Indian economic review

Markets that began reviving in 2013-14 gained momentum in 2014-15.

The economy was relatively independent of factors associated with usual economic slowdowns and evident in 2011-12 and 2012-13 - inflation, fiscal deficit, weak external account imbalances and an oscillating rupee.

A redeeming feature was the emergence of India as a large economy with a promising outlook, in contrast to pessimism in a number of advanced and emerging economies. India’s GDP grew 7.4% in 2014-15 and is expected to grow further in 2015-16 (Source: Economic Survey).

E-commerce

E-Commerce Rs as revolutionized retail. Its potential to offer one of the widest arrays of product categories and varieties at the click of a button, at the quickest delivery schedule and at the cheapest cost Rs as transformed modern shopping trends.

The convenience of shopping and efficient service Rs ave positioned e-retail as the preferred shopping trend, especially among urban masses – resulting in exponential growth. The growth in choices offered is staggering.

As customer aspirations soar and the awareness of e-retail increases, this business segment is faced with the challenge of sustaining its robust growth. For this the business will need to do the following:

• Strengthen the robustness of its platform to manage growing volumes

• Strengthen transactional security for cementing customer confidence in this segment

• Expand product offerings even before demand materialises

• Develop an even more agile supply chain for seamless delivery

• Innovate novel customer engagement strategies for customer retention

• The industry players will need to invest in capabilities and resources to capitalise effectively on this retail transformation to establish and retain a loyal and large customer base.

The US e-retail space

U.S. e-retail sales are expected to grow from $263 billion in 2013 to $414 billion in 2018, a compound annual growth rate of 9.5%, according to an online retail sales forecast from Forrester Research Inc. E-retail’s share of total retail sales will continue to inch upward from 8% in 2013 to 11% in 2018.

The dollar growth from the actual 2013 figure of $263 billion to the forecasted $414 billion for 2018 is 57.4%

Increased shopping by consumers on mobile phones and tablets will catalyse growth. Increased spending by digital natives consumers who grew up using the Internet from their earliest years could also accelerate growth as they move into their prime spending years.

Today, about 69% of U.S. adults that regularly buy online, purchase about 16% of their products online.

Clothing, consumer electronics and computers generate about a third of all online shopping dollars in the US.

Online advertising space

India is the fastest growing economy in the world and is going digital with a vengeance. Online advertising will play a large part in this transformation as well as metamorphosing into a more effective marketing tool.

Across a little over 15 years online advertising Rs as moved from simple e-mails and text ads to increasingly sophisticated and effective innovations like SEM (Search Engine Marketing) and mobile ads, widening reach across consumers.

Emerging trends

Mobile is slowly becoming the first screen in India. The of smartphones coupled with the popularity of online video is enhancing FMCG spending in the digital domain.

Another trend is the emergence of categories like e-Commerce, which is expected to lead the charge in 2015 in terms of ad-spend growth although from a relatively smaller base than more established categories.

Optimism

As per a joint study by the Internet and Mobile Association of India (IAMAI) and IMRB International, the online advertising market size is expected to trend as below:

• March 2014: C 2,750 crore (US$444.72 million), of which display advertisement contributes 29% and search 38%

• March 2015: C 3,575 crore (US$578.13 million)

• March 2019: C10,000 crore (US$1.6 billion)

The business

The Company Rs as two revenue verticals, namely online retail sales in the US and Canada (through 123Stores, Inc., a multi-channel E-Commerce retailer) and online advertising sales (mainly through 123Greetings.com, Inc., an online greeting cards company).

The Company owns and operates 123stores, a multi-channel E-commerce retailer with a strong technology backbone that combines supply chain logistics with real-time customer data to create a compelling shopping experience. The Company markets more than 200,000 products in leveraging the shop-in-shop business model. The Company’s top five product categories are

1) Furniture, Patio, lawn and garden

2) Musical Instruments & Gadgets

3) Rs ome Improvement & Art Crafts

4) Kitchen, Dining & Appliances

5) Toys, Games & Babies which account for more than 85% of its sales.

Its products are sourced from more than 1030 active vendors that are delivered by its logistics partners, UPS and FedEx, across all pincodes in the US. The Company also Rs as two distribution centers in the East (New York) and West (Nevada) for managing fast-moving products.

Business performance, 2014-15

• E-commerce revenues grew by 151% from C 128.49 crore to C 322.64 crore.

• 123Stores, Inc. was ranked #392 on the Internet Retailers 2015 Top 500 Guide, a jump of 107 places over the 2014 rankings

• The US company was ranked the 13th fastest growing online retailer

• Orders shipped were 772,981 in 2014-15 against 254,670 in 2013-14

• Average order value was C4,174 in 2014-15

Outlook

Customers are increasingly trending towards online marketplaces for their shopping requirements. They are further expanding their purchases and shifting from an experimental shopper to a matured shopper. We are fully geared to capitalize on this evolution in online shopping in North America.

123Greetings is the world’s leading online destination for Rs uman expressions reaching 95 million visitors annually. It offers over 42,000 e-cards across multiple languages and covers a mix of 3,000 seasonal and everyday categories.

123Greetings e-cards business strengthened its regional language content library with new e-cards across diverse languages namely Russian, Mandarin, Spanish, German, French and Rs indi for key Rs olidays and occasions. The presence across mobile and mobile apps Rs as further enhanced the value proposition for our customers.

