Creative Newtech Limited (CNL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Creative Peripherals and Distribution Limited Q4 and FY '20 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risk and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ketan Patel, Chairman and Managing Director. Thank you and over to you, sir.

Good afternoon, everyone. Welcome to Creative Peripherals and Distribution Limited Earning Conference Call for the fourth quarter and financial year ended 31st March, 2020. I would like to begin by expressing my gratitude to all of you for taking the time to join us. On the call with me today is with Mr. Abhijit Kanvinde, CFO; Mr. Vijay Advani, our Whole-Time Director of our company; and Bridge IR, our Investor Relationship team. Before we get into the business and financial performance of the last quarter, I would like to share a brief insight into our company. We are market entry specialist for experiential brands across India, the Middle East and Southeast Asia. Our company specializes in market entry for global brands and works closely with its clients to achieve optimal market penetration and growth. Our network encompasses all 3 channels: online, retail and general trade, thereby giving us a strong leverage to reach out to a wider market base. Furthermore, our value-added business model provides end-to-end solutions from market research and competition analysis to formulating and executing region-specific marketing and presales strategies of the brand. Currently, we have a strong long-term association with over 20 global renowned brands, which we categorize in 3 broad divisions: IT, Imaging & Lifestyle and Security Products. These wide spectrum of products has helped our company achieve economics of scale and become a single sourcing point to our customers. One of the key brands is Honeywell, a Fortune 50 company, with whom we have a deep integration in terms of contract manufacturing and distribution across India and abroad. We have identified our business in 3 broad categories: IT, Imaging & Lifestyle and Security. Our focus is on offering experiential products and enabling such brands to enter and establish in new markets. We continue to aim for higher operational efficiencies and adding higher-margin, value-added products to our portfolio. Associations with Honeywell, BaByliss, GoPro and Cooler Master are steps towards this direction. I would now like to take you through some of the key recent developments. As you are all aware, in the last few months, we have witnessed an unprecedented and unforeseen adversity in form of COVID-19 virus. The outbreak of this pandemic has brought entire economy to a halt. It has impacted everyone -- every aspect of our life, including personal life and industries across the world. Like every other business, we are also facing the impact of the lockdown, and its effects are likely to be seen over the coming months. However, we took this opportunity to refine and redefine our internal practices and improve our operational efficiencies and skill sets through various online trainings, et cetera. Moreover, we are currently working on the online B2B digital platform for our network of clients, which is expected to be released soon. The new platform will enable all our customers to transact, discover and share products and brands to their buyers in their own company's name. This platform will also assist them to showcase their inventory and trade amongst each other, facilitating higher volumes and expanding the product portfolio being offered through Creative Peripherals. They will also be able to host their white label microsite on our platform. We expect this platform to fortify our presence as a one-stop shop for customers as well as improve our profitability. One of the key purposes of this platform is to help our customers expand their reach and make it easier for them to do business. We continually update and expand our brand portfolio to keep it fresh and relevant. Before the COVID-19 crisis struck our industry, we had entered into distribution agreement with several international brands across subsectors. One of the latest brands we brought onboard is Panasonic, which is a global market leader in consumer electronics. We are distributing their premium range of audio products in India. Other premium and niche brands that we partnered with recently include Cooler Master, a niche gaming hardware brand; PNY Technologies, a U.S.-based specialist in high-performance graphic cards and SSDs; and BaByliss, a premium personal grooming brand with global presence. As industries reopen and business regain momentum, we look forward to continue expand our business portfolio. These associations are not only diversify and expand our portfolio, but also enhances and testifies the company's recognition among global brands. As the consumer sentiments improve, we are expecting strong demand for such products in the India market, both online and off-line. So from an overall business perspective, this is all from my side. I will now hand it over to Mr. Abhijit Kanvinde, our CFO, who will take you through the financial performance of the company in quarter 4 FY '20. Thank you.

