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

Ladies and gentlemen, good day, and welcome to the Q1 FY '27 earnings conference call of CMS Info Systems Limited, hosted by JM Financial. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Shalin Choksy from JM Financial. Thank you, and over to you, sir.

Thank you, Manav. Good afternoon, everyone. On behalf of JM Financial Institutional Securities, I welcome you all to the Q1 FY '27 Earnings Call of CMS Info Systems. We have with us the management of the company, represented by Mr. Rajiv Kaul, Executive Vice Chairman and Chief Executive Officer; Mr. Pankaj Khandelwal, Chief Financial Officer; Mr. Anush Raghavan, Chief Business Officer; and Mr. Puneet Bhirani, Chief Operating Officer. With this, I will hand over the call to the management for their opening remarks, post which we can open the floor for question and answers. Thank you, and over to you, Rajiv.

Thank you. Thank you for joining our Q1 call. Let me take a few minutes to talk about the quarter and the year, and then hand it over to the team for more details. The first thing we set out to do this year was to grow our services revenue run rate from INR 609 crores in Q4 to INR 650 crores. In Q1, we came in at INR 625 crores. This is some modest growth on Q4, but is INR 25 crores short of what we aimed for. And the shortfall is entirely down to the worst cash supply squeeze this industry has seen in the last decade. Banks supplied about 70% of currency what the industry indented for on a daily basis. This is a risk we had called out in our May call, and this INR 25 crores revenue loss has an operating deleverage impact on the P&L. We believe this should normalize by the end of Q2. So we are setting our full year services revenue goal at INR 2,650 crores to INR 2,750 crores against the INR 2,700 crores to INR 2,800 crores earlier. The total revenue, including product revenue, is estimated accordingly at INR 2,750 crores to INR 2,850 crores. Against this, we are raising our EBITDA margin guidance to about 27% from the 25% to 26% we had guided in May. So in summary, we have trimmed the revenue number affected by an external supply issue, but we have raised the guidance on a metric which reflects the quality of the business. The supply squeeze has been painful across the industry for banks, their customers as much as for the ATM deployers and operators. After extensive industry representation, the Indian Bank' Association, IBA, has constituted a committee to review the situation and evaluate repricing legacy PSE contracts. Anush, our Chief Business Officer, is going to cover this more on this in his commentary. A quarter like this does test how well a business can absorb a shock it did not fully see coming. In this environment, we delivered our highest ever services revenue and expanded margins by 170 basis points, while carrying higher-than-normal wage and fuel inflation in the cost base. This is a result of the investments we have made over the last 2 years in higher technology spends, which drove productivity gains and also towards a flexible workforce model. Pricing discipline has also helped us step away from lower-yield contracts and our shift towards fixed price contracts while winning large private sector bank contracts has also helped. Now I would like Anush, our Chief Business Officer, to take you through more details on the business environment, the key wins. And after him, Pankaj, our CFO, will take you through the financial highlights.

