Creative Newtech - Proxy to Gen Z’s Consumption 

Last updated on August 15, 2024

Summary

1. The Idea - Creative Newtech Ltd. (Creative) stands as a proxy for the rising consumption of tech products among Gen Z. The company leverages its extensive distribution channel of 8000+ partners to capitalize on the growth of multiple brands.

2. The Consensus View - Market is currently valuing it as a low growth, low margin peripheral/distribution business at a TTM PE of 19x.

3. Variant Perception - The company is evolving as an extended arm of tech brands, aiding them in launching and scaling their products in India. Additionally, the company through its exclusive license, is manufacturing products via third party for Honeywell and distributing them across 12 countries, including India, thereby expanding its distribution network globally. The company has also begun assembling products for CyberPower Inc. through an exclusive joint venture with them for the Indian market. The company is steadily expanding into high-margin products, integrating manufacturing with its traditional distribution channels. This strategic shift is evident from the rise in revenue of its high margins Honeywell and FMSG businesses. Currently, FMSG segment, which includes the Honeywell’s revenues, contributes 58% of Creative’s EBIT while representing only 15% of its revenue. This expansion opens numerous opportunities due to the network effects of its distribution channels. The company in future aspires to license more brands like Honeywell and even launch in-house brands with minimal additional capital. While the distribution business amortizes cost and generates modest profits, the licensing business have the potential to become significant value creators for the business and its shareholders.

4. Trigger Events - Increasing share of revenue and profits from high margin FMSG and licensing business and addition of more licensed brands.

Introduction

India's Information and Communication Technology (ICT) distribution market has seen significant growth driven by the increasing adoption of technology across sectors, rapid urbanization, and a growing middle class with rising disposable incomes. The market is highly competitive, with several players offering a wide range of products and services. However, the complexity of the Indian market, characterized by diverse demographics and purchasing behaviors, requires distributors to have deep market insights and robust distribution networks.

Established in 1992, Creative Newtech Ltd is a prominent player in India's ICT distribution market. Today company sells 3200+ products across 22+ brands through a robust network of 8000+ partners and distribution channels, offering an multi-channel presence across online platforms (Amazon, Flipkart), offline retail stores (Croma, Reliance Digital), and traditional general trade channels.

Creative Newtech operates on a value-added distribution model. Beyond traditional distribution, the company offers end-to-end solutions including market research, competition analysis, import, distribution, sales, and servicing. By providing these additional services, Creative Newtech differentiates itself from other distributors and adds value to its partner relationships.

The company’s approach includes specialized training programs, events, and promotional activities aimed at empowering its channel partners due to its better understanding of Indian consumer. This not only enhances the effectiveness of its distribution network but also fosters long-term loyalty among partners.

Creative enjoys a long-standing relationships with 20+ major global brands such as Honeywell, Samsung, Razer, and more, categorized into 4 segments based on gross margins.

Business Structure

Company operates in 2 lines of business, brand distribution and brand licensing.

• Brand Distribution - Within brand distribution, company collaborates with brands offering niche, experiential products that resonate with younger demographics, largely influenced by social media trends. The brands are categorized into 4 categories based on the gross margins they generate:
  
  

  1. Fast Moving Social-Media Gadgets (FMSG): This category, contributing 15% of FY24 revenue, consists of experiential brands that offers high margins (10%-40%) and appeal to younger audiences, driven by the pervasive influence of social media.
     
     

  2. Fast Moving Consumer Technology (FMCT): This category, contributing 14% of FY24 revenue, consists of mass and established brands that meet both personal and organizational needs, though they typically have lower margins (<10%).
     
     

  3. Enterprise Business (EB): Accounting for 70% of FY24 revenue, this segment focuses on high-volume products supplied to enterprises, though margins are lower, ranging from 2-3%.
     
     

  4. Fast Moving Electrical Goods (FMEG): Currently contributing negligible revenue, this segment focuses on electrical goods. The company has recently partnered with Polycab for the South Indian market to gain insights into the electrical goods industry.

• Brand Licensing -  Creative Newtech, in 2020, secured an exclusive license from Honeywell to manufacture and sell a variety of products, including cables, adapters, audio products, and air purifiers. The license covers exclusive access 38 countries across South and Southeast Asia, the Middle East, and Africa. Creative collaborates with contract manufacturers in China, with products being jointly audited by both Creative and Honeywell before entering the market. The company has the autonomy to set pricing for these products and generates gross margins of 35-40% in this business, far higher than the distribution business. The Honeywell business has expanded to 12 countries, with revenue growing from ₹61 crore in FY22 to ₹170 crore in FY24. Management aims to scale this to ₹500+ crore within the next two years.
  
  In Q3FY24, Creative further expanded its licensing business by partnering with CyberPower Inc., a leading U.S.-based gaming systems company. Through this joint venture, Creative gained exclusive rights to assemble and sell CyberPower gaming computers in India.
  