Thank you, sir, and a very good afternoon to you all. I will share the highlights of our consolidated financial performance, after which we would be glad to respond to your queries. Our financial reported are as per Ind AS guidelines from quarter 4 financial year 20 financial results. In the quarter ended 31st March 2020, our company achieved net turnover of INR 128.23 crores with a year-on-year growth of 12.29%. This is mainly driven by rising demand for our new and existing products in imaging, gaming and IT, including GoPro, Samsung, Cooler Master and PNY. Now the EBITDA stood at INR 2.85 crores in Q4 FY '20 as against INR 4.08 crores in the previous corresponding period. The fixed -- the impact of high-margin brands such as Cooler Master and GoPro was offset by higher marketing and sales promotion spend for the brand and employee cost we incurred for strengthening our sales and marketing team. The nationwide lockdown also adversely affected our inventory and working capital position. The net profit for the quarter is at INR 0.65 crores as compared to INR 2.1 crores in quarter 4 FY '19. Our EPS for the quarter was INR 0.56. Now I'll turn to FY '20 financial results. In the financial year ended 31st March 2020, our company achieved a net revenue of INR 459.06 crores with a year-on-year growth of 23.83%. This is mainly driven by strong demand for imaging, gaming and IT products, including GoPro, Samsung and Cooler Master, supported by addition of new brands in the portfolio such as PNY. The EBITDA stood at INR 16.82 crores in FY '20, an increase of 26.28% year-on-year on account of higher contribution from high-margin, value-added brands like Cooler Master and GoPro as well as addition of new product lines which offset the rise in advertising and sales promotions and employee expenses. The net profit during this year is at INR 7.76 crores as compared to INR 5.81 crores in FY '19. This represents a growth of 33.49% year-on-year. Our EPS for this year was INR 6.69. This is all from our side. Now we can open the floor for questions.

[Operator Instructions] The first question is from the line of [ Nayan Gala ] from [ Family Office ].

I have a couple of questions. First is on the financial side. During this quarter, we had an increase in revenues to around INR 128 crores. Despite that, our profits are lower. So like what has affected that? And the second is on the inventory side. See, the movement of goods and everything has stopped because of the COVID situation. So how does it impact us going forward?

So I would like to answer your question. The gross margin for this quarter has been in line, almost -- but there is an increase in sales promotion and advertising expenses for the quarter. In the last second half, we launched a brand like GoPro HERO8 we launched. And there were lot of advertising burst we had to do in the second half, okay? So some of the expenses have been -- have come in the second quarter. So if you see the other expenses for the quarter have been INR 9 crores -- INR 9.07 crores as compared to the previous quarter, INR 7.39 crores.

I'll add further. If you understand March is our biggest quarter and the industry is poised such as that your sale -- 40% of your sale happens in the last 7 to 8 days. So when we entered into the lockdown, we had started 2 new products. One is Samsung C distribution also we started in the last quarter and we have taken close to 20 people for that business. And Honeywell Passive also we have started now and for that also we have taken additional manpower. And February, March was our quarter to roll out that product. In both these products, we could not get the sales out. So -- otherwise, we could have got almost INR 22 crores of extra sale if COVID would not have in there...

Correct.

And March quarter would have been better than the...

So like in the last like 7, 8 days, we had missed a target of around INR 150 crores. So we had a target of INR 150 crores in the quarter?

Yes.

We were planning to touch INR 500-plus crores this quarter.

Yes, yes, that I know, like you had a plan of INR 500 crores, then INR 700 crores. So -- I've been tracking this company since quite some time. And sir, one more question on the inventory part, like how are you -- how is these things going to impact us? And how are we well-prepared to manage these things?

So 2 things. One, definitely, the inventory got adversely affected because the March inventory did not move out. You plan your inventories for 2 months. So the April inventory also came in. The May inventory also came in. So inventory is kind of all-time high. This quarter has now -- mid of May, there has been some traction in business. And June also looks like there would be good business. So if you consider the AMJ quarter inventory, it would be higher than normal. But if you will consider July, August, September inventory, so the 6-months inventory will become proper because post May all our orders for future material are on hold till the time the situation improves if that's the case. So for the first quarter, definitely, the inventory will impact, but the next quarter will smoothen that out.

