Intrasoft Technologies Ltd Management Discussions.

Global Economic Overview

The global economy grew 2.9% in 2019 compared to 3.6% in 2018. This decline was precipitated by an increase in global trade disputes that affected the cross-border movement of products and services, a slowdown in the global manufacturing sector, weak growth coming out of some of the largest global economies and the impact of Brexit. The result was that global trade grew a mere 0.9% in 2019, pulling down the overall economic growth average. The Great Lockdown is projected to shrink global growth in 2020. (Source: World Economic Outlook, April 2020, CNN, Economic Times, Trading Economics, Statista, CNBC)

Global growth over the years

World output Advanced economies Developing and emerging
2015 3.5 2.3 4.3
2016 3.4 1.7 4.6
2017 3.9 2.5 4.8
2018 3.6 2.2 4.5
2019 2.9 1.7 3.7

US Economic Overview

The Gross Domestic Product of United States grew 2.3% in 2019 compared to 2.9% in 2018 due to a decline in business investment and an ongoing trade war with China. United States is the worlds leading economy in terms of GDP The Gross Domestic Product (GDP) in the United States was pegged at USD 21.2 trillion in 2019, representing 17.5% of the global economy. The GDP per capita of United States was USD 65,456 in 2019 compared to USD 62,869 in 2018. The inflation rate in US was 2.28% in 2019. The U.S. signed a Phase 1 deal with Beijing in January 2020 to drive growth in the manufacturing sector.

The Covid-19 pandemic affected the global economy, the US economy included. The global decline in commodity prices, especially oil, is expected to reduce investments in the United States. It is estimated that unemployment could rise to 15% owing to the coronavirus outbreak in the major US cities. Since the Covid-19 lockdown, >22 Million US citizens filed jobless claims (as of 14th March-16th March 2020). (Source: countryeconomy.com, Trading Economics, The Guardian, CNBC, Stat bureau)

Global E-commerce Industry Overview

Global e-commerce sales amounted to USD 3.53 trillion in 2019 compared to USD 2.93 trillion in 2018.

Global retail sales through all channels were estimated to be pegged at USD 21.00 trillion in 2019, a 3.4% increase from USD 20.31 trillion in 2018. Ecommerce penetration has steadily been on the rise with online share of retail spends registering 10.5% in 2016, 12.3% in 2017, 14.4% in 2018 and 16.0% in 2019 and is expected to rise to 25% by 2026.

Asia-Pacific led the global ecommerce growth in 2019, was estimated to register 25% growth to reach USD 2.271 trillion and accounted for 64.3% of global ecommerce spending. Latin America and Middle East/Africa maintained year-over-year growth of 21.3% while North America grew at 14.5% and Western Europe at 10.2%.

One of the most important prerequisites for e-commerce is a functioning internet connection. Europe has the highest internet penetration rate (85%) in 2019, followed by North America (84%) and the Middle East (78%). B2C e-commerce revenues were estimated at USD 2 trillion in 2019. In 2019, 1.92 Billion people shopped online.

Global e-commerce industry is expected to reach more than USD 6.5 Billion by 2023. E-retail sales as a percentage of total retail sales is expected to reach 22% in 2023. E-commerce is expected to become the largest retail channel in the world, outpacing sales through retail outlets such as supermarkets, independent grocers, and apparel and footwear retailers, among others.

Marketplaces are popular online shopping platforms, as customers are attracted to the large number of products available, typically at lower prices, driving the e-commerce industry. The top online marketplaces in the world sold USD 2.03 trillion in 2019.

The COVID-19 pandemic brought in social distancing and lockdown across the world and is expected to move consumers towards online shopping. The global e-commerce industry is segmented as per products like electronics, healthcare beauty & personal care and others. The outbreak of COVID-19 had an impact on these segments due to the uncertainty in the supply chain and consumer demand across the world.

Where are the top marketplaces located?

Region No. of marketplaces
North America 60
Asia 17
Europe 15
Middle East/Africa 4
Latin America 4

E-commerce Technology Developments

Artificial intelligence: AI in e-commerce enables companies to gather as well as investigate data in real-time, thus facilitating more efficiency and competence in business.

loT:

IoT helps in inventory management by improving the monitoring and tracking process of inventory items, reducing human errors in reordering items. Information like product type, manufacturers name, the expiry date of the items and their batch IDs can be automatically stored in the system. IoT not only helps in optimizing inventory and reducing shortage but also eliminating over-stock of items in the warehouses. IoT ensures that goods move from one place to another smoothly, enabling tracking of goods right from the production stage to delivery.

Data analytics:

The proliferation of the number of online sales channels (e.g. desktop, mobile, tablets) implies a growing need for retailers to understand consumer behavior across these channels in order to maximize the benefit from online sales. Data analytics allows optimization of consumer marketing, which in turn drives online commerce growth further.

