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Earnings Call Analysis
Q3-2024 Analysis
CMS Info Systems Ltd
The company has achieved high compliance across its operations, with 85% of ATM routes and nearly all of CIT routes being compliant, and over 40% compliance in the RCM network. This strategic choice to focus on compliant contracts has enabled the company to maintain a robust and quality network while avoiding lower-yield, non-compliant business that may not align with long-term goals.
Looking forward, the revenue forecast for FY '24 projects a healthy growth trajectory with a revenue range of INR 2,250 crores to INR 2,300 crores. This implies a significant 27% year-over-year growth for the fourth quarter, fueled by strong order book wins and seasonal trends. The outlook remains bullish with expectations of closing numerous ATM RFPs in the near future.
Capital expenditures (CapEx) are expected to be lower than initially guided for FY '24 due to the spread of large order book execution into the next financial year. The management anticipates a CapEx spend of approximately INR 125 crores for the current year, with a part of the order win capital requirements being deferred to subsequent years.
The company's order book of about INR 1,250 crores is set to bring in revenue over the next 3 to 5 years, indicating a gradual revenue accrual in FY '25 and '26. Additionally, the firm is actively shifting towards higher-yield, higher-quality businesses, supporting an improvement in long-term margin profiles.
With the execution of substantial order wins, there's a concerted effort to increase market share, particularly in compliant contracts. Expansion efforts are primarily focused on semi-urban and rural areas to tap into new growth opportunities. However, competitive intensity and pricing impacts are also being strategically managed to maintain profitability and focus on business segments with stickier, better long-term margins.
The company is witnessing growth in its retail business and is exploring expansion into adjacent sectors like NBFCs, Insurance, Retail, and government projects. This diversification is part of the strategy to venture into new areas, build upon software stack platforms, and aim for a 10% market share in the ATM space by the end of the fiscal year.
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Gentlemen, good day, and welcome to CMS Info Systems Limited Q3 FY '24 Earnings Conference Call hosted by Asian Market Securities Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call.
These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ from such expectations, projections, et cetera, whether expressed or implied. Participants are requested to exercise caution while referring to such statements and remarks.
[Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Prithvish Uppal from Asian Market Securities Limited. Thank you, and over to you, sir.
Yes. Thank you, Michelle. Good afternoon, everyone. We are very pleased to host you and the management team of CMS Info Systems for the Q3 and 9 months ended FY '24 earnings conference call. We have with us today from the management team of CMS Info Systems; Mr. Rajiv Kaul, CEO and Executive Vice Chairman; Mr. Pankaj Khandelwal, Chief Financial Officer; Mr. Manjunath Rao, President, Managed Services; and Mr. Anush Raghavan, President of Cash Management Services.
I now hand over the call to Rajiv sir for his opening remarks. Over to you, sir.
Thank you, Prithvish. Good afternoon, everyone. Thank you for taking the time to attend our Q3 FY '24 earnings call. With the revenue growth of 19% and an adjusted PAT growth of 22%, it's been a strong quarter. This actually makes it our seventh consecutive quarter with more than 20% year-on-year PAT growth.
The strong and consistent performance highlights the robustness of our [Indiscernible] linked business model. We are seeing a very strong momentum in both our business lines, led by growth in the banking sector and higher outsourcing and the growth in the retail sector led by formalization.
Our track record on bidding and winning large complex banking outsourcing deals continues. We are happy to share that we have INR 600 crores worth of wins in this quarter, which takes the cumulative wins in this financial year to INR 1,250 crores, in our Managed Services and Tech Solutions business.
Our CFO, Pankaj will now take you through the Q3 financial highlights.
Thank you, Rajiv. Our consolidated revenue has grown by 19% to INR 582 crores with Managed Services and Technology Solutions now contributing 40% of our total revenue. Our adjusted EBITDA has grown 16% to INR 163 crores, and our adjusted EBITDA margin profile is 28.1%.
Adjusted PAT has grown by 22% to INR 96 crores, making it 11 out of last 12 quarters with greater than 20% PAT growth. Our adjusted PAT margin has expanded by 40 basis points on a year-on basis, to 16.5% in Q3 of FY '24. I'm also happy to inform you that our Board of Directors have declared an interim dividend of INR 2.50 per share.
Both our business segments have delivered strong results. My colleague will take you through the respective business highlights, starting with Anush for the Cash Management business.
Thank you, Pankaj. Our revenue in the Cash Logistics business has grown by 11% year-on-year and 4% quarter-on-quarter to INR 335 crores in Q3 with an EBIT growth of 14% to INR 98 crores. The EBIT margin has expanded by 80 basis points year-on-year to 26.0% in Q3. Our Cash-X offering, which we have shared in the Investor Day is scaling well. So far this year, we have onboarded and servicing 40-plus new retail logos.
Our platform offers retailers seamless technology integration, which enables process automation, risk mitigation, reconciliation and faster settlement cycles. With this, we have accelerated our business point growth to 4,000 for this quarter, which was close to what we did added in all of H1 this year.
We continue to invest in our infrastructure with additional 500 vans year-to-date and have upgraded vaults at 40 locations to state-of-the-art technology and a QR-based track and trace mechanism for cassette swap. With this infra capacity, we have been at the forefront of cassette-swap implementation and are placed in the industry to roll out cassette-swap. We have only added ATM cassette-swap process in 12,000-plus ATMs, and we expect 25% of our ATM network to be cassette-swap compliant by end of FY '24.
With this, I hand over to my colleague, Manjunath to share an update on our Managed Services and Tech Solutions business.
