[Operator Instructions] The first question is from the line of Suraj Nawandhar from Sampada Investments.
Is that...
Sorry, Suraj, we could hear only now. Can you please start again?
Yes. can you hear me now?
Yes.
Okay. Sir, we have had higher expenses or higher other expenses last quarter as well as this quarter on accounting of some timing expenses. So as far as I understand that our business model, these expenses are borne by our clients, not by us. So what are the branding expenses are regarding to?
Absolutely. Branding expenses and sales promotion expenses are always passed through, okay. So the gross margin for that matter, we include that expense portion in the gross margin. And then -- so we consider a higher gross margin, and again, spending and expenses in P&L. It is like rent income and rent expense, it cannot be net up. So you have a gross net income as well as gross net expense. So any expense which is reimbursed by the brand, it is shown added to the gross margin and represented in our account. So they are not our gross -- our expenses.
So these accounting practices has been adopted just 2 quarters back or it has been like that all along? Because...
No, no, no. There's been all that like that all along. It is consistently falling year-on-year.
Then what is the reason for increase in other expenses for last 2 quarters? I see they have jumped from INR 7 crore, INR 8 crores to INR 16 crores.
Last 2 quarters? Let me answer the question. The major -- other expenses increased in last 2 quarters, was on account of export rate. The other reason on increase was brand expenses of Honeywell, which was related to a pass-through. There has been sales promotion and commission sales, which is these 2 other expenses, which were all product-related expenses and that is the reason -- that was the reason of increase of other expenses.
Now please also appreciate that we -- there has been another expense increase, but we have also grown in turnover. So from almost INR 500 crores we have reached to INR 900 crores. There is an increase of almost INR 400 crores in our turnover.
Right, right. So we have also recorded...
This is commensurate increase. There's not surprising increase there.
Okay. And we have also recorded some higher other income this time? So what it was regarding this?
Okay. So other income consist of export -- sorry, [indiscernible] benefit, okay. That is approximately INR 13.16 crores. Okay. You see we -- this is an operational income according to us and as we have put a loan to that extent. Our -- these are the export incentives, which we did which would be actually part of our [indiscernible]. But as far as maintain accounting standards, we need to show them as separately as other income. You have to classify them as another income. So it's an operational income, INR 13.16 crores out of other income of INR 13.92 crores. Okay.
Okay. Okay. And sir, on the P&L side, we have grown quite significantly over last year but cash flow from operations still remains negative. So when our cash flows will improve?
Okay. So this is completely a valid question, and I was expecting and I wanted to answer it. During the last quarter, okay, we launched 2 big brands -- that rather 2 big segments in Honeywell. One of the segments was audio where we launches 73 -- 76 SKUs and another was Air Purifier, all right. All these launch 2 of them in the third quarter -- fourth quarter, okay? Therefore, we have to procure lot of inventory. So if you care to look at the cash flow, there is an increase in inventory to the tune of almost INR 25 crores to INR 28 crores. And this is all because of our major launches of product of Honeywell. But we have launched -- in the last quarter, we have launched rather in the third quarter, we have launched a product called Hyperice so there is an increase in inventory through the tune of around INR 2 crores, INR 3 crores of Hyperice. Actually, what has also happened is that there has been disruptions and supply chain issues in the last financial year.
So we have decided and we have taken a conscious call, okay, to add enough inventory maybe 15 to 20 days more inventory for brand so that we don't have a stock-out situation. The supplier issues and the transportation issues and disruption with that throughout the year. Okay. So this was the second reason.
Now, all this will be liquidated. And I'm sure, we are very confident that if we write will be finalized the next 6 months balance sheet in the month of September, okay? All the supply chain issues will be taken care of and COVID situation will be normal. And by September, we should be able to show positive cash flow for sure. Okay. This is [indiscernible] happened in the last quarter. There has been an increase in inventory.
Okay. Okay. And sir, what has been the revenue from Honeywell business in the Q4 and FY '22?
Sure. Perhaps, you want to answer?
It's INR 61 crores, sir.
For the whole year?
Yes, for the whole year.
And how much we are targeting for the next year? In last, like, if I remember correctly, you said INR 200 crores to INR 250 crores.
Yes. Not -- so we are targeting between INR 190 crores to INR 200 crores for the next year. And that is a lower base and if the supply chain, everything goes well, then almost INR 250 crores for this year.
And sir, how much margin we are earning on the INR 64 crores operating margin?
The gross margin is in the range of 60% to 70%, all right, branded, okay. And our EBITDA margin is in the range of 14% to 15% in this business year. Particularly higher...
