Key Rating Drivers & Detailed Description
Strengths:
Strong market position in the ATM managed services industry with presence across the value chain
AGS is one of the largest integrated omni-channel payment solutions providers, providing digital and cash-based solutions to both banks and corporate clients across India. AGS also provides automated and technology products for banking, retail, paints and petroleum sectors. The company commenced its banking automation business in 2004 which includes supply and installation of ATMs, site development and provision of maintenance services. Capitalising on the expertise in the automation space, AGS began to offer ATM outsourcing and managed services in 2009. The company further ventured into transaction switching services and cash management services (through its subsidiary, SVIL) in 2011 and 2012, respectively. This led to the company transforming into an end-to-end payment solutions and technology partner for the banking sector across the entire ATM value chain, thereby consolidating its market position. As of September 2021, the company has a network of over 33,000 ATMs under its ATM outsourcing and managed services business with a market share of ~15% and services over 48,000 ATMs under their cash management business in SVIL. Further, the company is also expanding its presence in installing cash recycler machines (CRMs) for various banks which should further strengthen AGS’s overall market position given the increasing preference by banks for CRMs to offer automatic deposit and withdrawal facilities to customers. This will in-turn also expand the portfolio of machines serviced by SVIL under their cash management business.
Moreover, AGS also has strong technical capabilities supported by its strong in-house research and development division, technology transfer arrangement with Diebold Nixdorf (Diebold) for manufacturing of ATMs and ACI Worldwide (ACI), for switching solutions. Both Diebold and ACI are global leaders in the respective segments, partnership with whom provides access to state-of-the-art technology for AGS.
Increasing presence in digital payment solutions as well providing diversity to revenues
To capture the growing demand in digital payments space and improve the mix between cash and digital payments, the company has recently diversified into digital payments solutions (through fully owned subsidiary, ITSL) providing services like switching software, merchant solutions (POS machines), and other electronic payment solutions. Leveraging their experience with in the petroleum retail space, AGS has also developed Integrated Payment Solutions (IPS) which in turn has helped the company to increase its presence in the digital payments space. The contribution from the digital payment solutions has been increasing over the last 2 years (currently contributing around ~12% of AGS’s revenues), improving the diversity of AGS’s overall revenue profile.
Good visibility on revenues owing to longstanding association with customer banks; healthy operating efficiencies
AGS’s market position is underpinned by its established relationships with leading financial institutions, retail players as well as paint and petroleum majors. In the banking segment, the company has a diversified customer base of both private and public sector banks, viz; ICICI Bank Ltd, Axis Bank Limited, HDFC Bank Limited, State Bank of India, RBL Bank and Bank of Baroda. Further, the company has been able to secure repeat orders from them given its positioning and currently has long term contracts (of about 8-10 years) with many of its customers in the banking segment. Currently, around 70-80% of AGS’s turnover is derived from these recurring orders from banks; having stable revenue streams (with mix of both fixed fee and variable fee contracts (wherein revenues are linked to number of transactions in the respective ATMs). Furthermore, large portion of AGS’s existing ATM network has a long vintage in the market where customer footfalls have stabilised, thereby providing strong visibility on revenues for the next 2-3 years.
Besides, for customers, where the revenues to AGS are linked to the number of transactions done in the respective ATMs, AGS reserves the right to relocate the ATMs in case of shortfall in number of transactions. Hence, with increasing vintage of ATMs, AGS’s operating margins has been improving till fiscal 2020. While impact of pandemic in fiscal 2021 moderated margins, gradual improvement is expected and regain previous levels of ~18%.
Adequate financial risk profile; to improve gradually
AGS’s net worth is healthy at over Rs 500 crore as on March 31, 2021, however, financial risk profile had moderated due to increase in debt (primarily NCDs). AGS’s holding company, Vineha had raised NCDs of Rs.450 crore in fiscal 2019 to provide an exit to two private equity investors who earlier held 42.41% stake in AGS. These NCDs along with accrued interest was due for redemption in April 2021. AGS has infused ~Rs 650 crore in Vineha from proceeds of NCD issuance and by utilizing own cash balances which in turn has been utilized to redeem the NCDs in Vineha.
Hence, with the issuance of fresh NCDs, overall net debt levels rose to ~Rs 1,058 crore at March 31, 2021 from Rs 573 crore at March 31, 2020 (Rs 559 crore at March 31, 2019). Consequently, consolidated gearing and debt/EBITDA peaked to over 2 time and over 4 times respectively, other while key debt protection metrics also moderated. The company has however, completed its IPO recently and proceeds have been utilized to retire substantial debt, mainly the NCDs. Furthermore, capex requirements of ~Rs 140-150 crore per annum is expected to be only partially funded through debt in fiscal 2023. Hence, debt metrics should gradually improve over the medium term, from the peak seen in fiscal 2021, also supported by progressive debt repayment.
Weakness
Slowdown in number of ATMs and risk of proliferation of digital payments
The Indian ATM industry had witnessed tremendous growth in the past decade. The number of ATMs in India had increased from 59,613 in fiscal 2010 to 2,22,318 in fiscal 2017. However, having grown at a very healthy pace till then, ATM deployment slowed down considerably post demonetisation. Further, increasing internet penetration and rising availability of smartphones have led many consumers to gradually shift to digital payment modes (like mobile banking, consumer mobile wallets, etc.). However, despite the slowdown in the number of new ATMs installed, replacement demand for existing ATMs is expected to be stable given the 5-7 years useful life for the ATM machines, and the need to upgrade ATMs based on evolving technology and regulatory requirements.
Besides, the number of transactions done at ATMs and the overall transaction value is still on the rise, since cash transactions continue to form the backbone of the economy. Further, with still a large proportion of India's population remaining unbanked or under-banked; compared to some of the major economies in the world, and with banks focus on improving financial inclusion, the number of transactions should continue its growing trajectory. Furthermore, cash transactions still remain a core part of the overall transactions in the economy, especially in semi-urban and rural parts of the country. Cash in circulation has also increased to an all-time high of ~Rs 29.70 lac crore in November 2021 from pre demonetization level of ~Rs 17.40 lac crore in September 2016. Hence, the structural shift to digital payments will evolve gradually over a longer time frame and is not expected to pose an immediate threat to the number of ATM based transactions. Moreover, the revision in interchange fee is also expected to add to revenues and aid improvement in profitability.
Moderate working capital intensity in operations
AGS’s operations are moderately working capital-intensive marked debtors of around 85-90 days on average over the last 5 years. This is partly due to the longer collection cycle of around in the automation business and milestone-based billing in the payments business. However, AGS’s counterparties in the payments business are strong.
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