Thank you, Anush. Our Managed Services and Tech Solutions business revenue grew at 38% year-on-year to INR 233 crores in Q3. EBIT grew 27% year-on-year to INR 41 crores and the EBIT margin stood at 17.7% in the quarter.
In the last earnings call, we had indicated that we expect to see key PSU RFPs get concluded this year. I'm happy to report that we have won INR 600 crores of new orders in Q3, taking the new wins in the first 3 quarters of FY '24 to INR 1,250 crores. In comparison, our total wins in FY '23 were INR 950 crores.
In our AIoT Remote Monitoring business, we have won orders of -- for 2,000 new sites and are conducting pilots in non-BFSI sectors.
With this, I would like to invite Rajiv for his closing remarks.
Thanks, Manju. To summarize, both of our businesses are showing great momentum. Our enterprise sales execution across banks and our solutions for retail such as Cash-X are delivering very good results. A significant part of our last 2 to 3 years growth was linked to the MS order book, the ATM growth and compliance.
Going forward, we continue to see high growth from our Managed Services business, our Retail and our AIoT businesses. Based on current visibility and new wins, we are on track to deliver revenue in this fiscal year of INR 2,250 crores to INR 2,300 crores, which would be a 17% to 19% growth rate. And we feel confident on our midterm outlook of FY '25, which we had presented as attrition of INR 2,500 crores or INR 2,700 crores to be in the upper half of the range.
Thank you for your support and attending this call. We can now move to the Q&A.
[Operator Instructions] The first question is from the line of Aasim from DAM Capital.
I think Rajiv was partly answered my question. So I'll just rephrase it slightly. So I think the revenue aspiration for FY '25, you said that you would be most likely in the upper end of the range, could you also just give some more color that would it be still more Managed Services driven that -- rather with Managed Services growth still be faster than Cash Management in FY '25? And basically, with Managed Services growing faster than Cash, what does that do to our consolidated EBIT margins over that year?
Thanks, Aasim. Our Managed Services business is obviously coming off a smaller base. It has grown very well. We had, in our Annual Investor Day indicated that by FY '25, we expect the split of businesses to be in a 60-40 ratio. Q3 of FY '24, we have already had that ratio. Forecasting it by quarter will be difficult. But I think we see a similar contribution from each business at the end of FY '25 at a 60-40 level, which is what we had indicated in May earlier this year.
From a margin perspective, the MS business EBIT margins are on the lower side. It's a business where we are aggressively growing and investing for market share. Also, it has a product automation mix to it, which can make a difference, which can impact margins on a quarterly basis.
So I don't see any change in the margin profile of the businesses from medium term perspective. We will give you more clarity, I think, at the end of the fiscal year when we have an Analyst Day.
Sure. I think -- okay. For now, I think from a base case scenario, one should pencil in maybe a slight decline, purely based on the mix changing in favor of Managed Services.
Yes.
Okay. And second question is basically on the compliance norm pricing catch-up. So you have mentioned 85% of your ATMs are compliant, cassette-swap at 15%. Can we know the similar figures for RCM and CIT? And if you can also talk about where the industry is currently in these 3 markets?
Sure. Anush here. As I stated earlier, the rollout of ATM compliance was happening on a route-wise basis as 85% of our routes, which are fully compliant, especially with addition of 500-plus vans onto our own network this year. On the RCM side, it is following a process of citywide [throwout], and as we speak, we would be compliant in a little bit more than 40% of our RCM network.
The CIT business, we -- the quality of network that we're operating, we have chosen to sort of have exclusively compliant contracts on the CIT network. So there are obviously some contracts which continue to come and go from certain public sector banks, which do not fully mandate compliance. They're taking a very strategic call to not lower our network with any of that business in just -- in order to just chase revenue. So 85% of ATM is compliant, almost all of CIT is compliant, and 40% of our RCM business.
And when Anush refers this, he is talking to you on the CMS network. We obviously can't comment on the broader industry and what our banks are doing, but this is on the CMS network. As a management, we have taken a call to consolidate our focus on working with banks and partners which are focused on compliance. And any other business, which is lower yield, we will slowly stop working on that and focus on a high-yield business.
But safe to assume that broadly within the industry, you would be higher or maybe in the ATM's case, similar to industry levels? Or would the industry be much behind?
We should be higher simply because the investments required for compliances were significant. We had front-loaded this investment in FY '21 itself, FY '20, '21 itself. So again, we will refrain from commenting on other market participants, but our focus on compliance has been to lead with these investments. I think most of the investments for compliance have peaked.
And I think you're seeing the benefit of that and just the quality of the business and also the margin profile of the business.
Sure. And just last question is basically on your M&A focus points. You've mentioned business services, fintech and financial institution. Can you just elaborate more specifically on these 3, where your synergies lie with your existing strengths? And would all these be noncash movement related? Or would there still be an angle of cash over here?
Well, from the Investor Day and what we talked about, I don't think there's any significant change in the way we think about acquisitions or M&A. And we did talk to you about the areas of our focus that we'll try to look for expansion. I don't think any of them have a cash element to it at all. I think this would be either broader towards infrastructure, financial inclusion or logistics or technology.
[Operator Instructions] We'll take the next question from the line of Balaji from IIFL.
Congrats on the good results. My first question is on the FY '24 revenue guidance that you have mentioned, which is INR 2,250 crores to INR 2,300 crores. If I take the midpoint, it implies about 27% Y-o-Y growth for 4Q, which is a fair bit higher than what you have been doing. So basically, what gives the visibility on such strong numbers in 4Q?
