Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of AGS Transact Technologies Ltd (AGS) to ‘Negative’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A+’.

 

The revision in outlook reflects only limited improvement in the debt protection metrics of AGS, compared to expectations, with debt levels continuing to be high due to slow recovery in receivables.

 

The rating continues to reflect healthy business risk profile of AGS, driven by its established market position in the ATM managed services industry, increasing presence in digital payment solutions and longstanding association with customer banks. The rating is also supported by adequate operating efficiency, which ensures steady cash generation. These strengths are partially offset by average financial risk profile, large working capital requirement and risk of proliferation of digital payments in the long term, leading to stagnancy in demand for ATMs in the domestic market.

 

Revenue has been flattish in the recent years and declined to ~Rs 1,691 crore in fiscal 2023 from Rs 1,788 crore in fiscal 2022; it further declined by 11% on-year to Rs 748 crore in the first half of fiscal 2024. Revenue growth of the payment solutions business division (~87% of revenue) was impacted by the delay in implementation of cassette swaps at automated teller machine (ATMs) by customer banks. Revenue growth also remains impacted by the strategy of the company to reduce focus on the highly working capital-intensive products business. With receipt of new orders and implementation of cassette swaps at ATMs, revenue is projected at Rs 1,750-1,800 crore for fiscal 2024. Revenue growth is projected at a modest 4% over the medium term, also slower than anticipated. Overall, operating profitability is seen moderating to 25-26% in fiscal 2024 (23.4% in the first half of fiscal 2024 and 26.8% in fiscal 2023), due to revenue reduction in its other automation business and stabilising at these levels over the medium term. Cash accrual is expected at Rs 200-240 crore per annum over the medium term.

 

Debtors exceeding six months amounted to 33% of overall debtors in fiscal 2023, including retention money. A sizeable portion of the pending receivables (other than retention money) pertain to the pandemic period and are from the public sector units (PSU) and various esteemed customers including banks. AGS is in the process of recovering the same and using the proceeds for debt reduction. Delayed recovery of ageing receivables has necessitated provisioning of Rs 45 crore during the second quarter of fiscal 2024 (after provisioning Rs 38 crore in the last quarter of fiscal 2023). Further, AGS has provided for a minimum one-time commitment fee of Rs 39.5 crore, leading to net loss of Rs 60.3 crore for the first half of fiscal 2024; this too will impact networth, which may remain flattish at around Rs 480 crore as on March 31, 2024. Consolidated debt (including lease liability of ~Rs 330 crore) is projected at Rs 1,150-1,200 crore on March 31, 2024 (~Rs 1237 crore as on September 30, 2023, and ~Rs 1,227 crore on March 31, 2023) and remains high, despite sizeable annual long-term debt repayment. This is because working capital debt has risen due to delay in recovery of ageing receivables and partly debt-funded capital expenditure (capex). Ergo, only limited improvement in debt protection metrics is anticipated; interest coverage ratio is expected at ~3.1 times in fiscal 2024 (~3.1 times in fiscal 2023) and total outside liabilities to tangible networth (TOL/TNW) ratio at ~3.50 times as on March 31, 2024 (3.54 times on March 31, 2023).

 

Recovery in pending receivables will be critical to ensure sustained improvement in debt protection metrics and financial risk profile over the medium term, as cash accrual will only suffice to meet repayment obligations and a part of the capex; this will remain a key monitorable.

Analytical Approach

CRISIL Ratings has combined the financial and business risk profiles of AGS and its subsidiaries as they have common management and are in similar lines of business. AGS has two main subsidiaries - Securevalue India Ltd (SVIL) engaged in cash management services and India Transact Services Ltd (ITSL) engaged in creating and dealing with digital payment solutions.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

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 omnichannel payment solutions providers, providing digital and cash-based solutions to both banks and corporate clients across India. The company also provides automated and technology products for banking, retail, paints and petroleum sectors. In 2004, it commenced the banking automation business, which includes supply and installation of ATMs, site development and provision of maintenance services. 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 2023, the company had a network of over 37,616 ATMs and cash recycler machines (CRMs) under its ATM outsourcing and managed services business with a market share of ~15% and services over 40,000 ATMs under the cash management business in SVIL. Further, the company is expanding its presence in installing CRMs for various banks; this should further strengthen its overall market position given the increasing preference by banks for CRMs to offer automatic deposit and withdrawal facilities to customers. This will also expand the portfolio of machines serviced by SVIL under its cash management business. Various contracts are due for renewal at higher pricing which will improve the bottom line as well. AGS has recently announced the order win of INR 1,100 crore contract over 7 years for deploying 2,500+ ATMs under Outsourced/Managed Services portfolio from the State Bank of India (SBI).

 

• Increasing presence in digital payment solutions, providing diversity to revenue profile: To capture the growing demand in the digital payments space and improve the mix between cash and digital payments, AGS has diversified into digital payments solutions (through its fully owned subsidiary, ITSL) providing services such as switching software, merchant solutions (point of sale machines) and other electronic payment solutions. The company has also developed integrated payment solutions, which in turn has helped to increase its presence in the digital payments space. The contribution from digital payment solutions has been increasing over the past two years (currently contributing around 15% of revenue), improving diversity in the revenue profile of AGS.