US E-commerce Industry Overview

E-commerce sales in US were pegged at USD 601.75 Billion in 2019, an increase of 14.9% from USD 523.64 Billion in 2018. Total retail sales increased by 3.8% to USD 3.763 trillion in 2019 from USD 3.626 trillion in 2018. Online share of total retail sales in US stood at 16% in 2019 compared to 14.4% in 2018.

Ecommerce accounted for more than 56.9% of all gains in the retail sales in 2019.

 

(Source: Digital Commerce 360, Statists, CNN, Pixel Union)

Emerging trends in the US e-commerce industry Drop shipping:

Drop shipping is a business model that allows online selling without actually stocking the items. According to the State of the Merchant E-commerce Report, 2018, out of 450 online stores, 16.4% used drop shipping model and registered an average revenue growth of 32.7% and an average conversion rate of 1.74%. Drop shipping is useful for selling bulky items that occupy huge space in warehouses and stores.

Multi-channel selling:

Multichannel selling is the process of selling products on more than one sales channel. Multichannel management includes a mix of ones own website and shopping cart, online marketplaces, mobile marketplaces and/or brick and mortar stores. This model has emerged as one of the trending model in the US ecommerce industry.

Omni-channel personalisation:

Omnichannel personalization is the practice of creating customer experiences that are registered by real-time data from all channels, and extend them across every touchpoint, to build consistent relationships with the customer.

Black Friday:

Black Friday is an informal name for the Friday following Thanksgiving Day in the United States, which is celebrated on the fourth Thursday of November and is one of the biggest sales days of the year. In 2019 on this day consumers spent USD7.2 Billion in digital sales in the US alone. (Source: Forbes)

Cyber Monday:

Cyber Monday is a marketing term for the Monday after the Thanksgiving holiday in the United States. Total sales of Cyber Monday stood at USD 9.4 Billion in 2019, a 19% increase from USD 7.9 Billion in 2018. As shoppers increasingly shift to digital rather than in-person spending, online sales via smartphones grew 46% from previous year, accounting for 33% of all Cyber Monday sales in 2019, amounting to USD 3 Billion. (Source: Forbes)

Holiday sales:

Overall holiday spending for 2019 was estimated to be pegged at USD 143.8 Billion in 2019 compared to USD 126 Billion in 2018, out of which the holiday season generated USD 81.5 Billion in total online sales in 2019. (Source: Forbes)

Growth drivers of the US ecommerce industry M-commerce:

Web traffic is increasingly generated by smartphones, driving e-commerce sales. Technological improvements such as better connectivity and voice-activated shopping have strengthened mobile shopping. As of 2019, 40.61% of the web traffic in the United States originated from mobile devices. Four of five Americans are now online shoppers; more than half made purchases using a mobile device. M-commerce in the US is expected to increase from USD 128.4 Billion in 2019 to USD 418.9 Billion through 2024.

Internet penetration:

The internet usage penetration in the USA stood at 86.5% with 285 Million users in 2019 compared to 84.1% in 2018. Rising internet penetration is expected to drive the e-commerce industry.

Advanced technologies:

Advanced digital platforms have brought about a seamless consumer experience (from access, viewing, selection, payment and delivery). Increased digitalization and innovation (biometrics and retailer wallets) are likely to enrich consumer experience.

Millennials role:

Millennials (72.1 Million) overtook Baby Boomers (71.6 Million) in 2019 as Americas largest population.

Smartphone penetration:

81% of Americans own a smartphone in 2019. The average American spends more than four hours on smartphone every day, checking it as often as 150 times; thats equivalent to two months per year spent scrolling, snapping, and shopping. Mobile is expected to dominate online sales, driving 54% (or USD 659 Billion) in sales by 2024. 67% of consumers admit to "digital window shopping" for fun on their smartphones, with 77% of those making impulse purchases when they do.

Increasing e-retailers:

There are 7.1 Million online retailers and 1.8 Million based in United States as of 2019.

Growing per capita income:

The US per capita income stood at USD 56,663 in 2019 compared to USD 55,290 in 2018.

Gen Zs influence:

By 2020, Gen Z could be the third largest generation group in USA, making it a leading online buyer.

 

(Source: Business Insider, Digital Commerce 360, Forbes, Statista, CNN)

Company overview

IntraSoft is a leading e-commerce retailer in USA, and has a significant presence across major online marketplaces like Amazon and eBay. The Company works with brand partners across all major categories such as home & kitchen, garden & outdoor, beauty & personal care, baby products, toys & games, tools & home improvement, among others. The companys backbone is its technology comprising proprietary web-based solutions to fulfil millions of orders across the US with speed and accuracy. The companys wide product range, competitive pricing, timely delivery to customers, backed by superior technology and an efficient supply chain, have established strong industry credentials at either end of the supply chain, before both brands and marketplace customers.

