Creative Newtech Limited (CNL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Creative Newtech Limited Q1 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ketan Patel. Thank you, and over to you, sir.

Good morning, everyone. Welcome to Creative Newtech Limited Earnings Conference Call for the first quarter ended June 30, 2022. Our company, as you all would know, was formerly known as Creative Peripherals and Distributions 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; and Mr. Vijay Advani, our Whole Time Director. Starting with some key developments over the quarter. Before we get into the business and financial performance of the quarter, I would like to share brief insights and recent developments regarding the company. On the recent developments, although the pandemic is behind us, the consumer sentiments are drifting over to the hazy views of the economy amidst persistent inflation. . While most of the world is gradually recovering from the pandemic, as recent as this week, we have seen that China has shut down a district of 1 million people over for asymptomatic COVID cases. The chip shortage is easing now, but the logistic issue and container shortages have to see some improvements. The unprecedented demand combined with supply chain shortage and pandemic shutdowns caused critical shortages of some chips forcing companies to redesign or reengineer product and hold components. And to add to this, for the last few weeks, the Indian rupee has been on a downward spiral and continues to show weakness against the U.S. dollar. Although the depreciation of the Indian currency impacts imports by making them costlier, but it also is likely to enhance export competitiveness, which would impact the economy positively. Our business and our vision far exceeds beyond just distribution. Today, we have established a brand licensing with a long-term agreement with Honeywell and are building further on this line of business. This is also garnering attention of our other global maps, which are looking at brand licensing as a beneficial approach. 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 gadgets, FMSG. This compromised new and niche products that appeal to the younger demographic and have a sound and a fast turnaround. The brands are driven by social media penetration and wide adoption. This is one of the fastest-growing and higher-margin segments. Fast-moving consumer technology, FMCT, 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. These compromises of products which are supplied to enterprise and are of high volume. Some brands in this category include MSI, Printronix and AOC [indiscernible]. Fast-moving social media goods, FMEG -- I'm sorry, it's fast-moving electronic goods, FMEG. This segment covers our alliance with Reliance through which we offer home appliances, bulbs and lights for brands such as BPL. This segment now better represent our brand portfolio and give better clarity on high-margin and high-volume products. We expand and refresh our portfolio periodically with new niche products, and brands, which are relevant to our brands. Some of our most recent brand addition, including Insta360, Fujifilm Instax and Hyperice, a U.S.-based company specializing in technology-based muscle recovery and massage products well known in wellness and fitness category. In quarter 1 FY '23, we continue to work towards collaborating with well-established global brands blend to our portfolio. One such brand that we added for the quarter was Lexar. Lexar is a global brand providing memory solutions for the last 25 years. These product offers, including memory card, USB, Flash Drive readers and SSD. Now we have the distribution right for Lexar product range of memory and storage solutions in India. We have also expanded the category in Samsung brand by adding the Samsung flash memory product into our existing arrangement with them. Our association was both of them will help us to cater to the younger demographic driven by social media, which on a broader perspective is a high-growth market segment. We are in the process of evaluating more brands to add to our portfolio during the year, which help us to achieve higher growth through higher-margin products and quick working capital cycle. Our license agreement with Honeywell continue to grow stronger. We are pleased to announce that we have expanded the geographic outreach to 38 countries for Honeywell. We are constantly working to increase our footprint in this region. This gives us an opportunity to further increase our scope in terms of geographies and our licenses business overall. We'll work towards scaling up this line of business in this fiscal year, too. Given that we are at present across multiple channels, it gives us strong leverage to rise a wide market base. The synergy from Honeywell business will continue to grow in this fiscal year. Coming to CKart, CKart is our online business, B2B e-commerce digital platform that will aid in the growth of our business while catering to the existing customers as well as new customers with nominal additional cost. It hosts our customers in the supply chain and enables them to transact and share the product with their buyers as well. This allows the user to share their own inventory and transact among each other. We take higher volume and expand the product portfolio being offered to Creative Newtech. CKart will continue to be one-stop solution for customers as well as improve the working capital cycle and profitability. I now hand it over to Mr. Abhijit Kanvinde, who will take you through the financial highlights of quarter 1.