Thank you, Rajiv. Good day, everyone. Let me start by covering the currency supply situation, where it stands today, what are we doing about it and the business highlights. Starting with currency, we normally see some disruptions around election cycles. This year, with the 4 key state elections in Feb to April, currency movements typically come under a lot more closer scrutiny through the model code of conduct period. There are currency imbalances, which strain the currency chest networks. Now this happens every cycle, and we plan for it in advance. This year, however, saw a much larger and a longer-lasting impact on the geographically larger part of the country. When fulfillment constantly fails the levels of cash which are indented, everyone tends to behave a little differently and start indenting differently. And effectively, this creates a bullwhip effect. Now this is not a demand problem. Currency in circulation is up 12% year-on-year. And on the retail side of the business, our own same-store volumes have held constant. The constraint imposed around currency supply affected distribution, and it was concentrated in Tier 1 and Tier 3 -- Tier 2 and Tier 3 locations, where our transaction BLA estate is. Now this has a direct impact on the operating deleverage for us on 12% of our revenue base. On per transaction contracts, an ATM which is not filled does not earn and there is no way to offset the operating costs. Across our own estate, ATMs that stayed well supplied saw transactions flat year-on-year. Those which saw currency supply lower at about 70% saw transactions fall by 27%. So in effect, there is almost a near one-to-one correlation between currency supply and the impact on transaction at these ATMs. This, in effect, has lowered our revenues by INR 18 crores in the BLA business and impact to us on the cash logistics side from the work that we do for other MSPs is about INR 7 crores. As of today, the currency fulfillment has recovered partially through Q2 to about 80% of indented volume. And in our plan, we now assume that this should improve gradually by the end of the quarter. On the cost side, this year has seen very steep increases in state-level minimum wages, ranging from 6% to as much as 60% in certain key large states. Fuel costs are up 8% this year. Now this will all necessitate a larger price increase than average. With private sector banks and our retail customers, the discussions are progressing well. As regards to the public sector banks, the industry and banks are engaging through IBA, which is the Indian Bank' Association, which has set up a committee to look into this and come up with pricing to handle these large statutory increases. We hope to have an update for you on this by the end of the Q2. On the market share side, we have been able to retain our share gained over the last year. We are now at 60% in ATM cash management and 38% in retail solutions. On the contract wins, we won INR 500 crores of orders in Q1. The largest of these is the HDFC Bank mandate, which we announced in May, 6,000 ATMs over 5 years at a TCV of INR 400 crores. This win effectively cements our market position with large long-term contract wins at all 3 of India's largest banks in the last 18 months. Our Tech and Payments segment is seeing strong traction. Over the last year, we have invested significantly in creating a world-class HAWKAI Enterprise product on the back of a large win at a large PSU bank. The demanding AI use cases developed there were tested and deployed over a national network, and this will be key for us in competing for a large pipeline of similar bids across banks in the next 2 years. Similarly, there are other banks also evaluating our ALGO MVS software, which is a multi-vendor software for powering their ATM networks. This, which has been deployed in SBI and will plan to go live at ICICI in Q3. With that, let me hand over to Pankaj, who will take you through the financial highlights.

Thank you, Anush. Total revenue for the quarter was INR 635 crores, with services revenue at all-time high at INR 625 crores, up 9.3% year-on-year basis and 2.6% quarter-on-quarter basis. Rajiv and Anush has called out the currency supply impacting services revenue by INR 25 crores, out of which INR 18 crores in the Managed Services segment and INR 7 crores in the Cash segment. EBITDA came in at INR 173 crores, up 8.9% on a year-on-year basis and 6.8% sequentially, with margin expanding 170 basis points quarter-on-quarter to 27.2%. Three key drivers led to the EBITDA margin expansion. One, the automation and the technology investment for route and process automation -- which has structurally lowered our unit costs, pricing focus and yield management, and increasing share of the higher-margin Tech and Payments revenue growth in this space. We are maintaining our increased spend on tech at 1.5% of revenue, so this margin expansion comes after fully carrying that investment. At an EBIT level, Managed Services EBIT has impacted directly by INR 18 crores revenue drop in BLAs business. The EBIT for Q1 was INR 32 crores at 10.3% margin versus 14.1% a year ago. If not for the INR 18 crore revenue impact, the EBIT would have been 15%. As and when the supply normalizes and transition comes back to earlier trend, the increased revenue will have positive impact. Depreciation is higher mainly due to higher CapEx incurred in H2 towards HAWKAI and ALGO product development and incremental depreciation related to FSS acquisition impacting in Q1. For reference, FY '26 saw peak CapEx of INR 350 crores as against our average CapEx run rate of INR 200 crores. For FY '27, we currently estimate CapEx to be substantially lower at INR 100 crores to INR 125 crores range. Apart from that, synergy benefits from FSS integration should start flowing in H2. Our tax rate this quarter is lower at 20.3% due to the deferred tax gain, our Securens acquisition turnaround operationally, which allowed us to recognize the deferred tax asset. PAT for Q1 is INR 84 crores, down 10.6% year-on-year and 5.8% sequentially. PAT margin is 13.2%, down 170 basis points year-on-year, but up 70 basis points quarter-on-quarter basis. As you are aware, we completed a share buyback on June 19, 2026, for 49.39 lakh shares at INR 340 per share, totaling to INR 168 crores. With this, I would like to hand over to Rajiv, for closing remarks.