Business performance, 2014-15

Revenues increased by 2% from C19.90 crore to C 20.27 crore Number of cards sent using Mobile Application grew more than ten-fold from 0.93 Lakhs in 2013-14 to 9.59 Lakhs in 2014-15

Outlook

The availability of E-greetings on Mobile and Mobile Apps Rs as opened a plethora of opportunities for advertisers who are increasingly using the mobile platform in addition to conventional routes for branding initiatives. This is expected to increase the online advertisement revenue for the Company.

Financial performance

(Based on consolidated financial statements for the year ended 31st March, 2015)

Consolidated total income for the year ended 31st March, 2015 increased to C 34701.59 lakhs compared to C 15301.27 lakhs in the previous year, registering a growth of 127% Consolidated profit after tax was C596.09 lakhs.

Earning per equity share (EPS) was recorded at C 4.05.

(Based on standalone financial statements for the year ended 31st March, 2015)

Standalone total income for the year ended 31st March, 2015 increased to C3473.32 lakhs compared to C2,317.78 lakhs in the previous year, registering a growth of 49%.

• Standalone profit after tax was C501.47 lakhs.

• Earning per equity (EPS) was recorded at C 3.40.

During 2014-15, a sizeable jump in income from operations was due to a significant momentum in the e-commerce business. The surge in shipment from 254,670 orders in 2013-14 to 772,981 in 2014-15 resulted in cost efficiencies. As a result, the cost of goods sold as percentage of overall sales reduced from 67.7% to 64.7% and business margins improved.

The Company lives by the philosophy that ‘we don’t care where the product is sold as long as we are the seller’. As a means to this end, the Company is working on growing business volumes through stronger relationships with vendors and increasing its presence across more marketplaces and platforms.

The resultant economies-of-scale is expected to improve operating margins.

Internal control system and its adequacy

The Company Rs as put in place adequate controls that are commensurate with its size and the nature of its operations.

These Rs ave been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorized use or losses, executing transactions with proper authorization and ensuring compliance of corporate policies. Regular internal checks are carried out to ascertain the existence of adequate system. The Management also reviews the other control systems and procedures to ensure its application.

The emphasis on internal control prevails across functions and processes, covering the entire gamut of various activities. An effective and comprehensive review by the

Audit Committee of the Board Rs as strengthened the internal controls and other systems within the organization.

Opportunities and threats

The biggest advantage of the online medium is its accessibility. Any innovation can be transmitted far more effectively and widely and can be, therefore, far more disruptive of any placid momentum. Consequently, customer preferences keep evolving and business models of companies Rs ave to keep up. Free of regulatory restrictions, this space offers a dynamism and flexibility that is unimaginable in any other space. This freedom and dynamism, while encouraging an out-of-the-box approach, can prove to be challenging to the existing players.

The online experience is all about novelty – anyone offering that will be able to capture a larger share of the market. The challenge posed is in the fact that any innovation online turns stale within a much smaller timeframe and innumerable replications of any successful idea make it difficult to separate the innovator from the imitator.

Unlike in the physical space, market preferences are transient and constantly shifting. While this can be a challenge, pre-empting this trajectory can pave the way for the biggest opportunities in the online space. It is not just about anticipating customer preferences, it is also about moulding them.

Consistent engagement through feedback forms and surveys as well as opening up social media platforms through which an open channel of communication can be maintained differentiates this space and ensures a closer connect with market realities than is possible in the physical space. Market research takes an all new form in this digital age.

Human resource

The past year’s success is the product of a talented, smart, Rs ardworking group. Setting the bar Rs igh in our approach to Rs iring Rs as been, and will continue to be, the single most important element of your Company’s success.

Our people are our key asset. We Rs ave been able to create a work environment that encourages pro-activeness and responsibility. The relationship with our employees Rs as been Rs armonious during the year under review. We Rs ave created an ambience of professionalism mixed with fun and creativity, which Rs elps in enhancing and elevating an individual as well as the organization to the next level of achievement.

The progress made by the Company was possible due to sustained efforts of the entire team.

As on 31st March, 2015, the employee strength of the company was 261.

Risks and their management

Business is about taking and managing risks. Business risk profile will evolve in line with altering dynamics. The same Rs olds true at IntraSoft, which Rs as progressively transformed into a prominent player in the online retail space.

Key Risks

1 Our business is seasonal. Generally a third of the annual revenue is generated in the third quarterofthefinancial year

Risk mitigation: This is most pertinent for the e-commerce space which is concentrated on the US market where the third quarter is the festive season. The Company Rs as ensured adequate redundancies in its systems and processes to ensure that it seamlessly addresses the demand spike in the third quarter of the fiscal. Consider this: 2014, the Company shipped 3000 packages a day on an average; during the week before Christmas, the Company successfully shipped 11,000 packages a day. Besides, the proprietary technology and the efficient logistics partners facilitate the Company to take this number even Rs igher in the coming years.

2 Managing growth through improved processes and systems could be a challenge.

Risk mitigation: The Company is focused on grabbing a larger pie of the customers’ wallet. For this the Company continues to invest business surplus to strengthen its proprietary technology platform, automate processes better through innovative software solutions that will enable it to stay ahead of the curve of customer expectations.

Forward-looking statement

The statement in the Management’s Discussion and Analysis reflect current expectations of the Company and are inherently uncertain. The actual results could differ materially for various reasons, including, among others, fluctuations in foreign exchange rates, changes in global economic conditions and consumer spending, world events, the rate of growth of the Internet and online commerce, the amount that the Company invests in business and the timing of those investments, change in the Government regulations, tax laws and other statutes and incidental factors.