The second question is on the ATM compliance which you mentioned of 85%, so we can see that despite that your cash management revenue has grown only by about 11%, I do understand that there was some pricing impact on a CIT contract, but still one would have expected a slightly higher number since there should have been some realization boost from this compliance. So what explains this phenomenon on the compliance percentage and relatively lower revenue growth trajectory that we are seeing? So those are my two questions.
Thanks, Balaji. From your commentary or assumption on Q4, I think the fact that our order book wins have been strong, that execution will lead to some of that work getting built in Q4. Secondly, Q4 does tend to become a seasonally higher quarter as we have witnessed even last year, so we have the -- I think that's what leads to the confidence of the commentary for revenue forecast for FY '24.
On your second question on the Cash Logistics business, I think if you go back to -- we have always guided to the growth potential of the business in the medium term to a 10% to 13% range. I think at 11%, it's still very good growth. There was that CIT contract loss, which we had talked about earlier. But I think more importantly, what we are seeing is what I did say to Aasim in his question is that as the team, we are standardizing our operations and delivery to focus on the compliance work.
So any customer or customer segment where compliance is not priority for them or they're not able to do it based on their own business model is the business which we will try and move away from. So case in point would be, let's say, the white label business. The white-label business and the operators are not in a position to maybe drive for compliance for whatever reasons, I think we will let go of those businesses because we don't want to have our revamped infrastructure, delivery services are both compliance and noncompliance. I think that's not the right thing to do.
We'll move on to the next question, which is from the line of Mr. Achal from JM Financial.
Yes. The question I had in mind is with respect to -- if you look at -- I mean, this is more top-down question we kind of face this. If you look at the currency handled by the ATMs or per transaction value, number of transactions, we are seeing a marginal dip year after year or rather for last few quarters.
So the question I wanted to ask you is, a, how does it impact the cash management company as an industry? And also for us, how do we tackle this? How does it impact us? And the second question is, is there any monetary impact or financial impact already seen in our 2Q or 3Q numbers?
Thanks, Achal. I think broadly, if you look at it, the fact that the interchange has continued to remain flat for the last few years despite the broader industry asking for an increase. I think that is leading to a more tepid 4% growth in the ATM volume. We firmly believe that deeper penetration of ATM is required, especially in semi-urban and rural and that increase in ATM rollout, either accompanied by an interchange increase or with what the public sector banks are doing in terms of growing the ATM channels and expanding that will lead to a more secular increase in overall ATM usage.
However, with the current concentration of ATMs, overall dispense to the channel is remaining relatively stable and steady at between INR 2.7 trillion to INR 3 trillion of total currency handled.
In terms of the -- from a CIT perspective, I think we've sort of reiterated this in the past as well. We are more focused in terms of looking at the total cash handled through the CMS channel which actually continues to grow quarter-on-quarter. So even in Q3, we had the highest sale currency handled at about INR 3.4 trillion. And the more immediate impact on our revenue stream is in terms of the total activities that we do, which have actually increased by about 10% year-on-year.
Okay. Secondly, with respect to the comment Rajiv has made with respect to compliance, investments are already -- by and large, it's already there. So with respect to the CapEx, how do we look at CapEx going forward? And another question I had in mind is with respect to the ATM addition, where do we stand? Because in the last call, you had mentioned about a fairly significant capacity -- the ATM additions should happen in the second half. So how is that progressing? Or are we seeing that getting pushed to FY '25?
Achal, I'll talk about the second question, and Pankaj can tell you on CapEx -- on the CapEx side. In the -- so a lot of the RFPs, which have got deferred or delayed rather have started closing out, we have seen contracts or -- RFPs for almost 33,000 ATMs, which have closed in the last -- in the year-to-date period. And there are another 20,000-odd ATM RFPs which are expected to close in, I hope, Q4, Q1 of next year.
So we're seeing good progress on this. This had got deferred or delayed a little bit. But I think this is moving along very well. And that's also part of the reason for our forecast, our bullishness and also the order book which we have.
In terms of CapEx, your question, I'll let Pankaj give you a view.
So CapEx spend will be lower than our earlier guidance of INR 150 crores in FY '24, with some of it getting spread to next financial year on account of large order books, which we took in the Q3.
Would you be able to give us a number Pankaj by any chance on FY '24? What CapEx would look at? And how much is already spent in 9 months?
So we have given a guidance earlier to INR 150 crores to INR 175 crores around in the last call. We expect that this will be over INR 100 crores this year.
And how much...
INR 125 crores is the forecast we have for the -- what we think will end up in CapEx spend this year.
Understood. And how much is already spent, Pankaj, in 9 months?
I think H1, we have reported the number. I don't exactly remember the number, will be in our H1 results. So you will get assumption there.
Got it. This is very helpful. I'll come back in the queue for the follow-ups.
[Operator Instructions] The next question is from the line of Nitin Sharma from MCPro Research.
Two questions. First of all, on the cost and both purchase of traded goods went up sharply, similarly service and security charges also went up. How should we see it going ahead? And then I have a follow-up.
Nitin, could you just clarify the question again? You said 2 costs.
Yes. Sales of traded goods and services and securities charge, both of them went up sharply in this quarter. So how should one see it going high?
See the cost of goods sold has increased because of the revenue mix change. So in Managed Services, our Managed Services business is now contributing this quarter around 40% and that too in that a lot of the banking automation business is there, which has resulted in percentage of the COGS has increased Q3 in '23, 5.5% to 9%.
As regards to your question on the service and security expenses, has gone up because of the change in the revenue mix. Second is the vehicle cost. We have added 500 vehicles, which has resulted in the reduction in the fuel cost, fuel and vehicle hiring costs and increase in the other cost.
So you should take those 2 together, the vehicle cost and service security and then see the trend line on quarters on that.
Understood. And secondly, on this INR 600 crore order win, what is included in it, it cannot be entirely remote monitoring, right? And also how much of the order book is yet to be executed?
How much of the order book is -- sorry?
Yet to be executed. Percentage that has been executed so far.
So the win -- so our order book, we actually only refer to our Managed Services and Technology business, right? We don't talk about order book in our Cash Management business. And the order book comprises backing automation, ATM-as-a-service, AIoT Remote monitoring. The INR 600 crores order wins are only in Q3. For the full year, the order book is about INR 1,250 crores.
The revenue from this INR 1,250 crores will accrue to us in the next 3 to 5 years. So some of this will start getting executed towards the end of the fiscal year, but the majority of this will accrue in FY '25, '26.
Understood. Out of the 4,400...
Sorry to interrupt sir. I would request you to kindly rejoin the queue for follow-up questions, please. We'll take the next question from the line of Adityapal from Motilal Oswal Financial Services.
Hello. Am I audible?
Yes sir, you are audible.
Just wanted to understand in cash management services, what would be the split of business across RCM, ATM and CIT? And when -- if you're saying 11% growth, what will be the growth attribution?
So we don't split our contribution of businesses within cash management. I think we always talk about overall business point and the overall business growth. We don't detail our growth by subsegment.
Okay. But if you can just give a commentary on if you want to attribute where the 11% growth is coming from, which are -- which one of the three is driving the growth?
So our -- and this was part of my opening and closing remarks where we said that a significant part of our last 2 to 3-year growth came from the ATM market and compliance-driven growth and our ATM as-a-service business lines. The current trend and momentum indicates that we are business in retail is growing very healthily. Anush also talked about the Cash-X offering, which is doing well. Also our AIoT Remote Monitoring business is doing well. And our broader management of the business is growing very, very strongly.
All right. And sir, when I -- so just talking about cash management services. So when I look at over the last 6 to 7 quarters, on a year-on-year growth has actually slowed down from some high 20% to low double digits. Anything that we have to read into it or?
No, I think you should -- you should go back to what most people thought before [Indiscernible] cash business cannot grow in the first place. And then we surprised people with growing very 20% at that time. You have to think of the larger business in cash management is linked to formalization and growth of the economy. So in a way, we will be linked to the growth of the economy, a 10% to 12% growth in large businesses, I think, very good and very healthy. It will look optically lower than what we had in 2 years prior.
But from a long-term perspective, I think our goal remains to keep -- to see this business growing the 10% to 13% range, which I think should be the market expectation also.
The next question is from the line of Pranay Jain from DealWealth Capital.
Yes. Could you throw some color on the outsourcing cycle in ATMs and how our talks with the banking partners on the PSU private side is giving us an idea of what could come to us next year as part of the expansion refresh cycle and the outsourcing trend?
So I will refer to the answer we just made -- 33,000, so the outsourcing trends are obviously different across different business lines. But the large ones, which were -- which we were looking to work onward, the whole ATM refresh cycle. 33,000 ATMs have already been on the process of getting awarded this year, 20,000-odd should happen in the early part of next fiscal year.
In addition to this, I think there is -- when you think of AIoT business, RMS business, and our software business, we are in talks with many banks in terms of their expansion. And actually for them, it's just about adopting new technology, right? This is a technology which has not been used before at many banks, whether it's in branches or in their ATMs. And I don't think I can tell you what will likely happen next year. It's very -- in terms of order wins. Order wins will only conclude -- this is linked to competitive intensity, of course, in each business of us.
But our gross order wins over the last 3 years are being at the range of about INR 4,400 crores, INR 4,500 crores. INR 1,250 crores of order wins in the 9 months of this year. And we aim to keep doing well with this as and when contracts come up for bidding.
Okay. And are most of the wins with regards to expansion in the banking and the refresh that you are seeing coming from non-metro pin codes? Is that the understanding going forward?
So no, I think this is -- so expansion, for sure, you're right, expansion would be in the semi metro and rural side. The refresh would be across the country, right? Because infrastructure, which was set up 7, 8, 10 years ago was across -- would be largely in the urban centers. And that would need to get replaced and upgraded by newer technology. Also -- sorry, is that what your question was completely? I couldn't hear you fully.
Yes, that was part of the question. And the second part was how is the competitive intensity looking because our peers whether it is Hitachi or Radiant or other smaller ones, they're quite aggressive in pricing and win. So how are we tackling competition presently?
We've been talking about competitive density, will be higher for the last 5 quarters. I think I've said this on every call. This is -- India is an exciting market for domestic and multinational companies. We expect competitive intensity to be intense that's the job of competition, right? So whether that is -- obviously competitive intensity leads to pricing impact.
We've been doing a pretty good job of focusing on market share and growth, as you can see from our results over the last 7 to 8 quarters. Our job is to balance growth with market share and then margin profile. And in our core strategic businesses, we are very clear of focusing -- long-term business, very clear on focusing on market share.
And therefore, again, if you look back at some of my commentary, some of the lower yield businesses which are not likely to get into compliance over the coming year or 2, we are not interested in those businesses, and we'd rather step away from that and focus our energy on businesses which are stickier and better margin profile in the long term.
