CMS Info Systems Limited (CMSINFO) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to CMS Info Systems Q2 FY '24 Conference Call hosted by Antique Stock Broking. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sarvesh Mutha. Thank you, and over to you, sir.

Thank you, Sagar. Ladies and gentlemen, good afternoon, and thank you for joining us on the post-results conference call of CMS Info Systems Limited. It's my pleasure to introduce the senior management team of CMS who are here with us today to discuss the results. We have with us Mr. Rajiv Kaul, Executive Vice Chairman and CEO, Whole-Time Director; Mr. Pankaj Khandelwal, President and CFO; and Mr. Manjunath Rao, President, Managed Services. We will begin the call with opening remarks by the management team. And after that, we'll open the call for a Q&A session. I would now like to hand over the call to Mr. Rajiv Kaul to take proceedings forward. Thank you, and over to you, sir.

Thank you, Sarvesh. Good afternoon, everyone. Thank you for taking the time to attend our Q2 FY '24 earnings call. With the revenue growth of 15% and an adjusted PAT growth of 25%, it has been a very good quarter. This makes it the sixth consecutive quarter for us with 20% Y-o-Y earnings growth. The strong, consistent performance highlights the growth as well as the formalization opportunity in both the banking and retail sectors. We are increasingly seeing more banks which are focusing on expanding and refreshing their physical infrastructure. We are also witnessing strong growth in organized retail and e-commerce, and we expect the sector to lead the overall growth for our cash business. Our Managed Services and Tech Solutions business has achieved critical mass, and we have strong wins. Our expansion in this category now has the potential to cross 40% revenue contribution by FY '25. In terms of our execution focus, our quality of service is very robust, thanks to our strong tech platform, and this has helped us maintain a very robust margin profile. Our Q2 margins have, in fact, expanded despite this being a fairly high-inflation environment. Basis our current momentum at half of this year, we feel confident of achieving our FY revenue -- FY '25 revenue target of doubling our revenue on an FY '21 basis from INR 1,300 crores to a range of INR 2,500 crores to INR 2,700 crores. Our CFO, Pankaj, is now going to take you through the Q2 financial highlights.

Thank you, Rajiv. Our consolidated revenue has grown by 15% to INR 554 crores, with Managed Services and Technology Solutions now contributing around 38% of the total revenue. For this quarter, we have recognized ESOP expenses to the tune of INR 10 crores for the ESOP granted in 2023 as per the approved policy. Our margin data is adjusted to reflect for the same. Our adjusted EBITDA has also grown from -- grown 15% to INR 157 crores, and our adjusted EBITDA margin profile is 28.9%. Adjusted PAT has grown by 25% to INR 92 crores, making it -- this is the 10th out of last 11 quarters with greater than 20% PAT growth. Adjusted PAT margin, 17% compared to 15.7% in Q2 of FY '23. These strong financial metrics are the testimony to our market leadership and execution of our order book. Both our businesses segments have delivered strong results. My colleague, Manjunath Rao, will take you through the respective business highlights.

Thank you, Pankaj. Our revenue in Cash Logistics business has grown by 11% year-on-year to INR 361 crores in Q2 with an EBIT growth of 18% to INR 95 crores. The EBIT margin has expanded by 160 bps year-on-year to 26.4% in Q2. Our business network has further expanded in the quarter, and we currently service 129,000 business points or 12% year-on-year growth. This was the first quarter where we crossed 5 million activities on our cash logistics network in a single quarter. Our overall cash handled growth has been 6% year-on-year. And in our ATM channel, currency dispensation has grown faster in metros by 10% on a year-on-year basis. On the compliance front, our network in 150 cities have been upgraded, covering 70% of our business points. On the ATM cassette-swap process, as per RBI, IBA and CCA consensus, Phase 1 rollout has been completed, and Phase 2 is underway. We expect 25% to 30% of our ATM network to be cassette-swap compliant by end of FY '24. I will now share with you an update on our Managed Services and Tech Solutions business. Our Managed Services and Tech Solutions business revenue grew 26% year-on-year to INR 206 crores in Q2 with an EBIT growth of 23% to INR 39 crores. Our EBIT margin stood at 18.8% in the quarter, marginally down from 19.2% in Q2 FY '23 due to business mix. 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 500 crores of new orders in Q2, taking the new wins in H1 of FY '24 to INR 650 crores. These wins are across our banking automation and ATM as-a-service business lines, and all of these wins are asset-light in nature and should help us maintain a strong growth momentum. 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 Balaji from IIFL.

