AGS Transact Technologies IPO opens tomorrow: Should you subscribe?

AGS Transact Technologies Ltd IPO opens for subscription on 19th January. The company is looking to raise up to Rs 680 crore through the public issue. Here are the details:

AGS Transact Technologies Ltd  IPO: Details

AGS Transact Technologies IPO Date: 19 January - 21 January 2022

AGS Transact Technologies IPO Price band: Rs 166 - Rs 175

AGS Transact Technologies IPO Issue Size: Rs 680 crore (Offer for sale aggregating up to Rs 680 crore)

Reservation: QIB 50%, Retail - 35%, NII 15%

Minimum Investment: Rs 14,875

Bid lot: 85 shares, and in multiples of 85 shares

AGS Transact Technologies IPO: Objects of the Issue

The net proceeds from the IPO will be utilized for the following purposes :

• To carry out an offer for sale of equity shares by existing shareholders.
• To achieve the benefits of listing the equity shares on the stock exchanges.

About AGS Transact Technologies

• AGS is one of India's leading omni channel payment solution providers.
• It is the second-largest company in India in terms of revenue from ATM managed services. Also, it is the largest deployer of POS terminals at petroleum outlets in India.
• Along with the Indian market, the company also has its presence in other Asian countries like Cambodia, Sri Lanka, Singapore, Indonesia, and the Philippines.
• AGS operates in three business segments - payment solutions, banking automation solutions, and other automation solutions.
• It had installed a network of 221,066 merchant POS, 17,924 petroleum outlets, 72,000 ATMs and CRMs offering cash management services, 46,800 cash billing terminals, and installed 88,521 color dispensing machines as of 31 August 2021.

AGS Transact Technologies: Services & Business segments

The three business segments of the company are as below:

• Payment Solution: Under this segment, the company provides services like ATM and CRM outsourcing, digital payment solutions, cash management services, transaction switching services, agency banking, POS machine services, and much more. They have deployed POS terminals at leading Indian petroleum outlets like Hindustan Petroleum, Indian Oil Corporation while Dr. Lal Pathlabs, Patanjali Ayurved, RJ Corp Ltd, VRIPL Retail Pvt Ltd, Organic India.
• Banking Automation Solutions: includes the sale of ATM and CRM, currency technology products, self-service terminals, and relevant services. The company has a 50+ banking customer base including large banks like HDFC Bank, ICICI Bank, and Axis bank.
• Other automation solutions for customers in petroleum, color segments, and retail such as system automation products, remote management, system integration, and other service offerings.

Industry Outlook for AGS Transact Technologies

• GDP growth, a surge in private consumption, and government initiatives towards promoting the Indian economy through Made in India strategies have resulted in strong growth in the payments sector.
• The number of transactions grew from 31,383.9 million in FY19 to 46,405.8 million in FY21.
• In India, the number of ATMs (excluding white label ATMs) installed increased from 199,099 as of March 31, 2016, to 213,575 as of March 31, 2021. 
• The number of ATMs operating in India’s ATMs market increased from 212,061 as of March 31, 2016, to 238,588 as of March 31, 2021, at a CAGR of 2.39%.

AGS Transact - Listed Peers

There are no listed companies in India whose business portfolio is comparable with AGS and comparable to their scale of operations. Hence, it is not possible to provide an industry comparison.

However, in the ATM managed services market, there are some companies. Out of these companies, CMS Info System recently got listed. In the India payment security market, there are many unlisted companies like CA Technologies, Symantec Corporation, Trend Micro India Pvt. Ltd., Thales e-Security Inc, Cisco-India, VASCO Data Security, Gemalto, Intel Corporation, and Transaction Network Services.

AGS Transact Financials

• The total revenue of the company has declined from Rs 1,805 crore in FY19 to Rs 1,758 crore in FY21. For the 5 months from Apr-Aug 21. 
• The net profit has also declined to Rs 55 crore in FY21. In five months to August 31, 2021, it reported a loss of Rs 18.1 crore on revenue of Rs 753.4 crore.
• Earning Before Interest, Tax, Depreciation, and Amortization (EBITDA) for the same period was Rs 1380.75 crore, Rs 1338.06 crore, and Rs 1320.39 crore, respectively.
• The EBITDA margin has remained in a healthy range of 24-27%. 
• For FY21, FY20, and FY19, they processed 121.27 million, 85.67 million, and 195.19 million merchant transactions, respectively, with a GTV (Gross Transaction Value) of Rs 20,571.82 crore, Rs 14,275.09 crore, and Rs 8,196.25 crore, respectively.
• Revenue from the Payment Solutions segment was Rs 13,50.58 crore, Rs 1378.43 crore, and Rs 1277.81 crore, constituting 76.8%, 76.6%, and 70.8% of its total revenue from operations FY21, FY20, and FY19, respectively, 
• The revenue from the Banking Automation Solutions segment was Rs 159.83 crore, Rs 210.87 crore, and Rs 246.1 crore, constituting 9.1%, 11.7%, and 13.6% of its total revenue from operations for FY21, FY20, and FY19, respectively. 