Okay. And sir, in your opening remarks, you talked about new brands also approaching you for brand licensing that you are doing for Honeywell. So if you can throw some more light on it, which brands are -- which sectors, and is it the same as arrangement as Honeywell -- we have with Honeywell? Or there is some different sort of arrangements you are looking at? And also on the margin perspective, if you can throw some light on it.
So Suraj, I'll answer that, this is Ketan. So with Honeywell currently, we have an opportunity to expand geographies. So currently, they have given us 29 countries. Out of that 29 countries, we have been able to reach almost 8 to 9 countries. This year, we want to go to Southeast Asia. So with Honeywell, it could be that you expand geographies. And in that geographies, you take the existing category of products. So in Honeywell, we have 3 categories, right? The air purifier, the home audio and mobility enhancement products. So with these 3 categories, first, we plan to reach out to all the countries where we have opportunity.
Second is we had approached by a lot of name brands, which have taken the licensing growth are all already in the licensing growth. That, whether we can pick up the branded licensing. So usually, the licensing process takes a couple of years because they want to understand the whole infrastructure. We want to understand what are the licenses required as far as technical product specification is there, whether the brand licensing will stay together, our TG is there. So we are in talks with a couple of brands for that.
Also, as the Honeywell network built up for us outside India, than on the same network with a different set of brand and products we can piggy bank and go to the market. So there are 3 to 4 brands whom we are talking to, as something finalizes, we'll come back to you on that.
[Operator Instructions] The next question is from the line of Sunil Menezes, Individual Investor.
Congratulations on a good set of numbers. Ketan, I think we have been -- some of the questions you already answered. My question is on the Honeywell side of business, which is, I think, one of the main growth pillar for us to drive the profitability.
So with that, I think last time you mentioned our target is to reach overall around 5% EBITDA, right, for the business as a whole. So if we make around INR 200 crores to INR 250 crores next year with a good EBITDA margin, can we assume that we can reach that milestone in FY '23?
No, Sunil, I think by FY '25, we said that we would be targeting an EBITDA percentage of 5%, okay? And we had said that our business from Honeywell or any licensing will be 30% of almost our total turnover. So in building the -- in the range of INR 500 crores to INR 600 crores. All right. So next year, there will be an increase in EBITDA margin for sure, okay? Today, the EBITDA margin consumed is almost 3.4%, 3.5%. The goal for next year, we are targeting closer to 4.5%, okay? And we will strive for 4.5% because -- please appreciate Sunil, we have a lot of marketing and promotion expense to incur. We have already started a lot of campaigns in India, and we will be using -- we will be -- next year, we are planning to go -- with Singapore, Malaysia and Thailand. So there will also be a lot of promotion and marketing and establishment expense growth, growth capital, we will need. So it is a still target to sell 5% by next year.
I'll answer number of 5% by next year.
Okay. So the second question regarding the Honeywell business with the intermittent shutdowns and the lockdowns in China and our secure connection subsidiary based in Hong Kong. So do you see any impact on supply chain getting products out of China?
So that's why there is this increase in inventory also and the working capital cycle. And we had to take a decision that either you face a stock of situation or you let the cash flow effect for a while. And instead of the 45 days inventory, you start stocking 60 to 90 days of inventory. And that's what we decided because we said that we don't want this lockdown to effect that. But still, in spite of all our efforts also, sometimes 10% of time, it happens that some of the SKUs even after stocking them for 90 days also, we have stock out for 10, 15 days in certain SKUs, where there is high demand.
Still, China continues to be in lockdown. Still, we cannot travel to kind of talk with the factories to develop new SKUs. So the whole process of development also is taking its own sweet time. But now this has been happening for almost 12 to 14 months. So it's not kind of a -- it's become a routine kind of process. So right now, we have taken a call that we would have 90 days inventory anytime and 1 month inventory in the -- see if we can get it.
We hope that before the Chinese New Year happens in the coming time, everything should better down or else that couple of months will be a lot of issue. So if last year also, if this lockdown would not have in there, then we could have been able to launch products faster. And I think we could have had free cash flow from operations.
Okay. That's good. And then now with the Honeywell business ramping up. So you mentioned we can -- we are targeting around INR 200 crores?
Yes, yes.
Is the revenue to be evenly coming during next year, say, can we expect INR 50 crore in Q1 of FY '23? Or there will be gradual ramp-up?
So, you will see that the major sales in quarter 3 and mid quarter 2 when the online starts stocking up, that's the case. And ours is a bit of a cycling business, the quarter 1 is a bit lower. Quarter 3 is the highest and quarter 4 is also kind of subdued. So quarter 2, quarter 3, you'll see a lot of volumes happening on the Honeywell business. Plus this year, we also decided that we will have our product launches in June and in October. So that's the time actually, we will have a lot of sales in that 2 quarters.