Thank you, Pankaj. Over the last 18 months, we have signed large long-term contracts with State Bank of India, ICICI Bank, and HDFC Bank. Execution for all of these is on-track. Midsized and some large banks are preparing for a product refresh after pausing this in FY '26. We have won 2 of these mandates in Q1 for ATM recyclers to be executed by the year-end. The Technology and Payments segment is growing ahead and now a meaningful part of our revenue. All of this should help us deliver a good growth year in FY '27. Platform-wise, we expect ATM Management and the Retail and Currency logistics platforms to grow between 11% to 14%, as supply normalizes and our pricing efforts deliver fruit. The Technology and Payments platform should grow between 35% to 40%. Combined, the services revenue growth should be in the 15% to 19% range. When it comes to profitability, we are expecting this to be stronger than what we told you in May. Last year, we invested about INR 350 crores of CapEx against an average of INR 200 crores in prior years. This investment was for large project wins and also for the product development for our HAWKAI and ALGO MVS products. The P&L now carries a full depreciation on these assets, while the revenue from them is still building out, which is what you're seeing reflect in the EBIT line this quarter. The CapEx in FY '27 will drop to INR 100 crores to INR 125 crores, in line with our long-term average. So depreciation should normalize over FY '27 and FY '28. Now Q1 EBITDA margins were strong at 27.2%. This is something I want to reinforce. This is amongst the highest margins of any business services company in India, where the norm is single digits. We aim to maintain these levels for the year ahead of the 25% to 26% we had guided in May. We have a track record of converting 65% to 70% of this EBITDA into operating cash flows, as we have done for the last 5 years. For those of you who know us well, we run this company for margin, cash, and returns. When assets stop earning, we will act on it. And if the currency supply and the transaction levels do not improve, we will prune the persistently underperforming ATMs out of our BLA estate. On our overall direction, we are executing as per the basis we set out at the Analyst Day in September 2025 -- sorry, 2024, and also reinforced in my letter to shareholders in May -- sorry, that is September '25 -- September '25, and our letter to shareholders in May. Technology and Payments segment, which is 7% of our services revenue in FY '22 has grown to 16% in FY '26, is 18% in this quarter, and we expect this to cross 20% contribution by the end of Q4. The HAWKAI Enterprise product has now been proven in a very demanding national deployment at one of the largest banks in the country, and we are bidding with this experience into a strong pipeline. The competition is broadening as attractive markets will attract newer entrants. But we like our position because we own the full stack of hardware and software. We are operating at national scale, and our models are tuned on Vision AI and cash operations data over a decade, which a new entrant does not have and cannot build quickly. We were early to machine learning, and we are now using AI inside our own operations. Cash forecasting and end-to-end vault automation have gone live for us last quarter, built by our own technology teams, and some of the productivity gains which you are seeing in this quarter's margins comes from there. It is also why I'm pleased to welcome Will Poole to our Board. Will has co-founded and leads Capria Ventures with more than 60 investments in companies putting AI to work in the real economy. And before that, he built and scaled platform businesses at Microsoft. That is a judgment we want in the room to help scale this part of our business. Overall, FY '27 will be a good year with strong double-digit growth rates in both revenue and profits, with margins hopefully outperforming than revenue. Thank you, and we now look forward to your questions.

[Operator Instructions] We have our first question from the line of Praveen Kumar from Aequitas Capital Advisors.

Yes. I had a couple of questions. The first one was on the cash crunch, the cash supply crunch which you talked about. The question was, how much of it do you see as being transient versus being more structural in nature? Or do you -- I mean, for example, do you perceive it as a behavior change from banks and RBI? And related to that is also the question on, you have put the statistics on partly supplied ATMs versus fully supplied ATMs and different transactions. The question on that was, is it possible that some of the causality is the other way around, meaning that the banks chose to supply lesser to ATMs, which they -- where they saw lesser potential, right? That's my first question. Second question was on broadly over the last couple of years, there have been multiple, I would say, exogenous kind of shocks, which have detracted from you achieving what you have set out to. So my question was what kind of changes have you made or are you currently making to your internal forecasting models to be able to give a better sense of what could happen? Yes. Those are my 2 questions.