Okay. So now -- right now, we are not sourcing any new material, right -- new products for our distribution channel, right?

No, we are scouting for new products. We are looking at products which are digital. We are looking at products which have now become essential. So for example, a robotic vacuum cleaner, which Indian houses did not want to have, now become as essential. A good TV, a good Wi-Fi, a good router, a good fiber Internet connection, they all become kind of essential. And these products would definitely will be there. And we are looking at products, health care products, products which allow you to monitor your health at home. That are becoming very popular and that have now come into essential category. Your first-aid box at home has completely changed. So these are the products which we are actively looking at. And you will definitely hear some good things about them in the next coming quarter.

[Operator Instructions] The next question is from the line of [ Nitin Dayal ] as an individual investor.

Sir, my first question is about the digital platform. Can you give a brief about the digital platform? And actually -- and how does it impacting on our profit margin?

Okay. Nitin-bhai, you touched on my favorite subject which has been there for now last 2 quarters actually. So we are a B2B company, right? You get marketing and distribution rights for brand and then you sell it to distributors and the distributor sells to sub-distributors and it goes to retailer. So we strongly think that everything will become a platform, including distribution. And so we wanted to make a digital platform which will help our customers to transact, to discover new products and to share new products to their buyers in their own company's brand names. So that is the digital platform we are building. And this digital platform has additional features like the customer can have his own customized price list at the click of a button, the customer can also have his own marketing material created in his own company's name which can be sent through a WhatsApp, he can place an order on the system, he can view a ledger, he can download an invoice. And nowadays everybody is moving to a space of virtual inventory. When I say a virtual inventory is that customer places an order, but he wants it to be drop-shipped to his customer directly, right? And so our digital platform also will help him to do the drop-shipment. And all this I'm talking is without any human intervention. He will be able to select where he wants to drop the product. He will be able to upload his list -- his invoice. And against his invoice, the products will be drop-shipped to this customer. So there are very few players in this B2B digital platform space, that would be one part. And how would it impact our balance sheet is that, if you understand distribution, distribution business is all about cash flow, how efficiently you manage your cash flow. I mean, your cash flow gets affected by the inventory what you have and the credit what you give, right? The more you have tons of your inventory, the better is this model. So the digital platform will help us in 2 ways. One is that it will help us that we could be able to do catalog sales. By catalog sales, I mean, the inventory of a customer can -- our distributor can also be uploaded on the platform and our other customers can buy them. So it will decrease our inventory. That's one part. Also the acquisition cost to get newer customers will go down considerably well. Also, the servicing cost of existing customers will go down extremely well. And since this platform will allow us to -- so we have currently 5,000 customers of ours. Once we launch this digital platform, we think that another 7,000 to 10,000 customers we will be able to add in a year's time with the same number of people what we have in the company. So these new customers will not be mainly credit customers because they will be customers smaller who would prefer to buy in cash. So it will also help us to conserve cash. So net-net, the digital platform will help our customers to get more buyers and service them efficiently. And on our side, it will help us to reduce cost drastically. So that's what the digital platform is.

Okay. Okay. So it means it will increase our customer base, right?

Yes, with no increase in cost.

Okay, okay, okay. Sir, my next question is about the other income. Sir, if you can see, quarter-on-quarter basis, the other income is actually in Q4 FY '19 is INR 1.79 crore, which has reduced INR 0.18 crore in current quarter?

You are referring to the consol accounts?

Yes, yes, yes. Referring to consol, yes, right.

Okay. That's right. That's right. So you want to know the reason?

Yes, yes, yes.

We have implemented Ind AS in this current financial year, okay? And we have changed our accounting policy for recognizing foreign exchange loss and gains, okay, on our COGS, okay. Earlier, we used to take it to other income. Now we are taking it to our COGS as per new Ind AS guidelines. Therefore, my other income is lower in the last quarter of '20 as compared to earlier quarters where we've been following the other method. That's the reason.