The next question is from the line of [ Aditya Mehta ] from Dynamic Investments. Sorry to interrupt [ Aditya ]. Your voice is breaking up a lot.
Am I audible now?
Now it is audible, yes.
Yes. As the previous participant's question, so just wanted to know if there are any thoughts on licensing? Do we plan to get into that business to add more brands?
[ Aditya ], thank you. Depends upon what kind of brand you get. And also, it could be that once we become proficient in the Honeywell audio business, you could have your own private label brand, which could be either a premium brand or it could be a 10% lower than Honeywell. That's on the card. But currently, the whole direction from the Board is also that you have to cross the INR 200 crore mark for Honeywell. And kind of has been near, say, 25% to 30% of our overall turnover from licensing business, that's when we would start reverting to look for newer brands or start our own private label.
Okay. That makes good sense. And sir, another question I had on the last one. I would like to -- Okay. what are you planning there? Is it like we are bringing in more debt or time to reduce it going further as the business grows?
I didn't get the question. I heard what are the plans, but for what, you are saying?
Question is regarding the debt outlook, what are you planning there? Is it like we'll be trying to bring it down? Or are we going to take more debt at the business grows?
Yes. Okay. [ Aditya ] I think, of course, debt, right now, there has been more investment in the working capital, okay? So this year, we have to take little more debt. Okay. Otherwise, we are very confident that right now today is working capital number of days of, say, 52 to 54, we will get that down and to fortify our working cap and our -- working CapEx turnover ratio, it will improve. And therefore, we will not finance or working capital by taking more debt, we will improve our working capital cycle once.
Secondly, in case we have already taken equity last financial year. So the second times it will also come in this financial year for the share warrants part. So we should be able to manage the growth and our internal accrual. With always, we should be able to manage our growth.
Okay. Okay. Yes, sir, understood.
[Operator Instructions] The next question is from the line of [ Mihir Desai ] from Desai Investments.
So I have 2 questions on Ckart. So can you please throw some light or enlighten us on your future strategy regarding Ckart?
Thank you, [ Mihir ]. So Ckart is our own B2B digital platform, which allows our captive customers to transact, discover and share new products to their buyers in their own company's name. And Ckart currently is intrinsic part of Creative where it also helps our sales team to digitize their process. And for the last full year, we have felt that the platform business and our product distribution business is kind of -- has different success metrics. And for that thing, we are thinking that we should put Ckart into a subsidiary. And in the coming months, that would be the plan to check with the Board and if they agree, then put it into the subsidiary and then get the relevant talent and the relevant resources to really grow Ckart very well.
Because for the Creative, the success metrics is bad, EBITDA, inventory turns, working capital. For Ckart is lifetime value of the customer, cost of acquisition of the customer, you have reached to the number of customers. All that is there. So -- and we firmly believe that for few need people, then product and then profit. So we developed a product in-house with [indiscernible] and we did it very well. Now, we want to have the right skill set of people to run that business.
Sure. Sure, sir. And do we have any specific road map on for the future for this segment, specifically?
Yes. So [ Mihir ] if anybody like it or does not like it, the future is digital. Anything which is as a service is going to become digital. And our whole aspect is that future, Ckart will lead us to a model where we play on other people's resources and other people's money, OPM, OPRs as they call it. So we want our buyers to become seller on the platform, so they can sell their inventory to that. And with the digitation, as we raise through more and more people, we want that some financial organization or an NBFC to take on the credit part. So we don't have debtors on that business. So that's the strategy. And in the coming years, our whole focus is to roll that out with Ckart.
Sure. Sure, sir. So if I have further questions, I'll join the queue again.
Surely, sir. Thank you so much, [ Mihir ].
[Operator Instructions] The next question is from the line of [ Ritu Gupta ] from Bliss Consultants.
So my question is the Enterprise business for growth during the pandemic. So how much of it is sustainable and what is the contribution we can expect from this business going forward?
Okay. So the Enterprise business is more from a place where it's an opportunity business. And whenever we have free cash flow, we usually use it into that business. What we are doing in the enterprise side is just the tip of the iceberg. Actually, if you have a lot of cash, then you can do that business very well. But right now, it does not take any management time to do that business. And one of our key metrics also while doing any businesses is how much management time it takes.
So currently, Enterprise business is not taking any much of that time and that's why we are doing that. To long answer -- short answer to your question is that there's much potential in the Enterprise business. And if we have the free cash flow, then we keep doing that, and it is quite sustainable.
All right, sir. And my next question is which brands are driving the business in Enterprise business?