Thank you, and good morning 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 financials are reported as per IndAS guidelines. In the quarter ended 30th of June 2022, the company reported a total income of INR 244.03 crores growing 79.59% year-on-year, which was partly since the last year's corresponding period was impacted by COVID-induced slowdown, growth was also supported by enterprise business and fast-moving consumer technology segment and demand for the products like Samsung, Cooler Master, Honeywell and PNY amongst others. EBITDA stood at INR 7.66 crores as against INR 4.11 crores in the previous corresponding period, increasing 86.21% year-on-year. Benefit from changed product mix was offset by higher sales promotion, expenses and freight and clearing charges leading to a contraction in EBITDA margin. The net profit for this quarter is INR 4.03 crores as compared to INR 1.23 crores in the Q1 FY '21, a year-on-year growth of 227.64%. This is all from our side. And now we'll open the floor for questions.

[Operator Instructions] We have the first question from the line of Suraj Nawandhar from Sampada Investments.

Sir, my first question was that for this -- this is now second or probably third quarter that we have been impacted by higher sales and promotion which -- for which brand we are undertaking this activity and how long this is expected to continue?

Actually, the sales promotion expenses are for various brands, okay? And this time, since the launch of Honeywell products, we had a sound, which was launched and -- in the last quarter of last financial year, the entire range of sound products, whose sale promotion expenses has come in this quarter in the sense, there was a continuous program of sale. So it was mostly about Honeywell products, okay, the sales promotion expenses. And now we think that as -- and it will taper down because it is an initial phase you have higher expenses. After that, it tapers down.

Right. Right. So can you quantify the amount of -- for the sales and promotion, how much we spent in the Q1?

Approximately INR 1.5 crores was additional to the run rate of around INR 50 lakhs.

Okay. Okay. So we are guiding for around INR 200 crores of revenue for this year, and we have done around INR 244 crores in this quarter. So that means we have to do at least INR 320 crores for the next 3 quarters. So is it achievable then?

Yes. So our business is kind of cyclic. The first quarter is a very subdued quarter. The quarter 2 and quarter 3 is where you really built up because all the festivals and everything starts coming in, in the quarter 3. And that's why in the quarter 2, month of September, the stocking level also from the retailers and the e-commerce guys goes up. So this looks very much achievable looking at how it is going, it should be. There would not be a problem.

Okay. And also on the margins and also on the profit side, we have set some targets internally. So we are on track to achieve that, right?

Yes. As of now, we are quite on track that we will achieve that.

Okay. Sir, what was the Honeywell business in this quarter?

Okay. So the Honeywell business in this quarter was close to INR 15.5 crores.

1-6, INR 16.5 Crores.

1-5.

1-5. INR 15.5 crores, sir.

Okay. INR 15.5 crores. Okay. And sir, what is the debt on our balance sheet as of end of this quarter?

Approximately -- just tell you in a second. The long term debt is around INR 11 crores and the short-term debt is INR 58 crores. So overall, that is INR 69 crores. So the debt equity ratio is 0.88. .

Okay. And sir, can you give a bifurcation of the other income? The drawback that you receive and...

Yes, yes, yes, in other income, the major income is the operational income, okay, of the incentive of duty scrip MEIS, that is around INR 4.37 crores. This is out of INR 5.32 crores for the quarter, other income INR 4.37 crores in the duty scrip credit MEIS. That's an incentive you get from the government, and actually, it is -- it should have been treated as a part of the cost of goods sold and I should have credited COGS technically and gross margin should have been higher. But due to it's an incentive which comes from the government as far as the India accounting standard [indiscernible] other income, okay? So from coming quarter, we will be classifying it as in other operation income that there is more clarity on this point.

Yes, absolutely. And sir, my last question is what would -- according to you would be 1 or 2 risks to our targets that we may not achieve it?