 

• Revenue visibility owing to long-term contracts and longstanding association with customer banks; healthy operating efficiency: The market position of AGS is underpinned by its established relationships with leading financial institutions and 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 Ltd, HDFC Bank Ltd, State Bank of India, India Post Payment Bank, Union Bank of India, IDFC Bank and Bank of Baroda. AGS has been able to secure repeat orders from them, given its positioning, and has long-term contracts (of 8-10 years) with most customers in the banking segment. 70-80% of its turnover is derived from the recurring orders from banks; having stable revenue streams (with a mix of both fixed-fee and variable-fee contracts, wherein revenue is linked to number of transactions in the respective ATMs). Furthermore, a large portion of the ATM network of the company has a long vintage in the market where customer footfalls have stabilized, thereby providing strong revenue visibility for the next 2-3 years. Besides, for customers, where the revenue to AGS is linked to the number of transactions made in the respective ATMs, the company reserves the right to relocate the ATMs in case of shortfall in number of transactions.

 

Early mover advantage and scale of operations support operating profitability, which has been 23-27% since fiscal 2020. Operating profitability, while declining to 23.4% in the first half of fiscal 2024, from 26.8% in fiscal 2023, remains healthy due to the benefit of operating leverage and recurring orders from banks, where it enjoys strong relationships. Operating profitability is expected at 24-26% in the near to medium term.

 

Weaknesses:

• Slowdown in number of ATMs and risk of proliferation of digital payments: The Indian ATM industry had witnessed tremendous growth in the past decade; number of ATMs increased to 2,22,318 in fiscal 2017 from 59,613 in fiscal 2010. However, having grown at a very healthy pace till then, ATM deployment slowed down considerably post demonetization. Further, increasing internet penetration and rising availability of smartphones led many consumers to gradually shift to digital payment modes (such as mobile banking and consumer mobile wallets). 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 Indian 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 remain a core part of the overall transactions in the economy, especially in the semi-urban and rural parts of the country. Cash in circulation has increased to an all-time high of ~Rs 34 lakh crore in March 2023 from the pre-demonetization level of ~Rs 17.4 lakh crore in September 2016. Hence, the structural shift to digital payments will evolve gradually in the long term and is not expected to pose an immediate threat to the number of ATM-based transactions. This apart, with deployment of more CRMs, which can accept cash deposits, the number of transactions may increase. Moreover, the revision in the interchange fee can support revenue and boost profitability.

 

• Average financial risk profile: Consolidated adjusted networth was healthy at over ~Rs 480 crore as on March 31, 2023, and is expected at similar levels as on March 31, 2024, due to provisions and one-time commitment fee paid. The consolidated debt (including lease liability of ~Rs 330 crore) is estimated at ~Rs 1,150-1,200 crore as on March 31, 2024 (~Rs 1,237 crore as on September 30, 2023, and ~Rs 1,101 crore on March 31, 2022) and remains high, despite sizeable annual long-term debt repayment. This is due to the delay in recovery of ageing receivables, which led to higher working capital debt and hence only limited improvement in debt protection metrics. The company has an annual long-term repayment obligation of ~Rs 147 crore in fiscal 2024 and ~Rs 210 crore in fiscal 2025, while annual capex is projected at Rs 100-200 crore. Interest coverage ratio is expected at ~3.1 times in fiscal 2024 (~3.1 times in fiscal 2023) and TOL/TNW ratio at ~3.50 times as on March 31, 2024 (3.54 times at March 31, 2023).

 

Recovery in pending receivables (debtors over six months, including retention money, amounted to 33% of overall debtors in fiscal 2023) will be critical to ensure sustained improvement in debt protection metrics and in the financial risk profile over the medium term, as cash accrual will only suffice to meet repayment obligations and a part of the capex; this will remain a key monitorable.

 

• Large working capital requirement: Operations have been working capital-intensive, marked by debtors of around 90-100 days till fiscal 2021. However, it increased to 153 days as on March 31, 2023, owing to pending realization with few large customers and retention money. The same is also because of the longer collection cycle in the automation business and milestone-based billing in the payments business. The company is taking various measures to recover the pending dues, which continue to be delayed, despite the strong credit risk profiles of various banks.

Liquidity: Adequate

Liquidity has been adequate, marked by steady annual net cash accrual of over Rs 200-240 crore from the business, which would be adequate to meet maturing long-term debt obligation of around Rs 150 crore in fiscal 2024 and Rs 210 crore in fiscal 2025. Utilization of the fund-based working capital limit was moderate at around 43% (on standalone basis) over the six months through September 2023. Cash and cash equivalents were Rs 128 crore as on September 30, 2023, of which ~Rs 90 crore was unencumbered. Realization of ageing debtors and reduction in the working capital cycle will be critical for improvement in liquidity and financial risk profile.

Outlook: Negative

Despite healthy operating profitability, the business performance of AGS will remain constrained by subdued revenue growth and large working capital requirement.

Rating Sensitivity factors

Upward factors:

• Improvement in cash generation, most likely due to better-than-expected revenue growth and operating profitability of ~24-25%
• Prudent capex management and improved working capital management leading to better debt metrics; for instance, interest cover of over 3.5 times.

 

Downward factors:

• Continued sluggishness in revenues, and moderation in operating profitability to less than 20%, impacting cash generation.
• Continuing high debt levels due to increased capex or stretched working capital cycle, leading to TOL/TNW of over 3.6-3.7 times.
• Moderation in liquidity position, due to continued delay in recovery of receivables impacting working capital cycle/and reduced drawing power, leading to near full utilization of working capital bank limits.

About the Company

AGS is one of India’s leading providers of end-to-end cash and digital payment solutions including customized solutions serving the banking, retail, petroleum and transit sectors. Operations covered approximately 2,200 cities and towns, servicing about 4,90,000 machines or customer touch points across India, as of September 30, 2023. AGS has two main subsidiaries – SVIL (engaged in cash management services) and ITSL (engaged in creating and dealing with electronic payment systems). The company has also expanded its operations to Southeast Asia and other countries by forming overseas stepdown subsidiaries in Sri Lanka, Philippines and Cambodia through a subsidiary in Singapore

Any other information: Not applicable