Okay, okay, okay. Sir, 1 more question. Can you give me a segmental breakup?

Yes. We have uploaded the segmental revenues and profitability on our website, okay? So the segmental revenue for consol are: Imaging, the revenues have been INR 196 crores -- INR 196.08 crores; in IT, it has been INR 192.27 crores; and in Other segment, that is Lifestyle & Security, the revenue has been INR 69.36 crores.

[Operator Instructions] The next question is a follow-up question from the line of [ Nayan Gala ] from [ Family Office ].

Sir, just wanted to know revenue of products like Cooler Master, BaByliss, PNY, as these were the latest to be added in our portfolio. So if you can just guide it?

Yes. So Cooler Master, we started in the month of September. So we had 6 months of sales for Cooler Master and the revenue stood at INR 23.6 crores for Cooler Master in the 6-months period what we did. BaByliss is a personal grooming brand from Paris and the products are manufactured in Italy. We got 1 quarter -- not 1 quarter also, we got actually 2.5 months of sales in BaByliss and we -- the sales was INR 1 crore plus for that. For PNY, the sales is almost...

INR 11.2 crores.

Yes. PNY is also the same story. It came to us in the month of September only and the sales stood at INR 11.2 crores.

Okay. And sir, these were the targets which we had set? Or does it exceeded it? Or we are low on the targets for these particular products?

On the Cooler Master, we are very much on the targets, probably plus 5%. BaByliss, no, we have not been able to achieve the targets because, frankly speaking, we missed the Diwali. So we were not able to achieve the targets we would have wanted to. But PNY, yes, we almost achieved 150% of the targets what we had planned for.

Okay. So that's a very good sign. And sir, I just wanted to understand the recent thing which is happening in Ladakh and like people are saying to boycott Chinese products. So does that impact us as well? Or what are your insights on this?

So 2 things. First, the anti-Chinese sentiments are really there, and a lot of people in India now don't want to buy Chinese products. But the expectation of the customer is that the Indian products should be equivalent to a Chinese product and if not cheaper, at least at the same price, which at period of now seems difficult for a while. We have been speaking to a lot of brands. So for example, GoPro. GoPro is a brand from U.S., Cooler Master, again, is a brand from U.S. So for U.S., they get their products manufactured in Mexico after the U.S. embargo on Chinese products, but for Asia, the products used to come from China. Most of the companies are looking at changing their factories. And these companies are quite capable to get their factory shifted to a different location and get started in 3 to 4 months' time. So I think Taiwan could be a bigger gainer in terms of that. And the products, for example, Cooler Master, ViewSonic. ViewSonic is also a company incorporated in U.S. but headquartered in Taiwan. So that could happen. One of our key brand is Samsung. So Samsung, all products are either made in Korea or made in India. So that will not get affected. So -- but yes, if this anti-Chinese sentiment keeps on growing, that would be the case. And we have identified a couple of factories in India. We have started discussions with them in getting some products assembled in India.

Yes, that was my next question. See, so you have been in talks with all global brands. And do these brands plan to manufacture in India as well? And do -- and at Creative, do you see -- as we are manufacturing for Honeywell, so do you see any plans in that way?

So we will have to see 2 things. The sentiments which are there should not be only on paper. In spirit also, the sentiments of getting global companies to India for manufacturing products should be there. And lot of governments or lot of states are actually doing that. So for Honeywell, we got 3 factories identified for our Passive product and we started manufacturing Passive products through contract manufacturing Passive products through these factories. And then the same is we are going to do this. So the long-term plan for BaByliss was also similar that BaByliss [Audio Gap] and then when the scale increases, you start getting it manufactured in India and then you -- from India, you would look at the SAARC, the Middle East, and the African markets from here. So once we reach some economies of scale, definitely, we should go. As a company, we don't plan up to set up any manufacturing. It will always be a contract manufacturing thing because manufacturing skill sets we still don't have.