  🗣 Management on Honeywell Business: ”Basically in the Honeywell businesses, sir, we ourselves design products, we get it manufactured, the specification is done by us. We can decide the price that we will sell the product. That is the Honeywell arrangement. And you give a certain minimum guarantee and a percentage of the sale, whichever is higher that we give to Honeywell. That's the arrangement with Honeywell. With all the other brands, you kind of have an exclusive arrangement, but you arrive at a decent ROI that how much months' working capital, I'll have to use and how much margin I will get and thereby, how much ROI I will generate, that's the agreement you have with this brand. Basically, it's a layman’s term, it’s a distribution agreement where you have exclusivity. That's the case. Sometimes, we take brands so that we can piggybank on that brand and foray into that market. For example, Polycab currently, we have distribution for southern, South India currently. And one of the reasons to do that is because Honeywell also we manufacture structured cabling products, which goes into networking. So that also has one channel, which is an electrical channel which sells the structured cabling, Cat 5, Cat 6 fiber and all other products. So piggy banking on the Polycab, we would find the right distributor, who will take Honeywell. So that's why we have taken, for example, Polycab as a brand. Samsung is more from the top line side that it gives you a reach, it gives you visibility. It gives foot in the door to sell your brands. So that's why Samsung is there.” [Q1FY24]
  
  “Honeywell business should become a Rs. 500 crores business in the next 2 years to 3 years and I will tell you why because if you see overall in the categories we are, in the Honeywell space we are in the air purifier category. Air purifier almost is a large opportunity, I said in my opening remarks that it is like how air conditioners were there 30 years ago. Last year, 1 crore air conditioners were just sold in India. So it is a multi-decadal opportunity in air purifier and if air purifier does well also it could be close to that. Second category is Honeywell Passive business, so Honeywell Passive is our networking cables business and if you see my Indian counterparts also, they would do around Rs. 800 crores, Rs. 900 crores, just one brand is doing Rs. 800 crores to Rs. 900 crores in that Passive business. Plus we have audio, audio is again a 2 billion to 3 billion means a Rs. 25,000 crores opportunity for that. In the audio space, Honeywell brand resonance is not so great, but I am sure that the opportunity is so huge that we can really make some dent with the Honeywell space. So looking at all this, if we get great products and if we get the right skill set, we can do very well. Plus we just don't have India as an opportunity we have another 38 countries also as an opportunity. So yes, that is why we aspire that we should do Rs. 500 crores in Honeywell.” [Q4FY24]
  
  🗣 Management on JV with Cyberpower Inc.: ”We have signed a joint venture and Brand licensing agreement with US based gaming system giant cyber powering through our subsidiary creative e-commerce Ventures private limited we are the exclusive brand licensing for the Cyber power brand in India this agreement. In this agreement we will have access to partnerships to Cyberpower with renowned it companies like Nvidia, Microsoft, Intel, AMD to name a few. we'll also be having our own D2C website of cyber power where consumers can configure themselves gaming PCs and can also buy preconfigured gaming PCs just. under this agreement we shall manufacture and integrate Bespoke high performance gaming computers equipment and accessories tailored to the unique preferences of consumers. The product covered with include gaming pieces laptops accessories and more. We are having a JV with that company in our subsidiary. In this JV Cyberpower will give us all technical knowledge also give us access to their relationship with uh large Brands like Microsoft, Nvidia etc and also they will uh uh give us the e-commerce knowledge to run the website a D2C website in India so uh that's the contract with them. we should start seeing some numbers coming from early next year second quarter because this business will take some time to build up. we will also be selling on Amazon and also through Reliance and uh other partners. over a period of next 3-4 years we think we should be roughly between 40 to 50 million dollars as a whole. Gross margins would be in the range of 14-18%. ASP of each computer would be around $1200 compared to $1800-$1900 in US. We own 49% in the JV.” [Q4FY24]
  
  

Creative classifies its brand licensing business from Honeywell and Cyberpower under the Fast Moving Social-Media Gadgets (FMSG) category. This category has been a key driver of the company's profit expansion. While revenue from the FMSG category has grown at a CAGR of 11%, EBIT has surged at a much higher CAGR of 35%. Despite accounting for only 15% of total revenue in FY24, the FMSG category contributes a substantial 58% of the company's EBIT.

🗣 Management on Importance of both business: ”So licensing, usually the gross margin is close to 35%-36%. And in the distribution space, it varies from 7% to 10%, depending upon the mix of the products that point of time with sales. That's the case. But both businesses cannot live without each other because distribution business really amortizes the cost, increases our visibility, gets our foot in door, and also helps us to see the market trend. That's the case. So on the back of distribution business, if you can build a good licensing business, it's a great opportunity.” [Q4FY24]

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Disclaimer - Apex Capital or I are not a SEBI registered investment advisor. This is for education purpose only. Please do not constitute this as a buying/selling advice