Business Performance, 2019-20

The COVID-19 pandemic has adversely impacted commerce globally, but e-commerce has seen a positive acceleration in the shift of purchase habits. In this burgeoning world of e-commerce that is dominated by online marketplaces, the company plays the critical role of bridging the gap between marketplaces that are customer-focused and brands that are product focused, enabled by the use of technology and data analytics.

We are confident of business success, as Home, one of our key categories in which we have developed competitive advantages, is seeing an accelerated online shift. Our investments in technology during the last two financial years have allowed us to scale during these unprecedented times despite facing supply-chain bottlenecks. We will continue to proactively invest in our future.

Over the last two years, we shifted focus from scaling the business to evaluating and optimizing our existing brand portfolio. The result of that is evident in our Accounts Payable Days that moved from 12.9 days in FY18 to 15.3 days in FY19 to 20.0 days in FY20. That shift of focus concludes with FY20, and we head into FY21 with a focus on growing the business and increasing outreach to brands.

Financial overview

The Companys consolidated Profit and Loss Account for the year ended 31 March 2020 is provided below:

(Rs. in Lacs)

Particulars 2019-20 2018-19
Revenue from Operations 59,067.54 83,655.42
Cost of Goods Sold (incl. Shipping) 48,899.29 70,700.49
Gross Profit 10,168.25 12,954.93
Sales & Marketing Expenses 6,637.98 9,514.98
Employee Benefit Expenses 1,566.92 1,523.92
General & Administration Expenses 1,272.24 1,426.14
Earnings/(Deficit) from Operations 691.11 489.89
Other Income (Net) 485.42 496.18
Earnings Before Interest, Tax, Depreciation & Amortisation 1,176.53 986.07
Depreciation & Amortisation 409.43 176.19
Earnings Before Interest & Tax 767.10 809.88
Finance Costs 553.87 497.95
Profit Before Tax (PBT) 213.23 311.93
Tax Expense 2.36 (254.52)
Profit After Tax (PAT) 210.87 566.45

On a standalone basis, Debtors Turnover increased from 12.78 to 77.02; reason being the fall in Trade Receivables vis-a-vis Revenue from Operations. Current Ratio increased from 17.94 (Restated Figures) to 47.23; reasons being the rise in Cash and Cash Equivalents, the GST refund receivable this financial year, and the excess income tax refund received in the last financial year repaid in this financial year.

Risk Management

Seasonal business: The U.S. festive season falls in the third quarter of our financial year, leading to e-commerce revenue and generally that of the Company being concentrated towards the same quarter.

Mitigation: The Companys operations are centered around the prudent use of technology, enabling it to remove redundancies from its systems and processes to ensure seamless business operations during the demand spike in the third quarter of the fiscal. Our data- driven demand forecasting capability serves as an input for brand partners to plan and manage inventory for the busy season.

Managing growth:

Continuous strengthening of process and systems could be challenging.

Mitigation:

The Company invests in technology upgradation to respond to the dynamic market requirements. Over the last two financial years, the Company has strengthened its business by putting the operational parameters in place, to respond efficiently to changes in the ecosystem.

Operational risk:

Building and maintaining a vast network of brand partners to strengthen its eco-system.

Mitigation:

The Company considers its brand partners as its customers and continuously invests in proprietary technology to provide the best resources to its brand partners to sell on marketplaces. The Company has a dedicated brand-outreach team to manage its brand portfolio; and participates in industry events such as trade shows and conferences, to further strengthen industry presence.

Restricted physical movement of employees owing to decisions made by local authorities, governments or public health bodies owing to the COVID-19 pandemic, and its impact on business continuity.

Mitigation:

The Companys employees have adapted to new processes and protocols to continue to serve strong demand, while keeping customers, employees, and the community safe. With a focus on safety & well-being, the teams, both in India and the US, will continue to work remotely for the foreseeable future, and are well equipped to do so as our technology scales on the cloud.

The management also regularly reviews all vital processes and control systems that further strengthen the organisation. The emphasis on internal controls is implemented across all units, functions, departments and processes. All measures are taken to ensure that the controls put in place are both adequate and commensurate with the size and nature of our operations.

Human Resource Management

The Company believes that its intrinsic strength lies in its dedicated and motivated employees. We offer an invigorating work environment, and aim to create a workplace where every individual can achieve his or her true potential. The Company encourages individuals to go beyond the scope of their work, to learn and devise innovative ideas. The Company has in place a programme of rewards and recognition to motivate talented employees, resulting in strong employee productivity. The Group employed 80 individuals as of 31 March 2020.