Praveen, very interesting questions. Let me tackle the first part in some -- because I think it's very interesting you're examining this from all different angles. I think as far as the transient nature of this is concerned, right now, I can comment on the currency supply situation. As you would appreciate, I think there are two parts to this issue. The first is how soon do we think the currency situation will normalize? And second, what is the implications of that normalization on further ATM transaction levels? As we speak, we've already seen that the worst of the dip is behind us, somewhere around the May, June -- or April, May of Q1, the impact was as much as only 70% of the money that we were indenting is what we were receiving from the banks, which means there was almost a 30% dip in currency levels. That situation has improved. It has gone up from 70% closer to 80%, 85% now. In conversation with multiple industry stakeholders, banking association and what our association has also engaged with the regulator, and we'll also be able to see this in the public data of what they show as currency in circulation, you'll be seeing that those levels are improving, which means there is fresh infusion of currency coming in. I think this is just a situation where I don't think anybody has a perfect answer on why and what. But we do know that, unfortunately, implications have been quite severe for the industry as a whole. With respect to your second part of your question on the supply of currency to ATMs of different transaction levels, so I don't think there was any such -- sorry to use the language, but I don't think there's any conspiracy theory of that nature. Banks give us currency in bulk against indents that we raise. Now at some point from a forecasting perspective, we need to figure out what is the best way to supply that currency to ATMs. And this disparity was not -- was widespread in the nature of the fact that there were geographical imbalances. So when we are comparing and looking at differences, there are differences in the way we have analyzed statistically between different ATMs of different banks, ATMs across different geographies. So I think to that extent, we've been able to sort of get to the conclusion that this is more a supply which is impacting the growth and not the demand side of the problem. With respect to your exogenous things, I'll just hand over to Rajiv for that.

Yes, Praveen, just to add to Anush's comments on this, we -- I think the press has covered this in fair detail. So I would sort of refer to that. There is a supply issue, which has got a cascade effect, which was not sort of anticipated between the currency issuing banks to the various banks which are fulfilling the currency needs of the country. And a shortfall consistently overall builds more pressure to the system because indent levels just keep going up. Now I think we are seeing this situation improve. It isn't back to normal. What happens to demand, we'll have to see, right? I mean, that will just play out, and we'll get to know at the end of Q2. I think it will be very futile of us to try and estimate that right now. So we'll just track the trend and report it as soon as it's visible to us. Going back to your other question on your point on comment you made on forecasting and how do we improve the quality of forecasting. It's a fair criticism. And if -- as I reflect, and we do reflect on this, just to put context, I think FY '22, '23, '24 were 3 years where we met or exceeded all forecast and high growth. '25, '26, I think we have come under. Now I think we -- when we look at the forecast, this is a team which is trying to set good goals as per what we think our potential to perform in the market is. We don't put the highest number, but we do put a number which we think is realistic, but a stretch target. I think that's the culture. I don't want to set targets which are very safe and guide towards it. I think we will put our best foot forward. There have been some shocks. We -- some of them have played out differently than we anticipated when AGS impact was both positive and negative, as we have seen over the last 1, 1.5 years. I do think that we are putting in the right investments to manage the quality of the business. So you think of EBITDA margins, I think we have done better. I hope we can maintain that. And we are looking at, obviously, also our forecasting and saying how do we sort of get back to a trend line. So the year has just started. This is Q1. If you look at it last year, as soon as we felt there was going to be a dip, we were early to come and call it out. In Q1, we have seen a little dip, we have called it out. We will still put our effort for and hope in the next 9 months, we are able to cross the growth numbers, which we are indicating right now.

[Operator Instructions] Next question is from the line of Umang Shah from Banyan Tree Advisors.

My first question was in Q1, how much of our revenues would be coming from FSS acquisition?