Okay. So kind of a couple of risks are there, one was dollar right. And it is -- we are completely hedged against the dollar. So we don't have that risk. But as the dollar price increase is going higher, the cost of the material also keeps going higher, not just in India, but all of the other countries also. So then if affordability becomes a problem and if we have a constraint on the consumer mind so that could be one of the risks if the dollar hovers around $80, $82 also, we know we will not have a problem because those are peripheral products. So there would not be significant between that. That's the first part, second part of it is the continued China embargo because most of our factories are in that region which are audited by Honeywell right? And we have not been able to visit any of these factories for the last almost now 24 to 28 months. And so the product development cycle and to look at the newer product things and then because they are under the embargo the supply can takes it. So the quarter-on-quarter gets hampered because sometimes you can't get ships for 14 days, 15 days. So to summarize, the dollar impact is one risk, the supply constraints and the logistics is the second risk. These are all the external factors. On the internal factors because the country is now -- so we have gone to SEA now as we had planned, and we had told that we will go to Southeast Asia in September. So internally, if we can get the right skill sets to head SEA, if we can't get the right skill set to expand Middle East. And as you know now, we have Africa also, the [indiscernible] country of Africa. So if we don't have the right skill set internally to head Africa, then it would slow down our sales, that's kind of the internal and external.

That is true.

Sir, are we planning to hire anyone just to look after the Honeywell business because it is spread across multiple geographies and there are multiple regulations related to each geography, there are different business dynamics of each geography. So are we planning to hire someone just to look after Honeywell business?

Good question, Suraj-ji. So when we took the Honeywell business, we understood very well that the skill set is very important. So we hired at that point of time as a co-founder, Mr. Mohit Anand, who was country manager for Microsoft hardware and Xbox in India. And then he also was Asia Pacific Director for a brand called Belkin from U.S. So with Mohit's addition on the product development, on the specification, on the marketing side, we have a good bench strength and we don't have a problem. Even the certification side, we have a good team who can get various certification because now Honeywell is almost a 4-year old business, right, with us. And besides Mohit now as we go to other territories, we would require to hire -- even for Honeywell and even for Creative say, for example, on the long term, we want to kind of grow every year at this rate. After, say, INR 5,000 crores, some point of time or say INR 3,000 crores, we would have to look at somebody who can then...

Gets the next level.

To the next level. So we keep speaking to a lot of guys. But then the culture fit also has to be important. And our mindset is also kind of quite frugal, right? So we can't take any business saying that it would be a loss on the balance sheet. So if somebody is with our right mindset who can fit into the culture. So we are actively looking at it. And I will be very honest, firstly, we have been looking for the last 3 months. Actually, our internal plan was that the person should be by -- on role by July, but we have not been able to do that.

Are we not getting a right person? Or what is the hinderance behind not getting a right person?

Because we are looking at somebody who would head the region. So you want somebody of Indian origin, if you can get. So who knows the Indian way of working business, but also should have relationships with the retailers and -- and across Asia, for example, when you go to Singapore, it is not about Amazon, right? Lazada and Shoppe are the largest retailers there. So then you would need somebody who knows Lazada and Shoppe. And Lazada and Shoppe are not existent in India. So from India, you cannot buy somebody. So you need somebody who is residing in Singapore with Indian origin with the connection for the business there. So we are trying to find out actively. We have spoken to headhunters. We have gone back to the peers, Mohit has gone back to his peers in Microsoft, in Belkin to find people, but it is still taking time.

Okay. And sir, my last question is Honeywell business is also cyclic as well, we have given target for around INR 150 crores to INR 200 crores for this year, and we have done INR 15 crores in Q1 is it a -- that business is also cyclical or...?

Honeywell business is a bit of cyclical because the air purifier business, which is there, that is completely cyclical. So the business only starts end of September in northern part of India. Similarly in Indonesia, similar is the case when they -- upon the rice ban, that's when Singapore also air quality gets poorer and they take that. The speaker as a whole is, we are just the new entrants. So cyclical business will not affect and we will grow from there. And the accessory business also is not cyclical, but it depends upon the availability of the product. So when the last quarter, especially Apple laptops and others, their shortage so our business gets a bit affected. But besides the air purifier is not very cyclical.

[Operator Instructions] We have the next question from the line of [ Riya Kumar from SKS Capital ].

Sir, I wanted to know like what is the rupee depreciation impact on the business, how it is impacting our business?

