IPO Review: AGS Transact Technologies

One of the fondest memories from my childhood is going grocery shopping with my father on early Sunday mornings. These trips were filled with even greater excitement whenever we’d visit the ATM before the shopping began.

Most adults, including myself, are excited by the cash that comes out of the ATMs. Childhood was different, I was absolutely amazed by “the TV where you could touch the screen of, and it would spit out money”(touchscreen was still very “sci-fi”). I used to equate the ATMs with space-ship controls that would go “beep-boop”.😅

Speaking of ATMs, another thing that fascinated me as a child was the big vans with nets on their windows that often stopped in front of these stalls. I used to think these vans were meant to capture and carry away people who tried to steal from the “money TV”. It did not help that my father would agree with and add fuel to my already raging imagination.

Enough reminiscing about childhood memories, today’s articles focuses on ATMs, their related services, and the IPO of one of India’s biggest payment solutions providers that also provide these ATMs and services, AGS Transact Technologies.

ATM and Transactions Industry in India

The Covid-19 pandemic hasn’t been kind to the ATM industry. The possibility of spreading the disease through contact has made cash transactions a scary proposition.

Due to this aversion towards contact-based payments, the number of cash transactions went down from 879.86 crore in FY 2020 to 610.09 crore in FY 2021.

However, India is a very cash-centric country. Although “the digitisation wave”(and multiple Covid waves) has taken the country by storm, India is still far from going entirely cashless.

This necessity for cash arises because a significant part of the country’s population still engages in many low-value transactions and transactions that require anonymity. The best way to complete these transactions is by using cash.

Stemming from this ever-present demand for cash-based transactions, the ATM industry in India has constantly been growing the number of ATMs installed in the country. On top of this need for cash, another growth driver in the number of operational ATMs has been banks. As banks have increased the number of their branches, they need new ATM vestibules in the surrounding areas to support the branch’s operations.

ATMs operating in India have increased from 2,12,061 by March 2016 to 2,38,588 by March 2021, at a CAGR of 2.39%.

AGS Transact Technologies at a glance

AGS Transact was founded as a private company in 2002 but was named AGS Infotech Private Limited. The name was changed to AGS Transact Technologies Private Limited to highlight the services offered by the company, which are deploying and maintaining third party ATM units and providing outsourced services to these parties.

The services provided concerning software include developing graphical assets, creating and updating security software, and creating web-based and standalone applications. AGS is also involved in the manufacturing, assembly, and supply of ATMs, POS terminal devices, and Cash Recycling Machines (or CRMs).

AGS also provides the services of managing ATM Replenishment, Cash in Transit and Retail Cash Pickup and Delivery.

AGS is also making commendable headway in the RFID based payment methods. This includes automated payment for transit through automated fare collection and refuelling with their ecosystem named FastLane.

With FastLane, AGS aims to make refuelling vehicles a fully automated system that removes the fuel station’s attendant from the equation (no more messing with the trigger to jack up the prices). This is achieved by fitting an RFID tag near the vehicle’s fuel cap and an RFID reader on the fuel nozzle. Another option is to add an RFID sticker to the vehicle that can be read by the POS terminal at the fuel station.

With these technological advancements to the refuelling process, AGS hopes to achieve full automation for fleet operators and individual vehicle owners. FastLane is also meant to discourage fraud or pilferage and allow users to track the quality and quantity of fuel and expenses.

Another brand that AGS has created is called Ongo. Ongo provides digital payment solutions. Ongo intends to provide a multi-directional payment platform for corporates, merchants and consumers.

With Ongo, users can transact using multiple payment options like Bharat QR, UPI, RFID and debit, credit & prepaid cards. This will turn the existing payment-as-a-service model into a payment-as-a-convenience model. Ongo will also allow AGS to stay in the transactions business even with the decline of the use of ATMs.

Having discussed enough about the company itself, let’s look at its financials.

Financials of AGS Transact Technologies

This graph shows how the reduction in cash transactions limited ATM usage due to the Covid-19 pandemic has harmed the profitability of AGS as most ATM and CRM outsourcing businesses get paid on a per-transaction basis.

However, the company has commendable performance as it has been able to not lose a significant amount of its revenue during this period. It has also been increasing its assets which might be a sign that the company is gearing up for expanding its scale of operations.

AGS Transact IPO Details

Source: AGS IPO Details on Finology Ticker

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Objectives of the IPO

The primary reason for this IPO by AGS is to avail the benefits that come to the brand from listing. A significant portion of the proceeds shall go towards paying off the company’s debt. The aim is to reduce their current debt of ₹1100 crore to ₹450 crore.

The Strengths and Weaknesses of AGS IPO

The Pros:-

• Scalability opportunities

Businesses often suffer when they cannot keep up with market trends and fall out of favour with them. As far as AGS is concerned, they are in a business where they will not suffer this fate anytime soon. Because let’s be honest, a company that provides people with payment solutions will only run out of business when people stop wanting to spend money. When is that ever going to happen?

• Relevant Product Diversification

Going cashless is the natural transition for transactions in most economies. This change is usually brought about in the people with the growth of awareness, but the Covid-19 pandemic has forced many people to realise the benefits of cashless transactions.
This shift in mentality has threatened AGS and its competitors equally as the reduction of cash-based transactions has rendered the ATM outsourcing business somewhat obsolete. AGS has not kept all its eggs in the same basket and is diversifying its product offering by entering payment automation through RFID enabled means, as discussed before.

• Market Leadership

AGS has established a strong leadership position in its various offerings. Following are its numbers in the multiple categories of services offered by the organisation:

1. AGS Transact was India’s second-largest ATM managed service company, with a 15.5% market share in the revenue generated for FY2021. With 32,367 ATMs managed under its outsourcing model.

2. For the FY2021, AGS held a 15% market share in terms of revenues generated from the supply, replacement and deployment of cash dispensing and recycling machines.

3. AGS was India’s second-largest cash management company with a 30% market share in terms of ATMs replenished and a 26% market share in the revenue generated from this segment.

Cons:-

• Adverse Effects of Covid-19

Although AGS is making forays into digital payments, the ecosystems that support this method are still new. ATM-related services are still AGS’s primary source of earning.
If the current cashless trend continues, this significant segment of AGS is likely to suffer poor performance for as long as people don’t successfully switch over to AGS’s alternatives to cash.

• Regulatory Threats

AGS is an industry that supports the banking industry. The banking industry, in turn, is heavily regulated. This means that the ATM management and outsourcing business is equally regulated along with the payment-as-a-convenience business, by extension of the laws that apply to the banking Industry.

Conclusion

India, like any other developing economy, is moving towards digital payments owing to the safety and convenience provided by this system. Yet the country is still very tied into using cash for certain transactions that are somewhat cultural (shagun ke paise UPI se to nahi de sakte na).

Jokes aside, AGS has had a strong presence in the ATM business ever since its conception nearly two decades ago. And it's not looking like the business will have too much trouble keeping up with the incoming trends of the market.

That being said, buyer beware, and happy investing :)

*Disclaimer: The stock discussed above aren't recommendations from Finology. They are only picked to make you understand the concept.