I have a couple of questions. So the first one is on the cash management segment revenue. While your touch points have gone up by about 12%, we are seeing that in the last couple of quarters, the revenue has been around 11%, 12% in growth terms, and that is despite some tailwinds from compliance also coming through. So where should one expect this to settle down? Are we down to these levels? Or do you see an acceleration going forward? And my second question is on the remote monitoring business. So where are we in terms of number of ATMs and the order book? And how is the competitive intensity there? Because earlier, you had mentioned that the competitive intensity can potentially catch up at some point in time. So those would be my 2 questions.

Thanks, Balaji. So let me take the last point first. I think we have been now over several quarters talking about competitive intensity, and I think we have to understand India is a fairly good growth market. There are -- in different businesses, there are different types of competition. We are a player with high-quality, high-margin profile and fairly choosy on the quality of business which we'll pick up. I think we will foresee strong competition across all of our business lines, including RMS, banking automation, cash logistics and whatnot. And therefore, maintaining our current revenue and margin profile, I think, is also a testimony to the quality of the platform and our focus on what -- on our execution. In terms of Cash Logistics business, we have seen growth in the last several years, which was led -- as you know, we have 3 different types of business in Cash Logistics: we have the ATM cash logistics, we have retail cash management and then we have the currency-in-transit businesses. Our growth has been led by the ATM cash management for the last 2 to 3 years. We have indicated that we foresee this -- sorry, can people mute themselves because I think somebody is typing while we are talking. So we foresee that the retail business will pick up and will actually lead the growth in the cash logistics sector for the coming couple of years. So when we talk about the growth trend you have seen right now of 11% to 12%, impossible to tell you what the future, what the growth level will be. I think from our side, we have highlighted that we have a diversified business. Our growth aspirations are in the 15% to 17% sort of revenue growth trajectory until FY '25. And we are on course to do it. In some quarters, some businesses will lead; in other quarters, other businesses will lead. I hope that helps you with both the answers. And sorry, finally, on the RMS business. RMS business, we did indicate that we already hit the INR 100 crore annual run rate. We are about 22,000 sites. We are the largest in the banking sector. We will give you an update on this business in our next -- not next, in our annual investor summit. I think that's the right time for us to talk to you about key developments in all of our new businesses.

The next question is from the line of Mr. Achal Lohade from JM Financial.

Sir, my first question is pertaining to the ATMs. Now we've been hearing about the incremental new orders with respect to ATMs, whether replacement or new ATM, 100,000 ATMs, right? Can you update us as to where we are in the cycle? Are you seeing the delay in terms of getting through these tenders? Industry-wide, what are those challenges? And I mean until now, whatever is given out, what has been our market share, if you could help us understand that?

Yes, thank you. The ATM RFPs that we've been -- there is still about 51,000 ATM RFPs are likely to be awarded in FY '24. That's what we had said about 20% new and 80% replacement. Of this, there is about 2/3 of this are under the Brown Label ATM model, right? And so that, as we -- I think we have been insisting on all our calls that we will be selective and opportunistic in this particular segment. We have been very selective. But as we mentioned in our call that we have won in our first half about INR 650 crores worth of orders, it's got both asset-light managed services as well as our banking automation business in it. There are still some tenders left to go for the rest of the year, and those are all in the pipeline.

So I think, Achal, overall, I know this was something we mentioned in the last fiscal year, some key contracts got pushed out of this year. We are finally seeing momentum in these moving to the finish line. Of course, RFPs have to close, orders have to be given. They have to be implemented, they take some time. But we feel fairly strong about the growth opportunity in this helping us lead our -- leading to higher growth in our MS and Tech business.