So kind of a 2% to 3% slide, overall transfer at almost 12% to 15% in the rise in the end user pricing. So that's one part of the thing. And second is when there is a lot of confusion about the pricing, the consumer kind of abstains from buying because it is no clarity whether the price will go back lower or not that's the tale. So in our cases, currently, around 10% to 12% is the cost increase in products.

And 1 more last question, like we have seen that we have got a lot of products from China. And there have been a lot of shutdowns there. So how this is impacting our business basically?

So a couple of things are there for the copper cables and that we have factories in India, which are certified by Honeywell. So there, we don't have a problem. In case of China, the factories really work there very well. But if supposing there are some cases in the container yard, that's when they kind of lock down the container yard, then the chances of your -- missing the ships are there. But the overall impact is that because China has been into lockdown instead of, say, 2 months inventory now we have to have at least 3, 3.5 months inventory because you don't know when the situation will get worse. And second is factories before were taking 30 days to produce goods now are taking almost 48, 49 days to produce goods. So overall, your working capital cycle has gone up by close to...

Five days on an average.

Overall 45 days, right?

No. Earlier it was 45. Now it is 50.

Overall it is 5 days but for Honeywell business, it is almost 35 to 40 days. So your working capital goes up by a month or so.

We have the next question from the line of [ Vignesh Iyer from Sequent Investments ].

So I just wanted to know what is the business from Cooler Master in quarter 1 as compared to quarter 4 of FY '22, if you could give me some numbers?

Okay. So this quarter, Cooler Master was INR 11.03 crores as compared to the last quarter, it was INR 10.58 crores, some marginal improvement in Cooler Master business. Year-on-year, yes, there has been an increase of INR 5 crores almost, INR 4.5 crores almost in the business.

Okay. Okay. Sorry, I joined the call late, but if you could tell me, as we had to talk last time about re-categorizing the other income and other operating income.

Yes. Yes. This -- I have spoken with the auditors, it will be done when we submit our half yearly when the balance sheet is submitted. So next quarter, it will be done. Yes? And see, they did suggested that we should do when we submit the balance sheet, which is next quarter. That time it will [ transacted ].

FY '22 balance sheet, I mean.

No, no, no. Half yearly, September. They will reclassify this September. And then we will consistently reclassify it.

[Operator Instructions] We have the next question from the line of [ Pratik Kumar ], an individual investor.

Sir, can you give you a breakup of your INR 15 crores of sale of Honeywell between various categories this quarter?

Right now -- okay, can you give me a second, so Honeywell active...

That is a mobility product.

That is a mobility product, it is approximately INR 6.5 crores. Honeywell package. That is -- even [indiscernible] INR 5.64 crores. Honeywell air purifier since the season that is not started. It is hardly INR 50 lakhs. And around INR 2.5 crores of sound, audio.

Got it. Got it. And sir, last year same time in the last quarter, what was your Honeywell sales?

It was INR 19.5 crores.

So why is there a decline, sir?

There is a seasonality. First quarter is also low for our actives business. Our [indiscernible] business, if you see the entire 4-year track, the first quarter has been always slow there. And...

Ketan will elaborate and...

We also have multiple products, probably into that mobility sector and other active components, which we sell to corporates. So the -- there was a shortage of we will lap of an other peripheral devices. So due to that, that probably in this quarter, we will see a good movement of those productions also. .

So [ Pratik ], to give a raser sharp answer to your question is that we expected this quarter to be '21, few stocks did not arrive on time, and plus some laptops were not there. And actually, kind of -- this is on the date of 30th July is what this report is. So some stock came in, in the next year. So this quarter should be well. But we fell short by say INR 4 crores, INR 4.5 crores of our internal target on Honeywell.

Yes, that is true.

And you're journey from, let's say, INR 60 crores last year to INR 160 crores to INR 200 crores, which category will drive it, sir?

Okay. So our hope was that -- and because the audio as a overall global is a $25 billion market, right? So we think audio will definitely lead the sale. And if audio we can really fire well, then we should sail through very easy thing. But we have built in a lot of contingency on that. And right now, active or the mobility products, which surround the 3 screen, right, your laptop screen, your mobile screen and your TV screen, that products are doing very well. And that will take us there. Second is, as we open up territories, right? So usually, now when we open up a distributor, say, we are in talks with a couple of distributors for Singapore, Malaysia, 1 for Bangladesh. Their opening orders are only close to, say, $0.5 million between the 3 distributors. So that also -- because you are going to virgin market your products will be placed for the first time. So you get that advantage that when the material moves on the retailer shelf that's the captive inventory, which they will always keep. So that's going to help us there. And I think it would be fair to say that we would reach the INR 155 crores, INR 160 crore Honeywell target, which we have in mind.