All right. And last 2 part question. One on the remote monitoring. Since we are seeing a lot of opportunities in India...
I'm sorry to interrupt, Mr. Jain. I would request you to kindly rejoin for follow-up please. We'll take the next question from the line of Ankit Kanodia from Smart Sync Services.
Sir, my question is related to a new vertical which appeared maybe yesterday or day before yesterday, where it has been mentioned that 40,00 ATMs are to be replaced in the next 12 to 18 months and 10,000 new ones to be added. So just wanted your thought on that in terms of how much of that can come to us and how much of that will lead to only Cash Management business and is there any scope for Managed Services business also with these new ATMs. If you can throw some more color on this that would be helpful.
So this is -- I talked about the 33,000 ATMs, which have already been closed out, 20,000 more. This is sort of part of the same trend of the article you might be referring to. The numbers may be a little bit here and there, but the number I'm telling you right now is what you should refer to.
On the -- there is an upfront opportunity of winning the automation business, and then there is a longer-term opportunity from sales -- sorry, by services. Managed Services, some of this may come as ATM-as-a-service business. But from an upfront product automation perspective, our historical market share has been in the 15%, 16% range.
For the business which got contracted out, the 30,000-odd ATMs and recyclers, our market share there in the wins would be about 25%. What will happen in the future, we can tell you, but this is what the trend is right now.
That was very helpful. Just one more question related to that article only. Someone from our team, Mr. Manjunath Rao, he mentioned there that banks right now is looking to be -- looking at ATM as a selling point rather than a service point. So if you can just elaborate a little more on that as to how does that open up new opportunities for us?
So Manju will help answer that.
Yes. This was in regard to the branch expansion plans of the banks. You must have read that in the articles of the bank. The branches -- typically, the -- on the ATM front, we have 1:2 deployments, 1 for every branch there are 2 ATMs deployed. And in that model, the banks are now thinking of a smaller format of their branch and making it more automated and using that space as their cross-selling points.
So rather than a traditional brick and mortar, they would be using more automation in their branches. That's what we get to hear from many of the banks that we discussed with.
Okay. And how does that help us?
Absolutely. Because one, the banking automation business itself and the -- as well as if the model moves on to ATM as a SaaS model, then that it would help us Managed Services business. And also, almost all our businesses get a play in that, including remote monitoring services.
That really was very helpful.
The next question is from the line of Abhishek Sinha from Bodh Capital.
Congratulation for the good set of numbers. I just have one question. I wanted to understand what is the run rate of the AIoT business or the Remote Monitoring business?
The AIoT business is running at an ARR of about INR 100 crores plus.
All right. So a couple of quarters back, I think last quarter also, it was around INR 100 crores. So have you seen any sort of uptick in...
Yes. But I think it's a number we report every year. And we already mentioned that we've done 20,000 sites. We have won orders for 2,000 more. I think by the end of the fiscal year, we should be closing around 25,000 sites.
The next question is from the line of Bhargav [indiscernible].
First of all, congrats for a good set of numbers. I have 2 questions. And my first question is regarding the provisioning. Like what's the recent trend in provisioning, and what's your outlook? If you can provide any outlook that could be helpful.
And my second question is relating to the pilot project in collection business that you mentioned in the last quarter. Is there any update in the projects? So these 2 are my questions.
So Pankaj can help answer the first one. On provisions, if I got you correct -- question correctly. On the collections business, of course, we shouldn't confuse our provisioning and collections businesses. And the second question, Anush answer.
So on the provisioning part, with the rollout of the compliance and increased coverage of the cassette-swap, we have seen a decrease in our risk cost. This has allowed us to drive a corresponding reduction in our provision from 5.1% in FY '23 to 4.1% in H1 of FY '24.
Further, we expect that close FY '25 we will expect to close a sub-4% basis.
Can you mention for the Q3?
So actually, we have done 4.1%, and we are expecting that at the full FY '24, we will close less than 4%. So the Q3 was also lesser than the H1 number. So there is a gradual decrease in the corresponding -- in the provision because of the rollout of the compliance and the increased cassette-swap.
Okay. And Anush on the collections.
Yes. I think as we have said, FY '24 as a year where we will incubate a few new businesses and run advanced pilots. Collections is obviously one that we were looking at very keenly. I think the pilot is progressing quite well. We would love to come back to you and update you in more detail on that closer towards during the next Investor Day.
We have signed more than 15 contracts with various banks and NBFCs. And I think there's a lot of learning, which our team has been getting out of that.
The next question is from the line of Darshan Shah from Multi-Act Equity Consultancy Private Limited.
I have 2 questions. One is on the order wins during the quarter. Can you just split it between CapEx intensive versus non-CapEx-intensive out of that INR 600 crores of order wins?
So instead of the Q3, we'll tell you for the whole year-to-date. The year-to-date order wins are INR 1,250 crores. I think less than 1/3 of that will be -- will need capital investment. The remaining will not.
Okay. And my second question is on dividend payout. So this is the first time we have given interim dividend. So is there any change in thought process of dividend payout policy? Because this -- if we look at Q3 dividend payout, it comes to around 45%, 46% versus 25, 26, yes.
So it's not a 45%, 46% for the quarter. I think this is -- so let me clarify. We have done interim dividends before. In FY '22, we have done an interim dividend. And we -- there is a change in dividend policy or thinking as such. I think from our perspective as a company, we would like to not wait until the end of the year and we [Indiscernible] do a difference. We have a fairly robust balance sheet, and we should be able to give capital back to shareholders at a frequent interval.