Sure. Just to get a bit deeper into this, 51,000 is the number or 100,000? So can you clarify...

No, I think the 51,000 is for this year. The 100,000 is something which you're referring to, which is over a 3- or 4-year period. 51,000, we are saying specifically, we know that contracts which will get into awarding in the -- likely to get awarded in half -- second half of this year.

Right. And just to clarify, of this 51,000, 20% are new ATMs, 80% are replacement. And of this 51,000, 2/3 is BLA and 1/3 will be bank-owned, bank-operated. Have I understood it right?

That's right. Yes.

And within this 51,000, how much has already been given out in last...

This is all going to happen in H2 of this year. So these are already -- September, October onwards, RFPs are in various stages of getting closed out or issued out. We -- this is our estimate, right? Obviously, we can't talk on behalf of all the banks. But this is our estimate of RFPs, which will conclude successfully in the second half of the year.

Got it. And this INR 500 crore new order wins, that's to be executed same 7-, 8-year period, right? Have I understood...

No. I think given the nature of these wins, I mean, I would say that majority of our H1 order book is asset-light. Asset-light businesses, I think you would see an average accrual in a 3- to 5-year period, not 7 to 8. 7 to 8 is usually for asset-heavy businesses. These ones will accrue over a shorter period, which is -- not short, I mean it's 3 to 5 years.

And with respect to this INR 500 crores, would represent what, 40% market share, 30% of whatever orders were given?

So impossible -- for one, I don't know the number. We will wait for the end of the year to see what sort of market share is. But again, you should -- it's not a number we track so much because, as we said, there's a lot of business opportunity in the BLA business. We are not, by nature, very focused on that sector. We will be very selective with a few key banks or deals and the rest, we would not be participating. And therefore, market share -- and this is not something which we really go ourselves on. Market share is something which we are very, very focused and our cash logistics, RMS businesses.

[Operator Instructions] The next question is from the line of Prithvish Uppal from AMSEC.

Congratulations to the management on a good set of numbers. So my first question is regarding the working capital. So we've seen an increase specifically coming through as receivable and receivable days have increased. So I think this was roughly around 90 days, has now gone up by about 15, 20-odd days for the first half. So any just color on that from the receivables side? Second is that on our CapEx side, we had done about INR 40 crores to INR 41 crores kind of CapEx in the first half with a guidance of roughly around INR 1,500 crores for this year. So just wanted to understand how we are seeing this develop over the second half and if we think that we're -- that INR 1,500 crore is something that we will actually end up doing or how do you see that? And if you could also just give some color on the cash management business in terms of the touch point where the growth has come from 72,000 ATMs, how has that moved between retail and ATM and what the realization increase would have been because of cassette swapping? So I mean these are the first set of questions. And if time permits, I'll add some more.

Thank you, Prithvish. So as regards the working capital or the AR increase, see, our business has grown 15% in H1, which has resulted the higher working capital with the AR increase. H1 is usually weaker in terms of collection. Historically, it's weaker compared to the H2. That is the reason that the AR has increased, basically. The third more important thing is that in this last 12 months, we got a lot of large PSU bank projects, which was executed, and it takes time to streamline the collection cycle. And the fourth important thing is about the -- is the interest -- higher interest rate environment leads to the delay in the payment from the customer. That has resulted in slightly higher AR and the working capital has increased to some level. About the CapEx, we have done around INR 40 crores to INR 41 crores of CapEx in H1. We have guided that in FY '24, we have -- we will do around INR 150 crores to INR 175 crores of CapEx. And we estimate that it will be in line to whatever the estimate -- the target we have given in the initial period of the year.

Yes. And on the Cash Logistics business, touch point-wise, how the growth has been between retail and ATM? And specifically, any kind of realization gain that we have seen specifically relating to...

Prithvish, in our earlier calls, we have said that we will share more detailed metrics on each businesses only once in a year. But we do give touch point guidance overall. I think breakdowns, we will do only at the end of the fiscal year.