And sir, sorry, my understanding is limited, you have a 52% stake in the Honeywell business right eventually after the minority interest?

Yes, yes.

Okay, okay. And just from a quality of sales perspective, I'm sure you guys will be catching it on the B2B channel -- on the Amazon channel. How is your quality of sales and within a category, what is your rank? Do you have it?

Yes. So a couple of things are Amazon, it is not just the quality of product, right? You should have the right GVs that is glance views they call, then you should have the right reviews, right? For every 100 products, you sell only 10 people write the reviews, right? And then to come on a higher side, you require a certain amount of reviews, you require a certain amount of glance views to do that. So that art we have now enabled and a lot of our products which are old say like [indiscernible], C type docking station. They are all with now 2,500, 3,000 reviews. And that review really help us that when we go to Middle East also, the same scenes get captured in Middle East so the same reviews have seen there. So that's helping us on products which are almost in the system for 2, 3 years old. For products like audio, which we just launched, we have just 40, 50 reviews on that. But -- so in India, the C Type docking station is the #1 choice for Amazon today. Our fixed port for suppressor is also Amazon's choice today there. In Middle East, our 3 of the products. So the Air purifier is #3 in Honeywell's choice, #1 in most recent launches, and #1 in most desired in its category of air purifiers. That's the case. And as we go to Southeast Asia, Amazon is not the dominant player, Lazada and Shoppe are the dominant players. And they have a different review mechanism. So it is a horses for [ forces ] strategy, but in India and Middle East, where Amazon is the dominant player, we have to still work a lot on getting the reviews done because on the reviews only your sale can increase, that's the case.

Correct. Correct. And sir, sorry, I missed it. What is your bestsellers rank for, let's say, your audio products or are you in any of the bestsellers as of now?

So no, in audio, we are not on any of the bestsellers. Only we corrected our applies the last 3 years, and we have seen a remarkable jump into that. Second was Amazon itself also was aligning its alpha sellers, right? So CLOUDTELL or Apache who is their alpha seller and they disintegrated CLOUDTELL last May. Now another 8 or 10 alpha sellers out there, which will align before the independence day sale in that. So once our products they start pitching in, that's when we will see some traction on our products.

Got it. Got it. And sir, just quickly, if I were to remove -- because Honeywell is a very high-margin business, if I were to remove that from the EBITDA and then see the other part of the business, the margins over there are quite immaterial. Is that understanding correct?

Yes. [ Pratik ], in a way, that understanding is correct. So kind of see everybody -- what is our business if you want to see, right? How fast we can rotate our capital, right? And so if you want to rotate your capital fast, then you require quick sell, right, products and quick inventories on products. So that -- the whole business crust is that how fast you can do your business. Second is the cost of -- because there is no capital expenditure, right? You are not running any factory or anything. So your cost of business is pegged at a certain number and post that everything what you do comes to your bottom line. So in our case, currently, the other businesses which are there, which helps us to bring down cost considerably for our Honeywell business. And as a company now, every incremental resource and every incremental finance what we are getting, we are just putting it into the Honeywell business. So over a period of time, you will see that Honeywell business will keep increasing, while as even in the FMSG, the fast-moving social goods category, there's a margin of 10% to 12%. So all incremental resources are put into these newer kind of businesses. But the traditional business gets [indiscernible] and that's why we can't drop that business. Yes, we have to be cautious that we don't increase that business a lot because it takes away a lot of our management time. But that business needs to be there.

Got it. And can you also help me with working capital as of June. Because as you said, your business is about inventory terms and managing working capital maybe that is something that we would be very helpful.

So ideally, we were last to last year, before COVID we were at 45 days of working capital. Lately, we are at around 50 days. The -- and that's because there has been -- there have been supply chain issues in last financial year and this quarter also, okay? But going forward, we -- our -- this year-end target, we want to bring down this days to at least in the range of 42 to 43 and then going forward, below 40. That's when it is least going to be meet our overall target. This quarter is slow. So the ratios and all will not be very, very representative once we have good numbers, then the ratios would make sense. So 50 -- for 50 we wanted -- first stage is to go to 45 and then go down 42, 43 and then go down below 40 over a period of 1, 1.5, 2 years time.

So [ Pratik ], just to add to what Abhijit said, it's a conscious call currently, right? You have to decide whether you want to have higher inventory because the logistics is a issue currently or you want to have a better cash flow. And currently, we have taken a call that we will have a higher inventory and -- because the finance cost can hit by 1 percentage point, but then we don't want to lose on say, on an average 10% margin product or in Honeywell a 40% margin product. So that's the call but yes, last quarter, we have not done a good job on working capital management, yes.

Okay. And sir, just I'm not sure you had a guidance of INR 2,500 crores by FY '25, right?

Yes, sir. .

Okay. And how much was Honeywell in it?

Sir, our endeavor is that it should be between 25% to 30%. So if we do -- our guidance is of INR 2,000 crores, sir. But if you say you are figure also INR 2,500 crores, Honeywell should be around INR 600 crores to INR 625 crores. And because we got category expansions, right, we had only first enhancement products and mobility products. Last November, we got November 21, we got all audio. And air purifier also, we got the complete new range. So with the category expansion and the geography expense, we'll see an exponential rise in Honeywell business.

Got it. Got it. And lastly, sir, just if you can help me understand your debtors and inventory cycle in the same, how much you have debtor days, just a breakup of that working capital that will be 3 year's worth?

100%, just a minute, Abhijit is the right person.

[ Equity ] I said that overall working capital cycle of 50 days, okay? So debtors would be in the range of 31, inventory 43 and creditors would be 24.

Okay. Okay. Okay. And when you bring this down to, let's say, whatever, 40 days or below it is the inventory, which will come down. That is the driver?

As the creditors days also...

Creditors will go up, sir.

So creditor days usually were around 30 to 35 days. But because now first from the factory to the dockyards, it was a 4 days and you could catch the ship in 4 days. Now minimum you have to plan between 18 and 21 days to catch the ship. That's what is kind of taking a toll on the creditor's days. And inventory because you don't want to lose out on that, that's why we are stocking at least for Honeywell and certain gaming products a month inventory more. That's why it is the thing.

And I heard your comment on China embargo, I was just slightly curious. Is it that you're not allowed to visit over there?

Yes. So we -- so China as a country we can't visit. And if you want to call somebody from China to Hong Kong, then every time you go, it's a 7 -- it was a 14 days, now it's a 7 days for it. So -- all of us have honed our skills to kind of launch products so Honeywell audio, kind of we launched more than 60 SKUs in the COVID period without visiting. But when you go to a factory, you see their facilities, you can talk on components, you can talk on other parts. So that whole process will get delayed. And then because it's not a face-to-face interaction, you can't kind of search for newer factories, newer design houses because we want to first visit their facilities, be comfortable, look at the vibe they give you and then go ahead, right? So that's our problem currently.

Is this because of COVID that they are not allowing? Or is it something else? The external issues?

They have a 0 COVID policy. So if they get a case of more than 4 or 5 then they lockdown the whole district, that's the case.

So that is why they have stopped incoming tourists or business people, is it?

From December '20, nobody has been able to go there. But people from China or Hong Kong are not coming to visit us, they can come, India is open. But when they go back, they have to have a 7 days quarantine at least in Hong Kong for the Hong Kong citizen. So that's why they are also not visiting.

We have the next question from the line of Mihir Dhami from Lucky Securities.

How much sales impact would you have seen this quarter because of customers deferring their demand in hopes of price reducing in the next 3 quarters? Can you quantify that? And do you expect sales to improve that in the next few quarters?

So Mihir, one is the price gets increased, and one is the fear that because of the price increase, the consumer will not buy, right? So because we are a B2B company, our primary buyers are the likes of Chroma, Reliance, Amazon and Flipkart and they, right? The moment you talk about increasing the price, they kind of reduce the inventory. So usually, a Flipkart or a Reliance would carry inventory between 6 to 8 weeks, right? So they kind of reduced their inventory. And they also do not buy a lot of inventory because they think if the price goes down, of course, they get compensated, but it takes time. So just to put an exact number would be kind of very difficult. But the price rise and the sentiments, they kind of hamper the consumer demand. And in terms the buyers don't buy.

Okay. So you witnessed destocking currently in this quarter and next quarter there going?

Yes, so 2 things are there -- no, I didn't get the question. What did you say?

You witnessed destocking in this quarter on the end of Reliance and Flipkart and in the next few quarters, it won't be there?

In the next 2 quarters because the festivities are there, right? Now you will have the Independence Day sale, right? And then the Big Billion Day sale for Flipkart and Amazon. And then Reliance will get into and the retail will get into the -- this thing, right? In Middle East from September, October, the overall heat would start coming down, right? And that's why for us, our business is quite cyclic. So how do we look at our business for you is the quarter 1 is the lowest, quarter 2 builds up. Quarter 3 is the highest, quarter 4 then sets the sales for the next year, next first quarter, and then you develop from there. That's how we kind of plan.

We have the next question from the line of [ Vignesh Iyer from Sequent Investments ].

Yes. Sir, I just want to know, which -- we are facing a scenario where our biggest buyer are not sure of whether to how much stock, the inventory of goods like where the price could be a major play, why are we front-loading, our inventory in our books and hurting our working capital cycle? Because -- or else does the management have a view in place where they foresee that the sales is going to be strong in coming because there seems to be some gap between the understanding from the management as compared to the buyers like Reliance, Flipkart, et cetera.

So [ Vignesh ], basically, I'll just make it simple. You are saying that if the market outlook is not so bright why are you stocking up, right? .

Right, right.

Right, that's okay. So 2 things to that. Number 1 is that our inventory, we stock only in a bonded warehouse in China. So we have an advantage that if the sales happen better in, say, Middle East, if the sentiment -- because kind of Middle East has been in advantage right from COVID times because they were always open. And the war also got them a lot of people to migrate there. So we have for the inventory which is international, so which does not have plus, we kind of have the inventory in Hong Kong. So if there's a chance to sell more, we are not stocked out that's one of our view. And second of our view is that when there is a price rise for a quarter or for 30, 60 days, [ then the end tie-downs ] and then the new price becomes normal. And the third most important part for us is because we have got extended geographies. So tomorrow, for example, Southeast Asia opens up, right. So we should have inventory to supply them also. And that's why looking at our internal projection and then building a bit of caution to it, we have taken this call.

But when -- on our contract side where we leave it to our contract manufacturers, our prices more or less set when that contract manufacturer produces -- manufacturers for us. Right? So how are we mitigating any drop in price as such? Even if the product has been the bonded warehouse in China, but our contract side of the cost is committed, right?

Correct, correct. So kind of when you look at our structure cabling business, right? That's where the copper decrease supply. And in structure cabling, there's no technology other than the rolling of the cable, right? So there, the markup is not huge and if the copper price goes down, obviously, your inventory, you will have to take up this. But because you are a brand and you are selling at a certain price. And overall, the pricing goes down, but there's some benchmark price associated with a brand and then the consumer price. Coming to all our other products, it's predominantly the chips and the circuitry and the board and the firmware and the app which goes with it. So to -- for a particular component to say that the price because of this component went up would be minimal overall. That's the case. And all these products we kind of forecast 4 months in advance, and the inventories got -- so for example, today, we are placing for the orders for the month of October, okay? And so we place a order today, the companies -- the factories start procuring material. And then the price is kind of fixed on that. Only for our copper cables we look at the alumina and for that, we only forecast the 60 days inventory. And yes, in that 60-day if the price goes down, we will have to kind of take that loss on the balance sheet.

Okay. Okay. Fine. And coming -- yes, yes, go ahead.

