IPO Size: Rs. 640 cr IPO - Entirely OFS, mainly by promoter

Price band: Rs. 166-175 per share

Mcap: Rs. 2,107 cr, implying 32% dilution

IPO Date: Wed 19^th Jan to Fri 21^st Jan 2022, Listing: Tue 1^st Feb 2022 (on budget day)

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Company Overview:

AGS Transact provides ATM management and maintenance services for 14,000 outsourced ATMs and 19,200 managed ATMs of ICICI, Axis Bank etc in India. It is also the country’s 2nd largest cash management company, serving 46,000 ATMs, behind recently-listed CMS, which serves 66,000 ATMs.

Stagnant Topline

AGS Transact revenue has remained stagnant at Rs. 1,800 cr annually since FY19, as ATM management and AMC services, accounting for 2/3^rd revenue, declined by 12%, while product revenue dropped 30%. Digital payment and cash management services are the only two segments reporting growth, but their share is only 27% in 5MFY22 revenue of Rs. 750 cr.

4^th Attempt at IPO

Company first filed for IPO 11 years ago in Sep 2010, implying many business and market cycles have been missed, to time its listing. Present IPO is structured as an OFS by promoter, to liquidate company’s Rs. 650 cr current investment (compulsory convertible preference shares in a promoter company), proceeds of which will repay Rs. 560 cr of company debt (NCDs). The NCDs, issued in Mar 2021, carry 12% coupon rate but 18.75% investor rate of return, which is extremely high, given the current low interest rate environment, again highlighting huge risk and weak company fundamentals.

Through this complex structure (which is not viewed positively by the market), company will reduce debt, essentially taken to provide exit to former PE investors TPG and Actis in April 2018.

Debt to Reduce only by Half
Current gross debt stands at Rs. 1,244 cr. After repayment of Rs. 560 cr post IPO, Rs. 683 cr debt will still remain, entailing a high debt-equity ratio of 1.1:1. Thus, net margin will continue to remain low, as going forward, annual interest burden will be to the tune of about Rs. 75 cr.  

Expensively Priced, in Comparison with CMS:

Besides high debt, AGS also has a high depreciation burden of Rs. 260 cr, vis-a-vis Rs. 63 cr for closed peer CMS. Even if interest burden from NCD repayment post IPO is excluded, AGS Transact’s net margin would be about 7% (3% in FY21), half of CMS’ 14%. CMS, with revenue growth, margin expansion and debt-free status, is ruling at FY23E PE of 20x, whereas AGS is also being offered at same multiple, despite its weaker fundamentals.

Digital Limits Opportunity

Currency circulation in the country rose during the pandemic. But this is a temporary phenomenon, as uncertainty rose. India’s digital adoption is accelerating, and the Government is also encouraging it, to formalize the economy. This will reduce share of cash in India’s GDP which is structurally an industry-negative.