Okay, okay. Sir, and you were talking about medical products as well. So what kind of products are we targeting? And like how do we -- like what -- do you have some players in there which we are talking to?

So today, if you understand, post COVID, everybody understands a N95 mask, everybody understands a oximeter, everybody understands a thermometer, every understands a attendance system which can do thermal imaging and personal hygiene products, personal sterilization products and a lot of emphasis is there on hygiene. So we have looked at a lot of products in this field. We have looked at a lot of companies which are there. The distribution segment is separate because these are all pharma distributors, these are all medical stores. And of course, online, Amazon, Flipkart, and power retail like Reliance and Croma with whom we have existing relationship is there. So that's the product which will slowly start building up. And then if that becomes a norm, then air purifier, then air quality monitoring and robotic vacuum cleaners, dishwashers all that will start becoming -- so for example, there's a unique product, a lot of people wants to write on paper and how do you have a face to -- you are having a virtual meeting and you still want to write on the paper and the other person wants to see. So there are a lot of document cameras which come which you hang it on the top and what you write on the paper, the other person can see that. So there are a lot of innovative products. The team is really working on it. So as of now, we think that we should have some good success on that products.

Okay, okay. And sir, one more -- last question on the financial side. So what will be your target for the cash flow?

Okay. See, I will answer to you on conservation of cash flow measures which we have taken in this quarter. Firstly, we are operating cash flow positive. You would have seen our cash flow, okay? However, what we have done is we have firstly given importance to conservation of cash after the COVID situation. Secondly, we have focused on our latest collection and we have done -- suddenly, we have done lot of cost reduction exercises. There have been instances when we have negotiated and renegotiated our rentals and fixed cost. Sometimes, we have requested our creditors or lenders to further -- for the delaying payments. And we have completely monitored the cash flow on a practically daily basis and with some fixed amount as conservation of cash so that we are not out of cash for next couple of months. These are the exercises we have done for cash flow management. Does that answer your question?

Okay. Yes, yes, it does, yes.

We have a follow-up question from the line of [ Nitin Dayal ] as an individual investor.

Sir, my question is related to the balance sheet side. As you can see, the long-term borrowing and the short-term borrowing which has been reduced, but despite the interest expense which has been increased. So what are the reasons for this? And what are the sources of the loan repayment?

Okay. I will answer the second question first. The source of loan repayment has always been our internal accruals. We haven't taken -- we normally don't take more -- borrow more to repay. The second thing is interest or the financial cost has got 2, 3 components. One is -- one major component is always interest, but the second component is processing -- bank processing fees and the third component is LC charges and BC charges. So there are some charges for non-fund-based funding also. So your total finance cost consist of fund-based interest and other financial expense charges. So normally, though you see a fund-based charge -- the fund-based borrowing being decreased, there are always non-fund-based charges and the processing charges which increase your financial costs. So this is the reason. This time, it has increased because of processing fees and non-fund-based charges.

Okay, okay, okay, sir. Okay. Sir, my second question is on the advances from the customer which have been increased.

Yes.

So is there any policy for taking such advances being changed?

Advances -- there's no policy for taking advances. But advances from customers has been increased due to couple of customers have paid us for some invoicing in advance. So there's no policy, but it varies from year-to-year.

So for example, when a product like GoPro, so GoPro HERO8 got launched. So the customer would like to pay advance and when the inventory is in short supply, want to book their orders. So similar -- that's the case for a lot of time when the customers paid their advance.

[Operator Instructions] Ladies and gentlemen, as there are no further questions from the participants, I now hand the conference over to Mr. Ketan Patel for closing comments. Thank you, and over to you, sir.

I thank the entire team of Creative for their untiring efforts, hard work, sincerity and dedication. Also, I appreciate all of you for participating in our conference call. Please do get in touch with our Investor Relations team for any other further questions. Thank you so much.

Thank you very much.

Thank you very much. Ladies and gentlemen, on behalf of Creative Peripherals and Distribution Limited, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines.