Creative Newtech Limited (CNL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Creative Newtech Limited's Q2 and Half Year FY '24 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 a guarantee of future performance and involve risks 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, Creative Newtech Limited. Thank you, and over to you, sir.

Good morning, everyone. Welcome to Creative Newtech Limited's earnings conference call for the second quarter and half year ended September 30, 2023. I would like to start by thanking you all for taking the time to join us today. On the call with me are Mr. Abhijit Kanvinde, our CFO; and Mr. Vijay Advani, our Whole-time Director; and Adfactors, our Investor Relations team. The company as a whole has continued on its upward trajectory through this period, reflecting the sustainable nature of overall growth strategy. Before getting into the financial highlights of this quarter, let me share some key recent developments during the quarter. Firstly, Creative Newtech Hong Kong subsidiary, Secure Connection Limited, entered into an agreement with a UAE-based Trigon LLC. Trigon is a part of the prestigious Dubai-based Al Ghurair Group with a strength of 150-plus sales and marketing and support staff. As part of this collaboration, Trigon LLC would act as the official distributor of Honeywell products in the UAE, thereby, expanding Creative's reach in the region. Honeywell's renowned for quality and innovation will now reach a wider audience in the UAE through this partnership helping us capitalize on the opportunities in the emerging regions. Earlier in July, we had launched a new range of Honeywell sound bars. More recently, we ran a campaign to spread our net about Honeywell air purifier effectively in Mumbai after the city's air quality dropped [ 16% ]. Our journey with Honeywell has come a long way. And today, we are deeply entrenched with the brand to represent it across product categories in the APAC and the GCC region via our licensing agreement. On the distribution front, we continued to curate our portfolio with niche and big brands, which are leaders in the field and have tremendous scope for penetration and [ market upfront ]. One of the recent agreement is with the U.K.-based company, Ruark. This is a premium audio entertainment company, which is popular among professional and enthusiasts alike. We are thrilled to introduce Ruark high-end audio products in the India market and hope to be the catalyst in the penetration of this region. Our cooperation with Ruark exemplifies our strategy to identify underpenetrated premium brands targeted at specific demographics with -- where there is substantial scope of growth. The technology and the consumer electronic landscape is evolving rapidly, Creative Newtech [ itself ] by aligning with the changing trends identifying high potential global brands and there being agile in our operations. As you are aware, we have a strong foothold in brand licensing with Honeywell, which is fast becoming a major contributor to our revenue. Our value addition goes beyond traditional distribution as it is [ awaited ] through our marketing campaigns for Honeywell mentioned earlier. Our e-commerce platform, Ckart, also facilitated in expanding our network of partners entering in economies of scale. By closely monitoring market development, we build stronger connections with our customers, ensuring that we stay [ right on the floor ]. The confidence of our brand partners in our expertise and the quality of our service is evident from the many long-term contracts sold over the years. Looking at the next half of the fiscal, we are optimistic about growth in all the 4 segments, FMEG, FMSG, EB and FMCT, and are poised to capture market opportunities. Now I hand it over the floor to Mr. Abhijit Kanvinde, who will take you through the financial highlights for the quarter and the half year.

Thank you, and good morning to you all. I will share the highlights of consolidated financial performance, after which, we will open the floor for questions. Our financials are reported as per IND-AS guidance. Looking at consolidated Q2 FY '24 results, the company reported a total income of INR 432.81 crores, growing 32.65% year-on-year. This was driven by strong demand for brands like Samsung, Cooler Master, Honeywell, ViewSonic and supported by improvement in EB segment. In terms of segmental performance during this quarter, the FMSG segment accounted for 14% of the revenue. FMCT accounted for 15% of the revenues, while EB comprised of 70% of the revenue. The quarterly EBITDA stood at INR 14.99 crores at against INR 13.27 crores in the previous corresponding period, an increase of 7.9% [ year-on-year ] mainly due to higher revenues. EBITDA margin for the quarter stood at 3.46%, lower by 61 basis points as compared to the corresponding quarter last year. A change in the product mix has in part impacted the margin. The PAT for the quarter is INR 10.46 crores as compared to INR 9.1 crores in Q2 FY '23 and year-on-year growth of 14.98%. EPS for the quarter is INR 6.79. Now let's look at consolidated H1 FY '24 results. The company's total income in the first half of the fiscal year stood at to INR 904.15 crores, growing 58.5% year-on-year. This was driven by strong demand for Samsung, Honeywell, Cooler Master and ViewSonic supported by growth in enterprise business segment. The half yearly EBITDA stood at INR 24.89 crores as against INR 20.93 crores in the previous corresponding period, an increase of 18.93% year-on-year. The EBITDA margin for the period stood at 2.75%, a decrease of 92 basis points as compared to H1 FY '23. Better operational efficiencies were offset by change in product mix impacting the margin. The PAT for H1 FY '24 was at INR 16.34 crores as compared to [ INR 12.35 crores ] in H1 FY '23 and year-on-year growth of 28.60%. EPS for the first half of the year is INR 10.52. This is all from our side now. We can now open the floor for questions.

[Operator Instructions] We'll take the first question from the line of [ Aditya Jhawar from AJ Capital ].

I have one confusion. When you say Honeywell licensing right, so you bifurcate into 4 segments, right? In that, how do we get to know that which is coming from Honeywell licensing, it is from social branding or how do we see that? That is my first question.

This is Ketan. I'll take that question, okay. So Honeywell itself has 4 categories, okay? We have Honeywell licenses for air purifiers, which is kind of a [ light sell ] category will get again in our 4 categories of -- from social media gadgets, it gets into that category. Then Honeywell has personal audio and it also has a Bluetooth audio, this is home audio also it has. That category is the third category is Honeywell has structured network cabling, which will get into our EB category. And the last is they have electronic essentials, which also is again into the FMSG category. So out of the 4 categories, we bifurcate this and then put it into the respective segments, which we have created in the company. I hope I could answer your question clearly.

Yes, yes. So what is the contribution total from the annual licensing for this quarter?

Okay. So for this quarter, it was -- last quarter, it was around INR 30-odd crores. This quarter, it was around INR 41-odd crores. Last time that Diwali was in the month of October, so our premium July, August, September was the main quarter. This time the Diwali is in November so October, November, December is the main quarter.

Yes. Great, sir. Great. I think whatever you have alluded in the last call that we are in that trend rate only. Okay. Now my second question is related to cash flow, right? So I think our CF [ standard ] will be cash flow positive. But still, however, we are increasing the revenue, the cash flows is going on negative. So you explain here of why -- because I think it is getting stuck in working capital, it is the nature of the business or with scale we'll achieve working capital or operating cash flow positive because if you again are in a negative cycle, then again when you try to grow beyond, then again, you need equity or some of the other instruments. So how are you thinking to get from internal across is my second question.

Absolutely [indiscernible] Aditya, let me take this question. Last time I had said that in this quarter we will be operationally cash positive, okay? We are working towards that, right? If you care to see the balance sheet and if you look at other financial [ assets ], the other financial [ assets ] have come down from INR 91 crores to INR 60 crores, yes. [ The INR 31 crores ] remarkable improvement.

Right. That's what you said for GST, right?

Yes. GST has come back. That's what I promised the last time, okay. Unfortunately, what has gone on is the latest figure is INR 108 crores from INR 67.5 crores, yes. There should have been some collection on a dealer from our side. And therefore -- and there was a holiday of Saturday, Sunday and Monday, 30th, 1st and 2nd. So that is what [ closed ]. So most of my collection, okay, approximately INR 20 crores, INR 25 crores has come on. All right. Unfortunately, this have to be accounted as the accounting rooms has higher data. I'm quite sure and 100% positive that we are managing our data as well, okay. Even for our working capital cycle, our data collection period, if you see. It is about '23, okay, and I was seeing this capital taxes of 29 has gone up for a while okay? But this will normalize. And by this year, we will be surely cash-flow positive, okay. We are cash flow-positive [ given the operations ] actually.

Aditya, what [ the CFO ] is trying to say is that if this balance sheet was made on sort of October, we were cash positive because the balance sheet is made on a date 30th September and the payment came 3 days because of the holiday.

It's an [ extra payment ], the proceeds.

So my last question is on the -- for this current year, if we see the run rate right, we are getting -- clocking INR 1,600-odd crores. In that still 40, would say, Honeywell licensing is our high-margin business. Basically, INR 80 crores is coming from there. But whole year, if I see, it will be roughly around INR 150 crores to INR 180 crores on the Honeywell business, right? And we have to scale this INR 500-odd crores. Then basically PAT margins will move up because we have grown margin. So for 1 to 2 years, can we scale in this Honeywell licensing INR 500 crores in the 2 years? That is my first question. And can you also throw light on 4 to 5 years' perspective, this is first milestone. What are the new milestone, new benchmarks are you setting internally to [ our FP ]?

A very good question, and I will take that question, and I will answer it elaborately because a lot of interest is within the companies because of the Honeywell license fee. Okay? There are 4 categories in which we trade. One is the air purifier category. Air purifier was not a mainstream category until last year. People who have opted to buy/people would have not opted to buy. But with the pollution and with the people screening and everything happening, it has now become a necessary item, that's what we feel. And looking at our sales for the last 4 days we already sold about for the whole month actually, right? Every day, we have been selling more than 1,700, 1,800 air purifier on Amazon, just Amazon itself. That's the [indiscernible]. So air purifier overall in India is INR 1,200 crore category in India. I'm talking we have 38 countries, but India INR 1,200 crores category, which I think next year will become a INR 2,400 to INR 3,000 crores, that would be the total market for that category, okay? Then coming to personal audio and home audio, that's a INR 25,000 crores category. Then coming to the electronic essentials, that's your fast-charger, your HDMI cables, your [ free-style ]docking stuff and all, and we are in a slightly premium segment. So that whole category is close to INR 30,000 crores. But for the category, which matters is close to INR 8,000 crores. Then coming to passive networking. In the passive networking space, if you just see dealing who is into that passive networking space, they'd be close to INR 600 crores or INR 700 crores, I'm not exactly sure of the number, last year. And then there is like CommScope and many others in that category. So that is also around the INR 2,500 crore category. For us the challenge is not that the TAM is not there with the right mix of products, the right certification. If any of this category kind of -- or any 2 products kind of become big products across any 1 country also, we see that Honeywell business by 2030 should be more than INR 2,500 crores, INR 3,000 crores means from [indiscernible] earlier, that is, if you ask me what's going to happen by 2030. Because this category itself is expanding formats, right? Or on the last 4 to 5 years, now we have complete range in everything. So when we account that in November itself, we launched close to -- and the products will be with us by 24th November, we launched almost 85 to 86 SKUs across different countries with different plug points, right? So just the spike suppressor, we launched close to 35 of them for Thailand, for Indonesia or Singapore or U.K., all these places. So Honeywell definitely has great scope and [ from there ] air purifier we think will get towards our magic number of INR 500 crores in the -- by 2025, '26. Other products are kind of a bonus. For us, the challenge is to only get the right skill set in the right geographies where we are because each geography deals in a very different way. Middle East likes products, which are very heavy. Out East Asia, they like products which are slightly subdued products, which are straight lines that [indiscernible]. And now we have already Southeast Asia Director, [ 69 ] place in Singapore, we have [indiscernible] in place in UAE. We have another customer appointed joining in a day's time in Saudi Arabia. So we already have a functional office in Middle East, which takes care of Middle East now. So I think it could be a quarter here and there, but I -- no doubt that we'll do very well in the Honeywell business.

Great. So this Honeywell, whatever you said, in the majority comes from air purifier right now, correct?

Air purifier, for example, was a very seasonal category till date, right? So if you go to a Reliance or Croma, they will say that, okay, we were in November, December take back in January, that would be their stance, right? But looking at the whole year trend now, we see that every month for the -- from January to September, it is selling. And from October, it becomes a peak season until February, March. And actually, when Diwali is a month later like November, when your Diwali and the [ crop ] burning all start in Delhi and then again the construction and all that happens, that's the [ synaptic ] supply. I think Honeywell air purifier over a period of time will become like your TV, it will be a multiroom product. You may have a TV or not and December you will service 100% have an air purifier. And it's coming to a point where we don't have to go and explain the product to anybody. You buy the product and you are explaining to your friend why you require the air purifier. Because until last 3 years, we had this problem that how does an air purifier work, how do you -- the air quality inside home, this is much worse than the air quality outside. The air purifier does not purify air, it also removes a volatile organic compound, the fumes which comes out of your [indiscernible], out from your [indiscernible], from the [indiscernible], the cat dander, your steam, which you share every day, so all that. So that's really picking up and it's coming to a tipping point where you will see that most of everybody will have. And we are now seeing hotels offering air purifiers to whoever takes -- books the room and you say like you wanted a hair dryer, now you can also say I want an air purifier. And since the top chains have started that, the rest of the hotels will also start doing that. So I think we're in a great business and we should see a lot of good traction in that space.

What is the contribution, sir, this number?

Okay. So this year, I think we will beat our targets. So we were thinking we would do around INR 16 crores where, if you recall, we should -- if we get the stocks in everywhere very well, we should be around INR 28 crores, INR 29 crores.

So yearly, we are talking about INR 28 crores to INR 29 crores [indiscernible]

Only started for us in October, November. But now we think it will do very well across. Because last year, the season was not good because it rained in Delhi and then people did not buy. So we were slightly conservative about the stock. But now looking at the sales and looking at the season, how it's opened up, we have already doubled our order every year. That's the case.

Okay. So you are seeing 1 category only rose to INR 500-odd crores in the FY '25-'26?

Because if we do [indiscernible], you are already #3 after Philips and Xiaomi in the air purifier category currently and a distant number 3, right. Philips does INR 400 crores, INR 500 crores, yes. If the market doubles, there is enough space for Philips, there's enough space for Xiaomi and there's enough space for us to be in that category. And Honeywell's brand salience with the air purification because all HVAC use Honeywell, right, or smart buildings use Honeywell to control their air quality and other stuff. So that brands salience with Honeywell air purifier is very good. So we think that, that category will get faster to that number.

Then only from 1 category if you get INR 500-odd crores and the other category will also -- it will be much larger from the Honeywell licensing than I can think like that in the 2 to 3 years?

Right. Completely. So it's better always to over-deliver and say a lesser number. So that's how it's panning out. I just told you the whole TAM about the market is 4 months. And if we get the right...

Also on size, I want to may add to what Ketan is saying. The size of the market in India for [ sound in use ] is more than INR 20,000 crores for personal audio and other, okay. So what we are targeting is a very, very small percentage, okay? Till this month, okay, our basket was not complete. But by November '24, we would have added a lot of sound new over the year products and GWA to our portfolio, which are very, very competitive in price and things like that. So it would be easier for my team to go with the same basket to the market and that would help us get our numbers.

Okay. So last question I have [indiscernible]

I'm sorry to interrupt, sir. I request you to kindly rejoin the queue. We'll take the next question from the line of [ Man Ashar from MA Capital ].

Am I audible?

Yes, sir, please proceed.

Congratulations on a good set of numbers, and thank you for providing me the opportunity. So I had the first question is that has Ckart generated any revenue -- has it started to generate any revenue for us?

Okay. So Ckart is our internal tool currently and so we kind of profit close to -- this year till long year profit close to around INR 400 crores, INR 450 crores of orders in Ckart. But because since it's an internal tool, we don't levy or [indiscernible] charge or anything on the Ckart side. Second, since you asked the question about Ckart, the metrics for Ckart is much different, the success metrics, than that of Creative. So for us, it would be that sooner than later some point of time we will have to have it as a separated [ entity ] to really kind of grow that business because it's a platform business, which is very different to a brick-and-mortar business. Currently, works as a tool where it increased our efficiencies and reduce our costs.

Okay. So I can assume that we are using the same for cross-selling opportunities, right?

Currently, we are using it to cross-sell. Yes.

And also what Ketan mentioned is that metrics for Ckart is different. You will need to invest a couple of crores in this business. So right now, we feel that our Board is that we will be completing this financial year with good numbers. And then we will be in a position to have those reserves in the next financial year, possibly in the first quarter, to invest in that business for growth, okay? So right now, Ckart is not a focus, but Honeywell has been our focus now.

Okay. So we intend to commercialize the same within the medium-term time line assets?

Correct. Yes. So 2, 3 things we'll have to do. First is kind of taken approval from the Board that can we invest 10% of our net profit. So for example, if we close this year anywhere around, say, INR 35 crores, INR 40 crores, can we invest INR 3.5 crores to INR 4 crores to build that business up for customer acquisition. That's one part. Second, you will also require a team, which is very different from us to run that business, right, because it's mainly digital, it's mainly getting people onboarded. So at the right time, we would have the right team and the right resources to do that. Because it's something where the financial stack is also built in [ from using where ] our retailers can in a couple of ours own website. It's a great proposition. And whenever we start focusing on that, I'm sure it will start generating its own revenue and profits.

Okay. Sir, just a suggestion from my end. We can treat the Ckart as a separate entity, can be [ more the finance ]. Now funding that, you are stating that Creative will fund the expansion and Creative will fund the growth. The sales funding can be from the external investor so the original shareholders' pocket might not be burdened such as it is, right?

That's the thought. And it could -- when I said the 10%, it could be that Ckart increases Creative efficiency by that amount of money and then charge it some transaction. But this is also a suggestion, which is from that you get the right kind of investor who believes in our platform business and then you value the business and get that money, and with that money, expand. So when you want to do that, then you require a separate team, right, who runs that. It can be the same team running this because you require a kind of a CEO kind who runs that business. So point very well. If we get the right team, then we may look at that option also.

Great, great. And the next question from me is that you are stating that air purifier will be a good opportunity for us. So just wanted to know that with the volume, how much would be online and offline? And on the basis of the channel or on the basis of the end users to like corporate versus retail or on the basis of online versus offline. Is there any margin [indiscernible]?

Two things. I'll first answer your question about the segmentation of the business part of that. So 44% of your air purifier sales is B2B. It looks like a consumer product where 44% of the air purifier goes into offices, hotels, restaurants, large board rooms, that stuff. Nowadays, builders also have started offering air purifier with the flat. So 44% of the business comes through that. Air purifier, the category, also another 35% to 36% of that business comes from online. Because the day the pollution is there, people want to buy that product. That's the case. And most of the online are delivering now the next day. So that's the second. And the rest is [ GT ]. Those looks -- [ GT ] is the consumer who are buying for that, okay. Second, air purifier also has a filter reseller, second life [ size ]. So when an office buys an air purifier, they'll change the filter in the next 6, 7 months' time. And when a household will buy an air purifier, they will change the filter in another 14 to 18 months because they only run their purifier when they are sleeping in the night or when the whole family is there. They don't run it like an office from morning into evening. So when the air purifier sales kick in, the next month or the next year around 20%, 22% of the sales will come from the filters also of the air purifier. So that's how the metrics is set. Coming to Creative's part, currently our air purifier sales from online is close to 40%, around 22% is from B2B and rest is from GT. The GT is slightly reluctant about all the [indiscernible], all the brick-and-mortar because it was a seasonal product till probably last, last year. But now almost everybody started talking about it. So that also would change after awhile.

Great, great. And since you say that 40% comes from online, actually [indiscernible] with the Honeywell's air purifier and the competitive price -- the price for the same is near to INR 7,000. And as you said earlier, Xiaomi and Philips are the major competitors. There, the price there to INR 9,000. But how do we intend to compute the same because they are quite mixed large of a market, if I'm not wrong?

So the best part about online business is that you can really understand what the competition is doing, you can get real data, which you can make meaning of it, right? So according to us, the sweet spot for an air purifier is around INR 12,000. The air purifier should have 2 functions in it. One, it should have a WiFi and it should have an AQI and a VOC display. Air quality index display and the wall -- the organic compound display. If you have these 2 functions, people are ready to pay any price between INR 12,000 to INR 14,000. Our current price point for this particular product is close to INR 15,000. Any product to launch takes around 6 to 7 months' time because it has to pass through Honeywell's audit specification period, golden sample has to come. We have to check all that. So we are in midst of launching that product also in another couple of months that will really drive our ASP to the second layer. Second, air has become a generic household product, then people also want premium in that. So they want [indiscernible] air purifier. They want air purifier that does not look like an air purifier. They want something, which is higher on a design, right? So then that would be another range which we should look at. So as the market matures, right, it will take the usual time, right? Today, your [ can ], which is around INR 1,200 [indiscernible] and you have a [ can ] which is around INR 20,000, INR 40,000 [indiscernible] also. And people in there all are now [ the can ] which are around INR 3,000, INR 4,000. For example, we just launched -- our relaunched our car air purifier, right? People are not going to be home. And in 2 days, we sold [ 500,000 ] car air purifier. The car air purifier has cost of just INR 3,600 to the end consumer. The size is small, it can be mounted on the [indiscernible]. This could be mounted on the dashboard. So lot of novelty, a lot of new innovative products keeping on coming in this category.

Okay. Okay. Just to suggestion from my side. That's all on the part of your questions. So since you are intending to increase the stake in our subsidiary, the suggestion would be that we can increase our stake by funding the same from debt because we have diluted equity a bit much and since that would be quite cheap in comparison to equity. And the second suggestion or the second, I would say, that the management might address the same is that, I guess, the company is focusing on increasing the absolute number in terms of profitability and EBITDA. But my particular concern as a shareholder is that when the sales are increasing and the salary increase of more than 30%, normally we intend to see the operating leverage where the bottom line increases quite a bit more than the sales figures. But we are increasing the bottom line, but not as fast as top line, operating leverage [indiscernible] So I hope management and the Board addresses this, both the issues in their operation. That's all from my side.

Sir, I would just like to add something to you. As a company, our CFO is very conventional, right? When I said I launched 85 products, right, I would have created 85 IPs, right? Certification for [indiscernible] is INR 1.5 lakh. Certification for [ CV ] $10,000, which is around INR 8 lakh, right, for this product. And if you see, we never capitalized any of this stock. We usually expand out all the stock, this development cost. So currently, because we are growing faster, we are just concentrating on that with the absolute margin is higher. But we are making also a fair amount of investment in our product development category. And that's why -- and because we think that once we reach the scale we will just flip it and it will have a great impact on the bottom line once we have the categories complete, when we have all the product range then we can go that side. So you will sooner than later see that we will have a good EBITDA, which is also increasing as per our sales. Currently, we are focused on whether we can give [ ROCE ] which is better and our working capital cycle becomes better, that's pretty clear. Once we cross, let's say, INR 2,000 crores top line thing, then we will also start -- and by that time, everything will start fire, that's the place. Because in the world, there are almost 8 plug types. So when I launch an air purifier in Singapore, I have to add the U.K. plug type. And when I launch it in South Africa, I have to have the European plug type. And when I go to Thailand, they have another standard only, so then I have to have another plug type. So that all is actually kind of driving our expenses, but we are almost there in terms of product launch and other stuff. So I think that you will be happy in the coming 3 to 4 quarters, for sure.

And any comments on the new, say, financing from debt, as I said that it will be costly right now?

Sure, sure.

I think that you asked the question. Surely, equity is costly, okay. So technically, we have now started the process of buying the subsidiary at Hong Kong and we have much cheaper rate of finance right? And that's exactly we would like to grow.

The next question is from the line of Sarang Anajwala, an Individual Investor.

Congratulations from great set of numbers. So lot of my questions are answered. Just 1 question in last quarter, we talked about expanding Honeywell into more territories in terms of appointing distributors and applying for certifications and also, just wanted to understand in this quarter what the specific categories or territories where we expanded?

Currently for the last quarter, we were in Singapore, in UAE, we were in Dubai, the heading, Oman and Qatar. We have already signed up our distributor for Indonesia, for Malaysia and Thailand. And in Middle East, we have now -- manpower joined us so Saudi Arabia will get signed up this month and Turkey also will get signed up this month. What happens Sarang is that, for example, if I sign up Indonesia, right, the first time the material received there only takes 30, 35 days. Then they place the product in the store and they get a feedback. So once you sign up a distributor also, you have to give a quarter than the run rate starts happening. So for example, our Singapore run rate till now of up to $80,000. Now it has gone to $150,000 a month. Similarly, Dubai after Taiwan coming in so Dubai is a very different market. The large format retail, the life of Chroma, Reliance there is a market, 90% is owned by them. with Trigon coming Lu-Lu [indiscernible] products. So 1 there, we also see the sales. And this will also help us to reduce our seasonality. For Indonesia [indiscernible] days are January, February. So -- because they also have the prospering thing there. So I think as we spread to different geographies, it will really help. And currently, this is the transition. So first, to get the [indiscernible] around 3 months to understand your company's products and then approach distributor. Once the distributor is timed, we again take a couple of months before we start getting repeat orders from the distributor. So that's where we are currently.

The next question is from the line of Naman from India SME Investments.

Am I audible?

Yes, sir.

Sir, this is Sidharth here. Just wanted to understand the mid- to long-term strategy, especially on this licensing business, right? So is it going to be a multi-brand, multi-core kind of a strategy? Like do you foresee that for air purifiers, will you position other brand as well? How do you naturally see the business in the longer term, especially the [indiscernible] business?

So for example, if you see another 5-year plan. So we talk about the 2029, 2030. And the company would be like it would have 2 licensing brands. So Honeywells plus somebody like Philips, they give a license or somebody like [indiscernible], they are giving the relevant category of license than a couple of licensing brands -- a couple of brands which we would have acquired, right? Because you also want to balance, right? Sometimes, if there is a problem in a license that we want to balance that, so a couple of [indiscernible]. And then another 3 to 4 brands, which gives you a ROCE of around 30% plus. So that how the company should look like in the coming years. And we are on that path also that we are in talks with a lot of people. But it takes a bit of time to around 8 months to a year to actually get something meaningful going in this category.

[indiscernible] strategy like, let's say, do we maybe focus on some products and under those products, we try to identify which are the right brands which will suit into these products or is it that we acquire a brand and then think about the product? Or how does it typically work out?

Typically, see, we see the trend, right? The India's demographic today is the population, we had millennials, we have Gen Z, right? Now we have a new term called Dink, double income no kids generation, right? So when you have a population which is kind of double income no kids or double income and only a pet, then they spend a lot of money on houses. They spend a lot of money on luxury. They spend a lot of money on eating outside and other stuff, traveling [indiscernible], and then you keep getting products. So for example, the [indiscernible] it's a 50-year-old brand from U.S. or from U.K. And we had the recent launch. The British embassy also came in at [indiscernible] and the kind of response we got and the kind of feedback we are receiving for that, we ourself never believed that people wanted to buy personal audio from INR 50,000 to INR 5 lakh. It's not a home theater system. It's a personal audio. But -- so our focus would always be on product, which would be kind of premium and which would be the kind of where you can personalize that experience for them. So that are the kind of the products which we are looking at generally.

So for Honeywell, what is the natural extension? And are you emphasizing to enter into some other product categories as well? Or do you see you'll expand the current categories or the licenses which you have. So basically, what I'm trying to understand, is there any idea to maybe get into the appliances business with Honeywell or there are some other categories which you're looking at?

Yes. So couple of things out there. The Honeywell existing product categories also have too much to do in that space. Second, Honeywell as a category and certain categories has a great brand salience. So when it comes to an enterprise, when it comes to measuring, testing, controlling air purifier has a great salience in that. The passive networking also has a great salience in that. But as soon as come to say audio, the consumer is not our that Honeywell would have a personal audio. So that brand category takes a little amount of time. So as Honeywell opens its category, they give us the [indiscernible] of refusal. So for example, when you say appliances, if we want to start appliances or they want to come here, they would give us. But then again, [indiscernible].

I mean we have an offer on other, let's say, right of refusal on the other products as well, is it?

Yes, because Honeywell, no, their team of licensing is less than 14 people. And they manage around $350 million of revenue under that. And they first need somebody who understands the Honeywell design language system then the factory audit should pass, then other stuff, that's the case. So, ideally, they would want the existing license to do that. If the existing license denies, then they may give it to a new licenses. Average license of Honeywell average, so like new ones like us and the older ones where license is around 22 to 23 years with them, that's the space they have. That's the space.

Understood. So which brings me to my next question, right? So how does this agreement typically work, right? So is there exclusivity, which we have with Honeywell or also the kind of royalty agreements we typically have with Honeywell? How does the entire agreement work under tenure as well?

Okay. So it's a royalty agreement and agreement typically is that you give a minimum guarantee or a certain percentage of the sales, whichever is higher to Honeywell. And also Honeywell [indiscernible] want you to not just get on the market, they want you to do certain things for them to do that. Usually, the licensing period is 5-year renewable till perpetuity, if you do 3 things correctly. You pay the minimum guarantees, royalty on time. If you get the factories audited very well. And if you get QC done for all the products, then usually, that's the case. And that's our contract with Honeywell. Our license -- this form of license will get over in December '25 and then probably looking at our association with them this time we are going to ask for a 15-year period than a 5-year period.

Makes sense. This is for the contract period typically the rights are exclusive or it's on a non-exclusive basis?

They are completely exclusive. So currently, for audio, we are the only partner in the world who will launch audio program. For air purifier currently, they have a partner for U.S. and Europe and then they have a partner for India, which is India, Southeast Asia, Middle East, which is us. And they have 1 more partner in China because China will peak separately [indiscernible].