So I don't think you should link it to Q3. I think this is year-to-date, we have done an interim dividend.
The next question is from the line of Nilesh Jethani from BOI Mutual Fund.
Congrats on a good set of numbers. My first question was on the...
I'm sorry, sir, your volume is too low. Could you please increase the volume a little bit?
Yes. Am I audible now?
Yes, sir. Please continue.
Okay. Perfect. My first question was on the margin front. So from going forward, I wanted to understand in both business that is Managed Services as well as Cash Logistics what are the levers for margin expansion? I understand remote monitoring is one of the piece. But apart from that, what are the levers for margin expansion from here on?
First of all, I do want to underline the fact that our margin profile is best-in-class globally. You will not -- I will [Indiscernible] company which have the margin profile, which we've been delivering consistently. Second point I want to underline is that our margins have expanded substantially over the last 3 years. And in both of our businesses, Managed Services and as well as Cash Management.
Number 3, I will go back to repeat myself again and say that there is very -- we expect intense competitive intensity. In this intensity, our job is to make sure we defend and grow market share and growth. Of course, our efforts will be to maintain margin profiles as much as we can. But that's not -- I don't think margin profiles can be linear in nature.
Lastly, it's like your fundamental question on levers of margin expansion. I think the mix of business is one. The second is really about productivity. If you are able to do more activities on the network and third is just pricing. So the lever will not change dramatically for any company, including us. And for us, the one thing which we have been good at, and we hope we can continue doing that in the future is driving the very strong investment in technology in the core of our operations for the last several years, which has helped us systematically drive productivity.
You are seeing that also help in reducing our, let's say, risk cost this year and just to keep working on improving these things. But we don't control inflation, we don't control how competition will be. And from the longer-term perspective, we have to be very careful and not just be overly focused on margins, but we focus on revenue growth and market share.
Got it. So on this revenue growth and market share piece, just wanted to understand if more and more brown label ATMs come out in the market and -- see we don't participate aggressively in that, but we participate for the other ancillary services and even Managed Services for those ATMs. So I wanted to understand, today, whatever vans or whatever infrastructure we are in place, and say, additional say, 70,000, 80,000 of PSU banking ATMs are there for refresh, I wanted to understand what CapEx we would require for capturing that market and whether that CapEx required today would be adequate for capturing the higher margins from here on? So I wanted to understand at today's infrastructure, what kind of additional ATMs, et cetera, we can service.
I mean, in a way, what you're saying is on our current investments on vans and capacity, how much more capacity could we really do. I think it's a function of -- this is always changing in time because we're expanding the network, right? When you move into a new location, your productivity will be low. But I think that's -- again, our productivity numbers have systematically gone up, whether you take it on per route or you look at just revenue per employee and cost of employee, I think we've been systematically working to improve those 2 things.
From a perspective of your question on BLA, you're right, we are reasonably careful on that segment because it's capital intensity. We don't mind the capital intensity. It's just that making a bet on how transactions will be for the next 7 years, we don't think we have that good a quality. Therefore, we will always be more conservative. We have rightly or wrongly taken a call that we will try and cap the contribution of this business to under 15% of our revenue.
We think that's the way to do position I think like when you do capital allocation. And in that, it gives us the flexibility to work with clients where we think we can get the adequate return of capital. And therefore, we're not getting over -- I mean, our revenue growth would be much higher if you want to play a bigger role in BLA, but that's not a goal. And I think I've answered.
Yes. And then the last point is really about when you think of we will what -- the work we do in our network, we are trying to make sure that we change that to a higher yield and higher quality, and we wean off the lower -- let's take the lower yield and therefore, the lower margin business over this network.
Three years ago, it was very different because the network quality was different. Today, our network infrastructure is of much higher quality, and we don't want to use that to deliver services which are not in line with the way we want to grow.
From a need for capital, we have done roughly an INR 200 crore CapEx, I think, Pankaj for the last 2 fiscal years? This year, we were estimating INR 150 crores to INR 175 crores. It will be lower, but some of that will just slip into early part of next year. It's too early to know what the capital needs will be from a 3-year cycle, but if next year, we would hope to be at an INR 200 crore capital plus some of the slip over from this year to maybe the INR 250 crores, INR 300 crores number for next year right now.
But keep in mind that the EBITDA of the business has grown significantly over these 3, 4 years. And therefore, the CapEx as a percentage of EBITDA will -- is going down substantially.
Okay. And on this -- last question from my side. On this upcoming 80,000 ATMs available for refresh from the PSU side, just wanted to understand any ballpark understanding you would be having based on your calculation, currently what routes, et cetera, we are servicing at least what kind of market share we can gain in this incremental number?
Impossible to know, but I just want to clarify, there are -- we haven't at least talked about 80,000 ATMs right now. We have talked about 50,000 ATMs in recyclers, 30,000 already closed out and 20,000 up. Now there may be more from other banks, but I don't want to confuse anybody with an 80,000 number, which at least we haven't talked about.
But impossible to know which routes and network, this will go into because these are spread across. The refresh will be already part of it. The expansion could -- some of it will come on the same route. Some may need new routes. But this is not something which we can sort of forecast.
Okay. Got it. I guess that was helpful, and thank you so much for answering each questions.
We'll take the next question from the line of [Mohit Madiwala] from Envision Capital.
So number one, with these touch points that have been added this quarter, have they basically been in locations where you already have presence and are getting more density within those pin codes or is it more that a kind of exploring other pin codes, you've got another kind of -- that's the first question.