So when you complete -- when you quote for any kind of a product it is not standalone product. It goes along with some peripheral subdevice, some product, some machine. So -- because of the supply side issue, if there are 5 components coming from 3 vendors, there is a possibility of 1 component getting delayed. So because of that, the sale is getting pushed, the purchase buying is getting pushed. Now I suppose if there is an LCL container where there is a component, which is maybe contributing only 25% of the machinery cost, but you are not getting the container for almost 20 days, 35 days to LCL container to shift from there to here, 1 consignment which comes by air, it has to be loaded in 3 aircraft to 1 aircraft. So these are the reasons where there are some places there are stocks. There are some places there is no inventory which is mismatching the...

[indiscernible] Inventory would have...

He is saying if the cost goes down.

Yes. Okay.

Yes, that was the second question. Sir you can complete. .

I get the inventory part of it, like I just wanted to understand that. Secondly, on Honeywell business, we have something in place where the licensing agreement is beyond India and how as of now, are we leveraging that advantage? Or are we expanding to other boundaries?

Currently, we have our distribution in Italy...

Again the China issue is creating problems as where we are not able to expand our product line.

So the China issue kind of slows down your new products introductions that's for NPI to the China issue, from our NPI and kind of increase your working capital. That's the 2 effects it has. Coming to our geographical expansion now because we have the whole enhancement and mobility range. We have the air purifier range, and we have the audio range as a category. We have taken all this category, and we have gone to [ Prakash ] Dohatna Distributors or Ali Bin Ali that's the distribution company who is taking our products to Qatar Jabal Al Rayan is the company in Dubai, who is over new distributor for the products there. And now we will open Saudi, we are in talks with a few people there to open up Saudi. Southeast Asia also because of certification and everything is in place. We are now in talks to open up Singapore, Malaysia and Bangladesh, Sri Lanka and Nepal are a very miniscule territories currently to look at. And both these territories would have a director sales, Middle East and Director sales SEA, that is Southeast Asia who would in turn come and report to Mohit or to me in India. So this territories would then kind of help us to increase those spaces.

So the middle -- more the idea of the company is to increase the Middle East footprint, right? And we can expect more business coming from Middle East in current fiscal, right?

Correct. So Amazon, we are present on Amazon.ae, we are doing quite well on Amazon.ae. Now we are present on [indiscernible] one, we are present in [indiscernible] mall. So all the hard work which we put in the last 6 months to get the product on the shelf, get products listed all that is done. So now the sales would start coming from this territory. And then that's our plan, right? You get a distributor, you work with them for 4, 5 months, you stabilize them. If that's giving you forecasting order, then you start opening another territory and then you get a distributor there.

Okay. And in this geography as well, there would be a similar level of margins as in India? Or would there be some?

The margin is a 10 percentage point higher because the GST is not there. And places like [ Smarty] is very high, right today in Singapore normal mean wood cost to between or a normal Uber costly between $18 and $20, right? And audio product average selling price would be $10 or $12. So for them, the -- is not much of an issue. If we are available at the right places, that happened. So the margin outside of India is 10 percentage points higher gross margin, I'm talking.

Okay, right -- and how is our -- after our agreement for Fujifilm in stars, how is the product performing as in Indian geography? .

Yes. So because India -- population, 35 years, and that is more than 75%, they have won something retro, they want something very nice. And Fuji is emerging as a good gifting product. Our sales currently for the last quarter for Fuji is close to INR 2 to INR 2.5 crores. And we think it will do much better in the coming festive season.

We have the last question from the line of Suraj Nawandhar from Sampada Investments.

Sir, last one, we met you spoke about Honeywell during [indiscernible]. Is there any update on that?

Go ahead, I didn't get the question. You said that we spoke about Honeywell what?

Honeywell cabling for the metro work that is going on in the [indiscernible]?

Yes. So that started picking up traction, even BSNL has approved now as main products. And we will see a lot of -- and when we go outside of India also, the Honeywell passive cabling business attracts a lot of attention. So it should start showing results. Last quarter also, we did well. And I think this quarter also, it would start falling in.

And if you have any tender, all the source will be done from us, right?

Yes, 100%. Because we have the exclusive license fee and nobody other than us can manufacture that.

I now hand it over to the 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 this conference call. Thank you so much, and have a nice weekend.

Thank you very much.

Thank you.

On behalf of Creative Newtech Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.