Sure, sure. And just lastly, in our bad debts written-off also have increased to about INR 25 crores. And since 15% of ATMs are now on the cassette swapping, so shouldn't this number ideally decrease? And what has been the reason for the higher bad debt write-off in the first half? Because it was, I think, around INR 50 lakhs last year.

No. So you have to read the provision and bad debts together. Depending upon the reconciliation, finalization with the customers, it has been bad debts or on the basis of receipt of any claims, it has been provided. So for right calculation, you have to add both the things. We have guided that our -- because of the nature of our business, the bad debts or the provision for bad debts or risk cost will be in the range of 4% to 6%. This time, it is in line with that. And in past also, it is in line to 4% to 6% only.

The next question is from the line of Sheel Shah from Sameeksha Capital.

Just one question. Sir, any update on our cash collection pilot that we were doing with 5 to 6 NBFCs?

Our collections business, I think we said we will use FY '24. And at the end of the year, we will -- we are already incumbent as a business. It is ramping up. We have hired a fairly strong team from the industry. We are doing -- we have projects we are working with 8 to 10 large NBFCs already on the ground. However, this will be too early for us to have any determination of how this business will ramp up and is this going to be aligned with the way we think the potential is. Towards the -- I mean, at the end of FY '24 is when we will give you a full status on what our learning has been and also guide you on how we think about this business going forward. Right now, this is an investment year and an incubation year.

Okay. Understood. And any other business area that we are doing pilots or anything like that you would like to share?

I think whatever we shared at our investor summit, we are -- we have the Cash-X business we talked about. We talked about the bullion business where we are trying to ramp that up. RMS, we have already ramped up, so we have mentioned that. There is nothing new. I think we have enough going on, and we are currently focused on these businesses to see where they head.

The next question is from the line of Aasim from DAM Capital.

So first question was on the RCM business. So on your comment that the next leg of growth will come from retail cash for the cash segment, and I presume you mean post FY '25. I just want to know if the anticipated growth is more touch point-led? Or is there any pricing growth also in play, courtesy compliance?

I think, Aasim, let me re-clarify so that there's no confusion. I don't think the growth is going to be from only retail. I think we see potential growth in all of our key businesses. We feel the higher growth is likely to come from retail just given the momentum we are seeing post-COVID and what we see in the market from a formalization perspective. As of now, what we have witnessed in the last 6 to 9 months, hopefully that trend will continue. In the midterm -- I mean, actually in the long term, I think the bigger opportunity here is really going to be from more touch points, right, because that's a formalization opportunity out there. And also our Cash-X initiative, we see a lot more opportunity coming in from there. From a pricing perspective, I think we've sort of told you about our longer-term pricing trends in this industry. I would say volume expansion of business points and then pricing would be the way I would think about this, in that order.

Sorry, sorry, just to clarify, I mean the pricing -- so from what I understand, compliance-driven pricing was more an ATM subject, right? It has not really populated on the RCM front. So maybe in the near term, there should be some catch-up on the retail side as well?

I think on the -- the compliance-led pricing is a benefit we have seen in our ATM business. We will see some of it in retail, but I think retail is really going to be a large driver -- the large driver in retail is going to be from formalization and more organized retail touch points in which we're handling.

Got it. Got it. And the second question, just a clarification. So of the 51,000 ATM RFPs you mentioned, that will be awarded over H2. I mean, is there any that was already done in H1 that maybe did not come CMS' way because of whatever reason?

No, this is what -- so we have already told you about the wins in H1, right? The wins in H1 have obviously come through basis, somebody buying an ATM or a recycler. So we're not counting that. We are talking about what the pipeline is right now. And again, I will again call it by 51,000 ATMs, a lot of it is likely to be BLA. We are not very highly focused on that sector. We are very selective. But from an automation perspective, we will compete as aggressively as we can.

Okay. Because I think I presume that of the INR 650 crore order wins you mentioned in H1, almost all of it was from the product automation and this thing, the ATM as-a-service bit, not BLA and remote monitoring. That's what my understanding was.