And second question is, if you could also provide an update on what kind of annual expense that is expected on ESOP costs, let's say, in FY '24, that is this fiscal, up until, let's say, the next 2, 3 years?
So Anush, I'll answer the first part of the question and hand over to Pankaj for a second. So as soon as the new business is coming in, I think we've spoken about some of those earlier, but one of the core strengths of the logistics platform that we have in CMS is the fact that we already present a significant number of pin codes, covering a large percentage of Indian district. So our ability to service any new business point that comes in, I think, is far ahead of anybody else.
What practically happens is, as and when new business is coming, it goes to an internal process where we use some of the technology to figure out what is the best way to service that. And in very rare cases, we may need a network expansion into a new area. But in most cases, it may be an expansion in terms of an upgrade of the infrastructure of the routes in case we need to cater to that incremental demand.
More than 62% of our network is present in semi-urban and rural, covering greater than 16,000 pin codes. So that's really the strength that we offer to our customers. Pankaj, the second part of it.
So whatever ESOP we have issued, was issued at very close to the fair market price, 75% of the ESOP have issued at a weighted average fair market price and 25% on a 10% discount. We have not given any deep discount or we have not issued any RSU. Those are -- ESOP have issued at a fair market price, but the option value to be calculated on Black & Scholes method and expense out in the P&L.
So based on that, for next 10 -- 2 quarters, we expect INR 10 crores to INR 11 crores of the ESOP expense, and then next fourth quarter, around 6% to 7% and then it will reduce to INR 3 crores to INR 4 crores. One more point I want to highlight that 50% of these ESOPs are vested only in case of the performance as defined in the ESOP policy.
Right. So just to clarify, ESOP for this is per quarter, right? This is a per quarter run rate that you have mentioned?
Yes. ESOP, cost per quarter.
The next question is from the line of Chinmay Nema from Prescient Capital.
My question pertains to the retail cash management business. The other players in this segment have talked about pricing revisions, price cuts. So just wanted to understand what kind of pricing power do we have in this business? Have we taken any price cuts? What kind of price hikes have we taken in the past? Do we have fixed contracts, variable contracts? Any objective or subjective commentary on this would be helpful.
Sure, Chinmay. I think let me answer it in a different way. I think fundamentally, when you look at the performance of the cash business, if we take 9 months of the year, I think they're showing almost 16% growth in our EBIT margins. I think that sort of speaks testimony to our pricing power and the way in which we are able to deliver with a high operational efficiency.
Having said that, I think the nature of the way in which we're looking at retail businesses is changing. This is no longer just a per pickup price or a per pickup model, it's transitioning from being a logistic service to a more solutions-oriented play. We are bringing onboard a lot of investments that we have done with respect to technology. The Cash-X is really a very strong ecosystem of collaboration between payment banks, fintechs, CMS and some traditional banks; to try and look at retail outsourcing in a very different way, how do we bring in data process efficiency to the front office? How do we bring in greater risk management and resilience to the back office processing?
I mean it's really about trying to help retail execute a lot more efficiently, making sure that their working capital cycle reduces, making sure that the risk exposure of the people who are working in retail is vastly different, offering accelerated settlements. So I think we feel quite positive about the offering that we have and the conversations that we have with retailers.
As I spoke earlier, we've got on board more than 40 different logos just in this year. So I think that's the way we're looking at it.
Got it. Would it be possible for you to quantify what kind of price hike you've been able to take in the last 3, 4, 5 years?
No. We can't.
We'll take the next question from the line of Pranay Jain from DealWealth Capital.
Yes. On the AIoT piece, I just wanted to understand what is the opportunity we see over the next couple of years as we are expanding into NBFC, Insurance and Retail. So that is the first one.
Okay. On the AIoT business, right?
Yes, the opportunity size versus where we are.
Okay. So the banking sector -- the BFSI sector is roughly about, TAM is about INR 1,700 crores. And whereas the non-BFSI sector, we estimate around INR 6,000 crores. And that's the opportunity. When I say non-BFSI, we are talking about big retail, logistics, warehousing and also government railways, metros, highways and ITMS area of business.
So these are the large ones, which are -- currently, we are very strong in the BFSI sector and like Rajiv said earlier, 22,000. And this year, we might end up with around 25,000 ATM sites. So likewise, the bigger businesses are outside the BFSI sector.
So in our BFSI side, ATMs will have -- we hope to be about 10% market share by the end of the fiscal year. This is a business we have incubated only about 2, 2.5 years ago. Our current focus and win rate is obviously high in the area we know well. Over time, we are building the software stack and the platform and then putting a base team together to venture into the other areas.
But just from an overall 2.5 lakh ATMs in the country, we think about -- and there are about 1.5 lakh branches. So if you take that total, that's about 4 lakh sites potentially as a TAM for this business. We are right now targeting to get to 25,000 in this -- by the end of this fiscal year.
We will tell you more about the thinking really at the Analyst Day, I think that will be the right time to sort of talk more longer term for the business.
Okay. I was just looking to get what size that would scale up in the next couple of years, any percentage, any goals or aspirations here?
No, no. I understand that. And -- that's a business which -- that's something we will update you at Analyst Day. Again, keep in mind that it's a business which we are new to still. We have done very well, but we don't want to get carried away and just focus on doing the right thing for the midterm of the business.
Sure. And the second question is on the inorganic part. This is -- the cash that we have on books, what are the strategies that we are looking to deploy over here in the opportunities we see as part of industry consolidation or in the adjacent areas of our operations.