And sir, just 1 last question. On the royalty, you mentioned what -- how much is the royalty facility we have to pay to, let's say, Honeywell?

So currently, in the whole year, I think it's about INR 6 crores. Around INR 6 crores of royalty we will pay this year.

INR 6 crores. And that would be on the total sales of?

There are 3, 4 talks about it. They have region-wise also, so they don't calculate the whole sales that way. So we got we have Southeast Asia, South Asia, Middle East and India. And the categories came in differently. So far, they gave only India and only the electronic essential category. Then, way back in 2019, November, they gave us 36 countries and 3 categories. So they are [indiscernible] according to that, we'll have to do.

So [indiscernible] estimated sales, if we [indiscernible] reach approx INR 160 crores to INR 180 crores then maybe the royalty will be in the range of 3 to 3.5.

3.5% to 4% [indiscernible] basis? So the range would not be more than 3% to 5% typically the royalty [indiscernible]

And that is what we are coming for this financial year. Just to add you to our [indiscernible] side on your question, Honeywell always gives us more countries or more regions in the same categories what we are successfully doing, okay? So there would be a possibility of they offering the Europe, they're offering a possibly U.S. in some of the categories. But right now, we feel like in this financial year, our role also has given us the guidance that we successfully do what we have today, okay, for next 1 year, okay? And they will ask for more categories and countries.

Just 1 last question. On the gross margin side, I believe these are typically high gross margin products side, which we're doing with Honeywell. Because the Personal audio at a 30%, 35% gross margin business. So what is the typical blended gross margin you will see for the licensing business for Honeywell especially?

So gross margins should come around 40%, and that's where you take [indiscernible].

So you want to -- you were what saying that the blended gross margin are lower, the reason [indiscernible]?

[indiscernible] portfolio, yes.

Because, right now, the share of Honeywell, okay, in the total scheme of, thing, okay? It is hardly 10%, annually. It will be of 160 crores if we hit [indiscernible] approximately INR 1,600 crores, then it will be 10%, right? So high gross margin products would be 10% among our total turnover. And rest of the gross margin as in the range of 7% to 8%. So because the blended gross margin, it would be lower. But this situation is safe when the [indiscernible] contribution in the business increases from INR 160 crores and growth year-on-year growth when it goes to [indiscernible].

Definitely, sir, that I understand. I was trying to understand only Honeywell's products which we were doing because we're doing multiple products under Honeywell, what could be the gross margin, blended gross margin of just those products? I think I have the answer to 40%, which is a very good number.

Product is around 45% to 50% because Singapore -- that is the cost of [indiscernible] slightly higher. So we mark up around 45% to 50% then.

The next question is from the line of Karthi from Swish Advisors.

Just continuing on the earlier question, just a couple of clarifications. One is in these distribution arrangements outside of India, for the license business, a, how does the profitability shape up over there, and b, so who decides on pricing for these products in these markets and b, of course, working capital cycles?

Okay. So 3 questions. The first 1 is that who decides on the margin is -- we decide the pricing, just to answer that elaborately, Honeywell [indiscernible] licensing contract is that concerned about the certification, the quality and the factories where you manufacture the product. They don't want a nonaudited factory to manufacture your products because they want all compliances, social and technical compliances, to be there. Second is they want cutting-edge products, so they want that the specification is up to date and currently what it is or better than what is available currently. And third is, they want to roll out the product. They do the quality check, that's where the Honeywell goal ends. What price to sell, what is the pricing we want to do in each market, that is kind of our [indiscernible], that's the first one. Coming to distribution abroad, because we have 4 categories, we come and look at the distributor profile and then depending upon the distributors' profile, we start giving them the distribution contract. So, for example, in Middle East [indiscernible] would be over distributes for the large format retail, the Chromas and Reliance, what we have there, the [indiscernible] and all. So that will be there. And [indiscernible] will be for independent retail or the general trade as we call, that could be there. Next time will be for e-com there. So we have 3 distributors, exclusively for 3 different categories there. And usually is that you get the right manpower, then you get the right distributor. And before getting the right manpower, you get the right product mix for that market that can be approach all the market.

Right. But I was asking you, would the margins be higher than if you were to go independently to distribute over there?

If we go and distribute, that's what you're saying?

Yes.

No, it would not be because distribution has its own advantages and because the distributor does 3 to 4 products or 5 products. He's actually the cheaper route to the consumer. So it does not make sense by chopping the distributor at any case.

So your international margins could be better than domestic markets?

International is definitely because of the buying power [indiscernible]. Today in Singapore, a taxi cost you -- from airport to the hotel cost you SGD 30. And much [indiscernible] SGD 15, SGD 20. So usually, in India, they want you to reduce the price [indiscernible] wanting to increase the price. That's the normal [indiscernible].

And in terms of working capital cycle, sir, what would the cycle be internationally for the distribution arrangements?