Umang, Anush here. I think we've spoken about the FSS deal the last time, most in terms of the overall revenue and effective valuation. As we speak right now, the contracts are in process of getting novated. In Q1, I think it will be roughly close to a INR 20 crore accrual from FSS.

Understood. And sir, any thoughts on the government introducing or planning, paving the way for introduction of MDR on UPI transactions. Any sense on how it will help increase cash transaction?

Yes. I think that's a flavor of the season right now. We have spoken to some of our direct customers to try and see -- get a sense of how they are thinking about it. But I think what they tell us pretty much resonates with our own thinking and -- the fact is it's a little too difficult to anticipate without knowing the specific details of how exactly they will come out. We've been hearing different media that it will be anywhere in the range of 30 to 50 bps. What I can try and tell you is that I think there are two aspects that we are trying to keep in mind. First is we go back and look at what is the fundamental vision that we have of CMS and what we set for ourselves when I look at from a cash perspective. Our goal has been always to try and invest in technology and process efficiency to keep the cost of cash as low as possible and to make the transaction as frictionless as possible. Ultimately, in the long run, that is what will help keep cash relevant as compared to any other payment systems options. The second being, I think the fintech and the payments world is a lot more -- has a lot more competitive intensity. It has a lot more players. How the MDR situation between what has been announced to what eventually gets effectively implemented and passed on to merchants, I think we'll have to see how that goes. Right now, when you sort of take the cost of a cash transaction to a merchant, it will be anywhere between 10 to 20 bps. So I mean, to all of our current and potential customers, I think that is what we have placed to them as saying this is what currency -- a cash transaction costs you versus an UPI, which was historically perhaps free, which we'll have to see where the cost lands.

Understood. And one clarification on your comments. You had mentioned that this shortage has affected 12% of your revenue base. Are you referring to the ATM logistics? Can you say 12% of the revenue base?

No, this is the 12% of our revenue, which is from what we call the brown label estate, the transaction-linked ATM revenues.

We have our next question from the line of Krushi Parekh from BugleRock.

Yes. So one of my question is that we mentioned in the presentation that our touch points are currently somewhere around 155,000. What is the growth trajectory when it comes to these touch points because the data that I have last quarter -- I mean, last June, we had somewhere around 153,000. So first of all, including acquisitions and excluding acquisition, what kind of growth are we witnessing in our touch points?

So Krushi, I think we keep updating this number on a quarterly basis. I think right now, we are sort of about 70,000 ATMs and 65,000 retail. Let me tell you about in the last 12 months, we have last quarter told you that on the basis of a 4% sequential growth in the cash business. We used that opportunity to also try and do a little bit of spring cleaning on our specifically retail business, which is to try to weed out some of the lower yield long tail businesses that has induced certain churn. So -- and second is when you sort of look at this through not the lens of just your touch points, but also through the lens of overall the platform business, which we have introduced in our September annual call, and we said we'll look at ATM business, for example, it's no longer about discrete revenues lying in managed service contracts versus ATM cash management contracts. A lot of the business that we are incrementally winning are integrated end-to-end contracts, where a customer doesn't discern between managed service and cash management. And as we speak, more than 50% of our overall ATM touch points are today from those end-to-end integrated ATM contracts. I think Rajiv had mentioned in the beginning part of his commentary that overall between -- across both ATM as well as retail, we expect to grow between 10% to 13% on both those platforms and close to 30% on the -- payments and tech.

Okay. My second question is related to the HAWKAI. We are talking about a TAM of INR 3,000 crores for BFSI, INR 5,000 crores for non-BFSI. So first of all, how are we estimating this TAM for ourselves? Is it like some kind of an existing market which is there that we are looking to replace with the HAWKAI? Is it some kind of an internal study or it's an extrapolation of what is the current market share and extrapolated to the existing number of the retail stores or the ATMs, et cetera?

