AGS Transact Technologies is a BUY for 48% Upside: HDFC Securities

Conflux of cash and digital ecosystem

AGS Transact Technologies Ltd (AGS) is the second largest ATM outsourcing and cash management player in India, with a 15/30% market share. The company has been able to sustain the impact of COVID-19 (ATM transactions declined by ~30%), supported by its strong and sticky relationship with top Indian banks and upward revision in interchange fees by ~14% by the regulator. AGS has focused on scaling the cash management (~20% CAGR) and the Digital payment business (~15% CAGR) to offset the impact on ATM management segment. We expect a recovery in the payment solution business, led by (1) revival in ATM transactions; (2) increasing cash circulation despite exponential rise in UPI; (3) higher demand for CRM machines; (4) preference for RBI & MHA compliant vendors for cash management; and (5) growth in digital payment business, led by tie-ups with OMCs. AGS is pivoting itself to a profitable growth terrain in FY23E, supported by (1) margin expansion in the ATM/cash management/Digital segment and (2) reduction in debt, leading to interest savings. We expect AGS to deliver +10/15% revenue/PAT CAGR over FY22-25E and RoE of ~17%. We initiate coverage on AGS Transact with a BUY rating and a target price of INR 123, valuing the stock at 12x Sep-24 EPS (~15% discount to CMS).

► ATM business set to recover: The ATM management revenue (transaction + fixed price) was down by ~6/10% in FY21/22 due to a decline in fixed-price ATMs (PSU banks) and a drop in ATM transactions during COVID (dropped to ~70/day, vs the pre-COVID level of ~105/day). Based on ATM unit economics, an increase in one transaction/day/ATM improves ATM revenue by ~100 bps and margin by ~65bps (on a consolidated basis ~25bps margin improvement). We have assumed transactions to improve to ~90-95/day vs the current level of 85-90/day. We expect the ATM management business to deliver ~8% CAGR and ~170bps margin expansion over FY22-25E. The cash management business will deliver ~13% CAGR over FY22-25E and EBITDA margin will expand to 15-18% with scale.

► Digital payments driving growth: AGS has a total of 0.24mn POS machines (~4% market share) and has registered a strong CAGR of ~28% over FY19-22. The growth was driven by tie-up with major OMCs for POS installation at petrol pumps across India. Out of the total order book of ~80K POS machines, ~50K are installed and the rest will be done over the next two years. The current GTV is at INR 0.4mn/POS/month; the target is to reach INR 0.6mn in the next few years. The revenue from digital payments is expected to increase at a CAGR of 16% over FY22-25E, led by OMC POS (~25% CAGR).

► Improving profitability: AGS reduced its debt to INR 7bn in FY22 through pre-payment of INR 5.5bn NCDs issued in FY21. The interest payout will reduce to INR 1.43bn in FY23E vs INR 2.5bn in FY22, providing a boost to profitability in FY23E. We don’t expect any further increase in debt level, cash generation is healthy (OCF/EBITDA is at ~95%), and capex per year will be at INR 1.2-1.3bn.