Intrasoft Technology Ltd – Bet on fast growing e-commerce opportunity
Intrasoft Technologies Ltd (ITL), is a 3rd party (3P) multi-channel e-commerce retailer in the US operating through major online retailers (Amazon, eBay, Sears, Rakuten), with a strong back end in India. The company is a unique play in the high growth US e-commerce market and has a proven track record of delivery.
The company has a sound business model and caters to products procured from vendors from the US geography. The logistics are fulfilled by UPS and FedEx which have a very high ratings on fulfillment. This in turn has helped ITL climb into the platinum club of the top 25 sellers of Amazon (USA) and its sustained rating of 97, helps it maintain its premium listing in the market places. ITL has further leveraged this rating and has not only expanded its listed vendor base (4.1x to 1900+ nos.) but also reached a humongous level of product SKUs on offer (8.7x to 6.25 lac units).
Company and its background:
Intrasoft Technologies Ltd. (ITL) is a technology driven, multi-channel online retailer serving across nine e-commerce platforms in USA including Amazon.com (US), eBay.com, Sears.com, etc. The company also sells its products on its own site www.123stores.com.
ITL’s business model is to create a distribution network to offer its customers a better shopping experience by leveraging its technology, efficient supply chain management and maintaining relationships with suppliers. ITL has three wholly owned subsidiaries viz 123Greetings.com Inc (USA), Intrasoft Ventures Pte. Ltd. and One Two Three Greetings (India) Pvt. Ltd. (India). To cater to the growing US based e-commerce business, 123Stores, Inc. (USA) was incorporated which is a wholly owned step down subsidiary of Intrasoft Ventures Pte. Ltd. (Singapore).
ITL – Business Model:
ITL operates under two business models, namely Drop-shipped (~60% of revenue) and Warehousing model (~40% of revenue).
Drop-shipped model: Under this model, ITL does not maintain any inventory and after receiving orders from market places, it directly ships products from the vendor to the customer.
Warehousing model: Under this model, ITL maintains inventory of fast moving stocks in the various warehouses of Amazon present in multiple locations in USA. In this model the inventory risk lies with the company.
Key Investment arguments:
Online retail sales to consumers in the US touched nearly $410 billion in 2017, thereby registering a growth of 12.1% CAGR over 2012-2017, (whereas the US retail sales grew at 2.8% over the same period). Further, the penetration of ecommerce sales over the same has increased from 5.3% in 2012 to 8.2% in 2017. Going forward the online retail sales is expected to grow at 11.1% CAGR over 2017-2020 to $561.5 billion and the penetration is set to improve to 10.2% by 2020. The growth in the online retail market will benefit Intrasoft.
Since ITL is present only in the North American geography, its revenues are expected to grow at a brisk pace of 33.7% over the next three years. This growth is expected to be driven by Improving ranking within the US retailers (Immense competitive advantage), Continuous expansion of product offerings and its robust technology platform.
Intrasoft has a presence in the US and Canada. It has a shop-in-shop (3P seller) partnership with Amazon.com (US), Amazon Canada, eBay.com, Sears.com, New Egg, Rakuten and Jet.com through its 100% subsidiary 123Stores, Inc. (123Stores). 123Stores has continuously improved its ranking over the years from 499 in 2014 and is now ranked 223 on the Internet Retailers 2017 Top 500 list. ITL is also ranked 1641 in Inc.5000 list (2014) of fastest growing private US companies. The improvement in the ranking is essential as the vendor before partnering with the web retailer takes a reference of such rankings. Thus such improvement in ranking not only assists the company in improving its vendor network but also increases the number of reviews by customers and thereby increases revenue.
123Stores is a Platinum seller on Amazon.com with a seller rating of 97 out of 100. Platinum rating enables the company to realize its receivables from Amazon in four days as against seventy-one days for other sellers thereby reducing working capital requirement and encouraging suppliers/vendors to partner with it, rather than selling directly on Amazon.
123Stores orders executed grew by 124% CAGR over FY14 – FY17. This was largely driven by continuous addition of its supplier base and expansion of the product catalogue. The company, in the last three years, has almost doubled its supplier base and more than doubled its product catalogue to 6.25 lacs SKUs. The 6.25 lacs SKUs includes diversified products across various categories such as furniture, lawn & garden equipment, musical instruments & gadgets, toys, kitchen & dinning appliances etc. The category mix keeps changing every quarter, based on the demand of the products. However, furniture, musical instruments and toys constitute a significant portion of the category mix. The management aims to keep adding suppliers; this will enable it to expand its product offerings and thereby, enable it to increase its orders.
In the online retail business, the efficiency of the business largely depends on the technological architecture. Intrasoft has developed an in-house e-commerce platform to automate each and every process in the supply chain. The platform has the flexibility to integrate with various market places. The company through this platform has fully automated its ecosystem from marketplace to 123 Stores to vendors to logistics partners. As a result, maximum orders are automatically verified and forwarded to the vendors and the logistics partners, thereby requiring human intervention only in exceptional cases. The platform currently executes around 3000-4000 orders per day and has the capacity to execute 15000 orders in a day. Further, the platform has enabled the company to reach out to approximately 95% of the total online shoppers in the US and maintain a 97%+ positive customer ratings.
Negotiation with suppliers to improve working capital efficiency and cash flows:
Intrasoft in Q1FY17 started negotiating new terms with its 1900+ vendors, pursuant to which it demanded a suppliers’ credit as against giving advances to the vendors. The new terms have been agreed on by all its vendors, which not only shows the strength of the company’s business model but will also improve the working capital of the company. Based on the above, working capital days are expected to reduce from 18 days in FY17 to 9 days in FY20.
ITL – Financial Performance:
In Q3FY18, Intrasoft reported a 20.1% YoY increase in its topline to Rs. 338.3 crore from Rs. 281.8 crore in Q3FY17. The EBIDTA margin declined by 97 bps to 2.1% from 3.1% and the EBITDA declined by 17.5% YoY to Rs. 7.2 crore. The decline in the margins was mainly on account of a declaration of bankruptcy by a major off-line retailer, which pushed all the toys in its pipeline to the online channel leading to heavy discounting. The PAT declined by 20.5% YoY to Rs.5.1 crore, on account of a weak operational performance.
During FY17, Intrasoft’s revenues stood at Rs.939 crore registering a growth of 31% YoY. Further, the EBIDTA margin increased by 70 bps YoY to 1.9% and the EBITDA increased to Rs. 17.6 crore. PAT (before exceptional income) increased by 95% YoY to Rs. 13.8 crore on the back of improved operating performance and increase in other income (mainly includes net gain on sale of current investments).
Going forward, the revenues are expected to grow at 33.7% CAGR over FY17-FY20 on the back of continuous vendor addition and an increase in the SKUs being offered. Further, the EBIDTA and PAT are expected to grow at a CAGR of 37% and 39% respectively, over the same period. With the strong growth in earnings and improved working capital conditions ROCE and ROE are also expected to improve to 20%+ levels by FY20. With the said factors, ITL can be a good investment bet for a period of two years.