AGS Transact - USPs

Omni-channel integrated payment and cash solution provider - They are one of the largest integrated omnichannel payment solutions providers in India in terms of providing digital and cash-based solutions to banks and corporate clients. They serve diverse industries such as banking, retail, petroleum, toll and transit, cash management, and fintech in India and other select countries in Asia. As part of the cash payments solutions business, they offer a portfolio of banking services and automated banking products. They are the only company in India to provide the full range of services in the ATM-managed services market.

Customer-driven portfolio - AGS regularly interacts with its customers to understand their requirements and work closely to develop future roadmaps. The company's ability to innovate and offer customized payment solutions to address the requirements of its customers allows them to deepen their relationships with them and enables them to target a greater share of their payment-services-related requirements.

Long-term relationships with technology providers and customers - They have long-standing relationships with leading global technology providers, such as Diebold Nixdorf and ACI. Further, they have established relationships with leading Indian financial institutions, such as ICICI Bank, Axis Bank, HDFC Bank, Federal Bank, Dhanlaxmi Bank, and RBL Bank, having procured repeat orders from them.

Inhouse infrastructure and technological capabilities - They have nationwide service infrastructure that allows them to effectively and efficiently service their customers. Their service infrastructure is a major business enabler for them across several cash and digital initiatives.

Growth Potential

Focus on growing digital payment solution business - There has been an increase in demand for cashless transactions due to the COVID-19 pandemic, increasing smartphone adoption, a growing need for faster payment modes, and a strong push from the GoI. They plan to capitalize on this growth. For that, they intend to leverage their existing presence in the consumer-oriented sectors to service the growing demand for products and services.

Pivot from Payments-as-a-Service to Payments-as-a-Convenience  - They plan to grow their digital payments business by attracting more merchants and consumers to join the Ongo ecosystem. The Ongo ecosystem allows consumers to use one single payment system, Ongo, to make payments at POS terminals through various modes of payment.

Enhance integrated technology payments platform - They intend to leverage their product and services portfolio to provide additional customized payment solutions as well as develop an integrated payments platform for customers. 

Focus on Cash Management Services - Having gained scale and operational efficiencies in this business, AGS now plans to grow this business further by leveraging their experience and other factors such as the increasing trend of banks outsourcing their ATM operations and retailers outsourcing cash pick-ups to third parties.

Risks

Significant revenue from the banking sector - AGS derives a significant portion of its revenues from customers in the banking sector in India. Any adverse development in the growth of the number of Automated Teller Machines (ATMs) or the usage of ATMs in India could hurt their business. Also, as new banking licenses for potential entrants to the banking industry are difficult to obtain in India, their customer pool may be limited, which could also have an adverse effect on its growth.

Limited number of customers - The revenue from the top 10 customers constitutes  62.8%, 62.6%, and 67.6% of its total revenue for FY21, FY20, and FY19, respectively. If one or more of its top customers suffer a deterioration of their business, cease doing business with them, or substantially reduce its dealings with them, the revenue of AGS will be significantly affected.

Decrease in the use of cash - The company's business and results of operations are significantly dependent on the maintenance and growth of the ATM network in India and on the use of cash as a mode of payment. A decrease in the use of cash as a mode of payment could hurt AGS's business.

AGS Transact IPO: Review

AGS Transact Technologies has reported a decline in revenues between FY19 and FY21, impacted by the ongoing pandemic. The company’s profits have also declined over this period. In fact, in the Apr-Aug 21 period, AGS Transact Tech has clocked losses of Rs 18.11 crore. 
The company was able to retain its EBITDA margin in the 24-26% range. The company’s return ratios have also been in a healthy range over the last three years. However, the return ratios have declined to 10.3% from 16.7% in the previous year. 

At the higher end of the price band, AGS Transact IPO is priced at a PE ratio of 38 times based on FY21. This is higher than CMS Info Systems (30 times). Notably, the company has cut the size of its public issue to Rs 680 crore, from Rs 800 crore as planned earlier.

Given factors such as muted growth in bottomline, steady margins, low return ratios, good growth visibility, and high valuations, analysts remain “Neutral” on the prospects of this issue.