Both cases -- so a couple of things, Abhijit does not allow any open credit. So if the customer gets the credit insurance from, say, [indiscernible] these are insurance company with insurance credit insurers. If they give a credit, then they get typically 45 days credit on that product. And otherwise, they pay DP advance from placing the order to the factory to getting the goods manufactured is now post COVID 45-day cycle, and another 30 days time to reach that place. The 30 plus 45, 75 and another 45 days credit, I said. So the cycle is 110 and now the [indiscernible] generous because looking at our [indiscernible] following the Honeywell brand, they have started giving the credit of 60 days on the product. So that's why our working capital cycle is now close to 60 days on the Honeywell, blended comes to much lower [indiscernible] because of the distribution.

Interesting. And your arrangement with the factory, so you would be responsible for sourcing the products manufactured, right? Manufactured and getting the product to distributer?

That to be audited by Honeywell and every time the consignment leaves the factory, our QC, which is [indiscernible] QC, which is [indiscernible] would go and check the product and then give a release certificate.

Right. I was asking you whether you get any credit from your suppliers or you pay them at once?

That's what I said. Now that suppliers are generous. They give us a 60-day credit now, most of the suppliers.

Right, right. And the other question I had was, what is your medium-term thinking on the enterprise business? It bulks up your business, but the margins are not very interesting. So can you share some thoughts on, obviously, the enterprise business or say the next 3, 4 years' time?

So currently, I have been given 2 benchmarks. If we increase our working capital cycle, we better our working capital cycle. And, if the net return ROI, if we can increase year-on-year, then because we are growing at 30%, 40% currently, we should not bother about the percentage of the profit. That's the 2 benchmarks.

Absolutely, to add this, if we are making absolute money as far as EBITDA is concerned, that is concerned and our return on working capital is improving. Return on investment will increase, then even if the percentage of profit falls, it is our upper view that we are growing. And therefore, these are the signs of growth, actual increase in EBITDA, absolute increase [ Audio Gap ].

[ Audio Gap ] Because on the enterprise business, the directive is that our money should not get used or the working capitals were not let go. So it's working capital gets slapped only for 2 to 3 days, I think max. So it's a very back-to-back business. And that's why we also measure it very separately. Then we have the cash flow, and we can do that, that's when we go back [indiscernible] . Also clearly you have to understand 1 more part, right? Today, if I had to just build the Honeywell business from scratch without the distribution, without the GP, my balance sheet would be negative by more than INR 120 crores.

[ Audio Gap ] are used by Honeywell business. Independently, Honeywell was to stand, it would have like to elevate so much in the infrastructure. That is what [indiscernible].

Sir, 1 last question, if you have the time to answer.

Yes, go ahead.

Yes. So how close are you [ Audio Gap ] licensing agreement?

It could not be just a licensing agreement. It could be a JV also or it could be acquisition also, right? So as a company [indiscernible] work on the 3 years plan, and we are really working on that and got [indiscernible] if everything goes [indiscernible].

Yes, absolutely.

The next question is from the line of Aditya Jhawar from AG Capital.

Sir, I have 1 very short-term question. So currently, if I see the PAT margins are roughly around -- it is a drop of -- currently it's trading at 2.4% and we have in next maybe 1 or 2 years [indiscernible] go to 4% to 5%. So our H1, then quarter-on-quarter, there should be a gradual improvement by the year-end and by the next year? What are the targets for PAT margins?

Sure. I think very difficult to give guidance quarter-on-quarter because we are looking at something which is 3 years from now okay? And possibly, what Ketan is looking at [indiscernible]. Quarter-on-quarter is something which is very difficult to give you guidance. What I'm trying to say is that by [indiscernible] H2 also for that matter, okay? It will improve, okay? But if you ask me a percentage and what basis find, it's difficult for me. One more thing is that by FY '26 we are sure that PAT margin will be in the range of 4.5%. Okay, or may be 6%, but [indiscernible] FY '26 is a difficult question to take.

Sir, on the -- this year, we have done roughly [indiscernible] we'll do basically, hopefully, we'll do INR 1,600 crore. Then we should hit the INR 2,000 crore market by next year only, right, if I see the growth, whatever we have been doing? So you are being very conservative that FY '25 will not hit?

No, no. That's a because -- see, we were also in the dilemma that percentage, do you manage the percentage or do you manage the absolute profit right? And then we spoke to our Board and then we spoke to a couple of advisers. And then they said that if you can get absolute margin, which is higher and it's -- every year, you can grow the absolute path by, say, 20%, 30% then you should grow that. That -- and with that guidance, INR 2,000 crores should be next year.

Ladies and gentlemen, that was the last question. I would now like to hand the conference over to Mr. Ketan Patel, Chairman and Managing Director, Creative Newtech Limited. Thank you, and over to you, sir.

Thank you, everyone, once again for your participation in our quarter 2 and H1 FY '24 earnings call. In case of any further queries, you may get in touch with [indiscernible] PR or feel free to get in touch with us. We look forward to interacting with you next quarter. Thank you so much.

Thank you very much.

Thank you, members of the management. Ladies and gentlemen, on behalf of Creative Newtech Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.