Yes. So currently, we have AOC, Philips, both are monitors and also signages that's doing very well. InVue is another product which goes into retail security to all the Apple stores and some stores what you see that are -- the retail solution is -- they use is of InVue. Printronix is a line printer business that also kind of sales on the Enterprise business. Plus a lot of your gaming products, these are all high-performance computer components, HPCC, they're also going to enterprise because a lot of people use it for crypto farming or they use it for 3D and virtual reality and all that. So we have seen quite a fraction of these brands on this.
And also, we have [indiscernible] and Dell for enterprises -- distribution for enterprises. So we have a good business there itself. So that comes under the Enterprise business.
The next question is from the line of Hiten Boricha from Joindre Capital.
Sir, I have a follow-up question on the previous participants. So you mentioned our Enterprise business will continue to grow at this level. So do you mean to say that the EB business has grown around 200% compared to FY '21 basis? So what kind of growth you are looking in this segment?
Yes. So like EB business can't keep growing at that level. The only indicator for that is we should have that relevant cash flow to do that business. So every year, we don't take such a steep target for that business. We kind of try to limit it close to 20%, 30% of that.
And actually, what happened is during the COVID thing, a lot of company's balance sheet could not [indiscernible] that the brand would take a punt on that. And that's why we got this advantage, and that's how we got this business. And next year also, probably it will grow at a similar thing, right?
Okay. Sir, just a follow-up on this. Can you elaborate a little more why do we need more cash or capital for this particular segment?
Because whatever you do, you require 10 to 15 days, your money will get invested for sure because when you sell to the corporate, it may happen that -- the payment is approximately 45 to 60 days from GRN from the corporate and similar credit also you get...
Both in 60 days credit. Yes, but still 15 days, sometime it's over that.
Get stuck into that, that's one part. Second is...
And almost no inventory. It's only on making data.
On the data.
Okay, okay, okay. So you mean this EB segment will continue to grow, and the Honeywell business will do around INR 200 crores in FY '23. So what kind of revenue growth we are targeting for this year?
So this year, we are targeting close to INR 1,240 crores.
Yes, around that. In the range of INR 1,200 crores.
INR 1,000 to INR 1,235 crores.
Okay. But around 4%, 4.5% kind of EBITDA margin, right?
Yes, yes.
Okay. One more question, sir. Our tax rate has been very volatile in the last 3, 4 quarters. So what would be our tax rate in this year?
25%. 25-point something.
Okay. 25%, yes.
Yes, absolutely.
[Operator Instructions] The next question is from the line of [indiscernible], Individual Investor.
Congratulations for extreme set of numbers. My question was -- I'm not sure if you have already answered, I joined a little late. But I just wanted to understand, what kind of numbers we have done for Honeywell business this year. I mean we -- our guidelines were somewhere around INR 70 crores to INR 80 crores. So just wanted to understand where we are with that.
So our guidelines for this year were almost INR 70 crores we would do in Honeywell business. We closed at INR 61 crores this year on the Honeywell business. And before that, the last financial year, we had done INR 25 crores. And for the coming financial year, we are targeting between INR 160 crores to INR 180 crores. And if the supply issue gets better, then almost INR 200-plus crores, we will go on that business.
If I may add, we have launched -- in the last quarter we have launched 2 big segment in Honeywell. One is in audio segment and another air purifier segment. So that is going to add revenue in this financial year. Also, we are likely to decide -- whether this year we are likely to expand through in the second quarter -- second half of this year, likely to expand to Singapore, Malaysia, Thailand. So that will also add geography -- that geography will add some revenue to it. And of course, India growth will also be there.
Sure, sure. Yes. One related item is around the EBITDA margins on this. So this year, what kind of EBITDA margins we have in this Honeywell business. And I think overall, this is a relatively high-margin business, right? So -- but of course, there will be some teething pain in terms of initial setup and all. But over a period of time, we -- next year, what kind of EBITDA margins do we expect in this business?
So I can give you a guidance that by next year, the EBITDA margin should be in the range of 14% to 15% in Honeywell business, okay. So today, we are -- overall, we are 3.7% to 3.9% EBITDA margin company. So that -- those margins have surely improved, and we will tend to overall margin of return to 4.5%. That will be the EBITDA guidance for next year.
Okay. And how much -- what was the EBITDA margins this year for this INR 61 crores?
This year's EBITDA margins for Honeywell in the range of 10% to 11%, yes.
[Operator Instructions] As there are no further questions, I'd now like to hand the conference over to management for closing comments.
I thank the entire team of Creative for their hard work and dedication, which pushes the company forward. Also, I appreciate all of you for participating in our conference call. Thank you.
Thank you very much.
Thank you.
Thank you very much. On behalf of Creative Newtech Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.