So I think on the BFSI side, it's a lot easier because we have been a lot more proximate to that, and that's exactly the customer set where we started incubating HAWKAI 4 years back, and also the one where we've had the fastest historical growth rates just because of our presence in the customer accounts or being part of the broader ATM and branch ecosystem. In those cases, I think when we look at it, there are roughly close to about 400,000 ATMs and bank branches in the country today, of which the current outsourced market is anywhere between 100,000 to 120,000. So our estimate of the opportunity sizing is really saying in some time frame of the next 5 to 7 years. We anticipate the ones which are not covered under the HAWKAI model, which is using AI-based remote monitoring and visual surveillance for the banks to start outsourcing more and more into those. Right now, we see a very healthy pipeline of banks wanting to start implementing this, either by way of helping us set up a command center for them or also helping them with the branch surveillance, and the RFP pipeline is quite healthy for the next 18 to 24 months. On the non-BFSI and when we talk about those opportunities, I think it still sort of goes back to the sets of businesses where we have a use case or we have done certain pilots or POCs. These could be gold loan branches. These could be dark stores and warehouses. So in a way, it's sort of qualified by the set of the industry that we're familiar with. Beyond this, there could be a much larger use case, but we don't know because we haven't done some of those things. But incrementally, we've been having a lot of people talking to us. Just to give you an example, this could be around border fencing. This could be around sort of monitoring and supervising how exams are conducted and to sort of weed out potential discrepancies in those. So I think there's a world of opportunity for that. We just need to pick and choose where we are the best positioned, where we have the video libraries, which have been created, which have a high degree of accuracy and where we are confident on backing ourselves.

Okay. Just one thing. What was the currency handle this quarter and the corresponding quarter of the June last year?

We'll just pull out the data and come back to you at the end of this call.

[Operator Instructions] Next question is from the line of Ankit Kanodia from Zen Nivesh.

I just have one simple question. One of our competitors, they are probably much smaller than us, but they have applied for payment aggregator license. Do we have something on this line as to are we keeping that as an option for us? Or have we looked at it in the past? Any color on that would be very helpful. That is my only question.

As of now, we don't have any plans to be in the merchant acquiring space. We find that space to be very competitive and very difficult to make any money. In the past, we've looked at companies which have licenses, including a PA license, but it's not something which has attracted our focus and attention right now. I think the market leadership there is clearly established and not a space we think competitively makes sense.

We have our next question from the line of Khush Shah from VIVOG COMMERCIAL.

Congratulations for a good set of numbers.

Sorry to interrupt you, Kush, can you please speak a little louder?

My question would be related to the future outlook of the polymer, as there has been news by the government or the -- in the news, that there has been rollout of new polymer sheets of the cash. So I just want to understand the future outlook of what would be the polymer as you are seeing for your view as a cash logistics business?

I think right now, from what we've read publicly, again, I believe the polymer notes are right now being planned for what we call the lower denomination, which is the INR 10, INR 20s, INR 50s and may possibly for INR 100s, but between INR 10, INR 20s and INR 50s. Generally, the industry's experience in sort of when I look at the life of a currency note is that -- and this is a little dated information, but last time I read RBI statistic, they said the life of Indian currency note is about 11 months on average, which means the INR 100s, INR 200s and INR 500s possibly last a little bit longer because the frequency of handling is a little lesser and the lower denomination extinguish a lot sooner. I think polymer is a great innovation to help try and extend the lifespan of that currency note. It has also been seen internationally that polymer notes tend to have a lower life cycle cost of currency printing and handling. So right now, if India is incurring roughly about INR 5,000 crores in currency printing annually, so polymer may have a slightly higher upfront cost. But over a longer-term period, it should reduce this. To us, I think the implications are a lot lesser because ATMs are still not configured for doing some of the lower denomination, right? There's still INR 100, INR 200 and INR 500. But in terms of some of the work that we do for our CIT work and the currency shifts work, I think there may be some incremental opportunities, especially by way of helping with the transaction and the processing work that we do.

Maybe around 3 to 5 years, I guess, would be -- it would take time, more or less 3 to 5 years or more than 5 years from your side...

Sorry, I can't help you on that, Kush, because I think that's more a matter for the regulators to decide what time frame. But I think this has been the talks for a while. It just seems to be picking up momentum now.