You're right. Yes, most of it is from the automation side.

Next question is from the line of Lokesh Manik from Vallum Capital.

My question was on the pilferage in the system in the form of cash reconciliation and cash loss in transit. So what I understand is we are incurring somewhere around INR 10 crores per INR 1 lakh crore of cash handling versus our peers who are doing INR 3 lakh crore to INR 4 lakh crores of cash handling. So I just wanted to understand where is this issue arising given that we need to introduce in our software ALGO MVS, ALGO OTC. In light of these, we should not be seeing an increase in trend happening at least on the reconciliation side. And secondly, if you have observed any area of your operation, right, from picking up cash to overnight vaulting, which segment of the operation is this issue recurring? If you can just share some details, throw some light on this would be really great.

Sure. So just for -- to educate you and all the other listeners on the call, the -- comparing the INR 12 lakh crores to somebody in INR 3 lakh crores, unfortunately, is not like-to-like because of the mix of business. The INR 3 lakh crores, I don't know who's the company may be, but I suspect it could be just a company doing retail cash management only. We have a business across all sectors. The reconciliation specific losses, right, they occur predominantly in ATM-related activities. It could be in Brown Label ATM, it could be in ATM cash management. That's where the large trend line has been until now in the country. But our overall provisions, which you are maybe referring to, and Pankaj can dive deeper if required, will cover multiple things, including reconciliation, any provisions for bad debts and any SLA penalties which we may be incurring in terms of execution. That's the usual mix. We have said for the nature of our business and our business mix, 4% to 6% is the range we have seen. It was 5.1% at the end of FY '23. Right now, at the end of FY '24 H1, it's about 4.1%. And -- but we would hope this would trend down as our business mix changes over time. And also basis the reconciliation and governance and compliance law, which RBI is mandating across the ecosystem.

Okay. Okay. So it is not on your operational legs, right, from picking up to overnight vaulting? It's not occurring there, you're trying to say?

No, not really. I think this comes more from our customer claims and reconciliation-led losses which happen at the point of transaction. It's not linked to the cash losses, which may happen while you're transporting currency.

Understood. Understood. My second question was a clarification. I read in the DRHP that the government does not permit more than 49% FDI in this segment. Our promoter is an FII. So in that sense, have you received some special approval from the RBI on that regard in terms of any risk on operations from that area?

I don't think this is applicable to us at all. I'm a little confused as to what exactly in the DRHP you're referring to. But there is no FDI approval required to be in the sector. I think that's already been sorted and cleared out.

The next question is from the line of Pranav Mehta from Valuequest.

So my question is about ESOP expenses. So you mentioned in the notes that we have granted some 8 million options during the first half. Just wanted more details from you. So first of all, this looks like a pretty sizable number. It's almost 5% of our current equity base. So if you can share with us who all are eligible to get these options and what are the conditions and the pricing attached to it? And if I think maybe Pankaj can guide us as to what kind of expensing out will happen in the P&L over the next couple of years?

Thank you, Mr. Mehta. See, the ESOP, what we have granted is already disclosed whenever we have granted the ESOPs. There's the 2 grants which has happened in -- one was in the Q1 and the second one was in Q2. All the ESOPs, generally, we are granting is close to fair market price. 75% of the new ESOP we have granted about that -- weighted average fair market price as defined in the ESOP scheme, and 25% of the ESOP issued was only on 10% discount of the market price. We have not given any -- no deep discount was given on the ESOP, and we have not issued any sort of RSU. Though the ESOP was issued on the fair market price and the option value as calculated using Black-Scholes methodology has to be expensed out in the P&L. And second thing is the point of only 50% of the ESOP we have issued will get vested only in case of the performance criteria, which is defined in the ESOP policy itself. The cost, based on the ESOP what is already granted is next 3 quarters, next 3 quarters, we see that the charges to P&L for the option value will be around INR 11 crores, and then it will gradually reduce to INR 6 crores, INR 4 crores and INR 2 crores level in the FY '25, FY '26, FY '27.