Sure. And we've talked about this in detail in our earlier calls and as well as our Investor Day, but I'll just summarize. We aren't that -- #1, we are a fairly conservative company. We have done many small tuck-in M&A deals and to look for expansion. But we do see opportunity to scale into newer segments with meaningful M&A in the coming years.
We have reasonable cash on the books, which we want to have flexibility as and when an opportunity comes up. Having said that, buoyant stock markets and whatever don't necessarily help for M&A, especially for a company like us, which is looking to do things at the right value.
Our focus will not be so much on consolidation. I think the consolidation opportunity as a market leader in most of our segments, we will prefer to grow organically rather than do aggressive M&A. We think that's the best use of our capital to invest the capital ourselves rather than use it to buy somebody in our current line of businesses.
The areas where we would like to deploy capital for expansion remain on broader financial inclusion and infrastructure space of banks, bullion logistics and collections.
All right. And we have adjacencies over here, right? The areas that you mentioned. Financial inclusion and the other pieces that you mentioned? Or are they pressure areas for us?
Well, when you think of bullion logistics, it's a fresh area for us. With the Logistics business, we do cash logistics. We know risk management. And therefore -- but we may not know the clients. So therefore, the whole thing is about getting new clients there.
When you think of collections, we haven't done collections. But then again, it's a business which should render itself very well to the infrastructure we set up of both governance, risk management and the branches we have in our cash logistics business. The clients here would be potentially would be banks and NBFCs with whom we already do some work.
So adjacencies, it depends on how you define the work, right? And the final one of financial inclusion, I think that would be something new. Our approach usually for M&A from the past has been to incubate and pilot new businesses internally, learn about them or do a small acquisition to learn and then only scale it up. We normally don't do something big in a new sector upfront.
We'll take the next question from the line of Shakthi Dinesh, an individual investor.
Am I audible?
Yes, sir.
Yes. So if I look at our business, so there is...
Sir, your audio is breaking a little bit.
Am I audible now?
Yes, sir.
Yes. So if I look at our business, there is Cash Management, and there is Managed Services. So just wanted to understand in Managed Services, we have this software solutions, ALGO and AI-based monitoring. I understand our competitive pushing in terms of cash management and how this offer in strengthening our business focusing -- and NBFC is there, we are transporting the cash, and we are also providing the monitoring solutions. I just wanted to understand the competitive dynamics, like from CMS side, like what kind of competition are we seeing in -- particularly in the software domain like why can't an IT company do it. So if I can get a picture on that.
So when you think about the -- I'll specifically talk about ALGO because, on software. Because your question is very vast. I think it will -- we can't do justice in our analyst call for a quarter on that. But if I just pick software. When we work in software, our ALGO software, there are 2 elements to it. One is the whole multivendor software we work on with the large banks on the ATM channel. Now this is specific to the ATM channel, it is of relevance to strategic companies like us.
There are other competitors like global companies, which could do this. But I don't think Indian IT companies would have the necessary skill set to focus on this.
The second is on AIoT remote monitoring. I think AIoT remote monitoring is a sector which has seen many companies over the last decade come in and set up solutions, but the software and technology has changed dramatically. We saw an opportunity. We are a later entrant to the sector. We only entered the sector in 2021. We saw a disruption ability at that time basis the model of technology changing from mostly -- I mean, whatever it was earlier to mostly using machine learning and AI.
And therefore, we are able to invest into that aggressively when there is a disruption in technology and where the incumbents were maybe slower at that time or weren't able to invest for whatever reasons. So I think that helped us propel us into a market leadership position. So we are in the BFSI space, the #1 player, even though we are one of the last people to enter that sector. But that's what both the good and bad of technology-based businesses are there can be disrupted by anybody, you don't know from where, but it also gives us people like us a chance to enter into new sectors and drive strong growth.
Okay. So just to clarify, so when we are saying we are investing -- when we are investing in these machine-learning models and such. So can I take it that since we have been in this business segment for long, like we have done solutions for ATM and now we are offering an allied services. Can I take it as the way -- can I take it in a way that we have the required data that gives us an edge over some of these IT companies?
I think it's a technical expertise, first, right? As a technical expertise is the understanding of how -- what a customer is wanting to do and ability to work with them. And finally, it comes down to having a company which is present across the nook and corner of the country to be able to scale. Today, you could find -- lets argue, some companies which would help you do this in Bombay or Delhi. But you will not find -- it will not be so easy to find companies which could help you scale this across the country when you have to think of a branch network or ATM network across the country.
So it is a technical knowledge. It is the quality of technology. It is our service levels and finally, ability to work with large complex customers like banks enable to do this.
Okay. So it's more like a bundled strong business proposition plus elaborating our already strong vintage with our clients.
Yes, I would also recommend that maybe at the end of the call, if you can -- if you haven't already, have a look at our investor deck, which we have updated and uploaded yesterday, it will talk about our integrated platform capability and where we are able to bring together one -- what is the word? One, integrated approach to solving a banking customers' needs and the platform will work across Logistics and Technology to offer a very high-quality service, which gets very difficult for others to replicate.
Ladies and gentlemen, that was the last question. I would now like to hand the conference over to the management for their closing comments. Over to you, sir.
No, I think I've already done the closing comments, no new comments. Thank you so much for your time and patience interest and support. We look forward to talking to you at the end of the fiscal year with our annual results. Thank you. Have a good day.
Thank you, members of the management. Ladies and gentlemen, on behalf of Asian Market Securities Limited, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.