AGS Transact IPO: For medium-term returns

AGS Transact Technologies Limited is tapping the capital markets with its offer for sale (OFS) of 3,88,57,141 equity shares in a price band of Rs 166-175. At the top end of the price band, the issue would raise Rs 680 crores. The issue opens on Wednesday the 19th of January and closes on Friday the 21st of January.

This is the first issue to tap the markets in the new calendar year 2022. Incidentally, the last issue to tap the markets in calendar year 2021 was from the same field of cash management services and was from CMS Info systems limited.

The company is into the business of providing customised products and services comprising ATM and CRM outsourcing, cash management and digital payment solutions including merchant solutions, transaction processing services and mobile wallets.

The issue which is an offer for sale would see the promoter settling the loans taken for providing an exit to the PE investor before the shares are listed on the bourses. An amount of Rs 550 crores plus interest from the offer proceeds would be utilised for the same. This would lead to a significant surge in profitability for the company as the cost of interest on this loan would cease to remain there. The company had reported an EPS of Rs 7 in FY 2020 which fell to Rs 4.62 in FY 2021. Based on this EPS, the PE band is 36.48-38.46 times FY 2021 earnings. As mentioned earlier, this would stand corrected as the loan gets repaid and results in profits moving up significantly and the EPS rising to much higher levels than the FY 2020 numbers. The trigger for the share would be the digital initiative that the company has and revenues could rise sharply in the coming two to three years. Another trigger would be the upgrading of ATM machines to recyclers where they also act as cash collecting machines. This would increase the cost but act as a cash collection machine and also a cash dispensing machine.

Coming to the revenue mix of AGS Transact, one sees that of the Rs 1,800 crores revenue approximately in FY 2021, about 55-57 per cent comes from ATM and management services, 16-18 per cent comes from cash management services, about 9 per cent comes from digital services and the balance from other services. Of the total, in FY19, service revenue was 82.8 per cent which has increased to 88.2 per cent in the five months ended August 2021. Yet another way of looking at the same is payment solutions revenue has increased from 70.8 per cent to 74.5 per cent in the same period, Banking automation has remained constant at 13.8 per cent and other automation has decreased from 15.8 per cent to 11.7 per cent.

The company has been continuously evolving and expanding its offerings. It has launched its switch, 'India Transact', and followed it up with launching 'ONGO', a digital payments solution. It has for oil retailing launched a product 'Fastlane' which is currently deployed and becoming very popular with customers. It already has a very successful and robust merchant base. To facilitate their working capital requirements, it facilitates loans against their card receivables which is financed by NBFC's and banks who are partners on their platform. Going forward this would be extended to card holders who would be able to get financing under 'BNPL' (buy now pay later) scheme. The beauty of these products is that it earns fees or commissions and there is no risk or liability on the company. AGS Transact would not be extending a loan or being a guarantor for the same.

The company is comparable with the recently listed CMS where 18 per cent of the ATM servicing model is identical and comparable. The remaining business is different on three counts. AGS Transact supplies ATMs on lease where the revenue model is a combination of a fee model and per transaction model or a combination of both. This is a significant portion of their revenue and includes the AMC of these machines and servicing them as well. Further they supply POS (point of sale) machines on a similar model which are used on their digital platform. Finally, the digital initiative which is currently 15 per cent of their revenues currently and is likely to grow exponentially to around 33-35 per cent in the next three years on account of the digital platform growing in size would be a key driver for them going forward. In comparison, CMS gets almost 67 per cent of the revenue from cash management services and the other part from managed services which include remote monitoring of ATMs.

I believe the share though expensive based on the current valuations as compared to CMS when it went public, is attractive for investment for investors with a medium-term outlook. The share should offer decent returns a quarter after listing as people are able to understand the benefits of loan repayments, upgrade in credit rating post the repayment and the increase in profitability as the digital platform sees higher revenues. The share merits a look certainly and investment would be beneficial for investors in the medium to long term.

(The author is the founder of Kejriwal Research and Investment Services, an advisory firm)