The next question is from the line of Ankit Kanodia from Smart Sync Services.

Congratulations on good set of numbers. So my first question is related to unbilled revenue. So if you can give me some more color into what are these unbilled revenue? Because what I've noticed over the last 3 years, our unbilled revenue is growing at a faster pace than our total revenue. So if you can just give us more color as to what are these revenues and how it is reconciled in the subsequent years, that would be very helpful. That is the first question.

So unbilled revenue, the different businesses have a different type of unbilled revenue. If I will talk about the cash management business, the last month, generally, the month prior to that, it takes time to around 25 to 30 days to get it reconciled from the customer. And based on that, we bill it. Most of our unbilled are closed -- 97%, 98% is closed in the next month itself and 3% is being closed in the next month. The Managed Services business, the unbilled is related to any of the part execution of the contract or the AMC wherein the quarterly in arrears or 6 monthly in arrears are there. So we have 3 to 6 months based on the contracts or agreement is being unbilled. We have no -- most of -- I believe 98% to 99% of the unbilled of the last year is already billed for, 1% is spending because of the AMCs or which is not yet allowed to be billed as per the contract norms.

And if you can give me more color into which part of the business has more of unbilled revenue and which has less?

Yes, both businesses have unbilled revenue. Like if I will talk about like the month, we provide -- it is -- example of September, we provided the services in the month of September. So as on 30th September, there will be unbilled related to September month and some unbilled related to August and prior period as well. But 97% of unbilled in cash business is for that particular month. In Managed Services business, depending upon the type of business, like BLA is generally for the last month. For AMC and other business, wherein the -- based on the agreement terms, it can be 3 months to 6 months of the unbilled revenue.

That was very helpful. My second question is related to the cash logistics business where we have 3 subsections: one is the ATM cash, the other is RCM and the third one is cash-in-transit. I think it would be great if you can just share the competitive intensity in all these 3 subsegments. Where do you see more competition? Where do you see our situation being far more stronger, where the second competitor is probably far more distant? And how do you see in the future? I think that would be very helpful.

I think I'll give you a quick philosophical answer. We are in India, everybody is chasing growth. There is competitive intensity in all of our businesses. We have highlighted that. I don't think we can go away from dealing with the actual things in market. Both -- if I think of our ATM cash or retail or even cash-in-transit, each have their own different competitors who are operating in different margin profiles or different growth aspirations. So I think our competitive intensity, I would say, is usually -- let's take the smallest business in cash, our currency-in-transit, what we call DCV business. It is relatively the simplest business, and therefore, it has the highest intensity because the barrier to entry, I would say, is maybe lesser and the expectation from the customer side is also lesser. But as soon as we go into something like ATM or retail, which is linked into having a deep network in the country, having a very strong technology platform for reconciliation. I think that's where our advantage of CMS comes in to help. So I think ATM is generally the one where we have made the biggest inroads, followed by retail and then by the currency-in-transit business. A lot of currency-in-transit business is still done in-house with the banks and will get outsourced slowly over a period of time. I think that we see many more smaller competitors instead of organized players which you see in the retail cash and ATM side.

The next question is from the line of Aasim from DAM Capital.

Sorry, Rajiv, just one clarification on the INR 650 crore order wins. You mentioned most of it is bank automation. That's the product business, right?

Sorry, Aasim, we have a lot of banking automation and services business. Both of those are there. All of this relates to MS and Tech Solutions. What my point of view was that there are -- this is non-CapEx heavy. So we are not investing capital for this -- these set of wins compared to the wins we had in the last couple of years. I think we are trying to differentiate the 2 to give you a better idea of why these will -- you'll get a sense of the margin profile, you'll get a sense of the CapEx intensity, you'll also get a sense of the accrual period. The accrual period will be, therefore, a little bit lesser. It won't be 7, 8 years. We will accrue this over a 3- to 5-year period.

Sure. So just wanted a clarification because if most of it is product, then it should have been seen in margins this quarter itself. And of course, that would not be a recurring thing. That's why...