Thesis and Anti-thesis Pointers for the Business
Investment Thesis Pointers
Minimum standards for cash management service providers by RBI and MHA.
In April 2018, RBI introduced certain minimum standards for service providers and sub-contractors engaged in cash management activities, due to banks’ increasing reliance on outsourcing these activities.
Minimum net worth requirement of Rs1bn
Must own or lease a Fleet of 300 LCV with specifically fabricated Cash Vans.
GPS enabled and Live Geo-fencing monitoring, separate passenger and cash compartments with CCTV, wireless communications and tubeless tyres.
Similarly, the Compliance norms like Minimum Standards, Cassette Swapping are beneficial to large players because of the scale of operations, which increases the cost but are then passed onto customers ultimately.
Integrated Offering of Services
The logistics and technology platform coupled with extensive network helps position CMS as a strategic partner for end-to-end outsourcing with banks as a one stop solution positioning themselves as a unique player in the market, where the competitor provides only a handful of services.
Increased outsourcing Leading to TAM Expansion
In Cash Logistics, there are more than 100,000 ATMs that are yet to be outsourced. The organized retail sector is growing at 8% to 10% annually, with 550,000+ touch points, and only less than 1/3rd of these currently outsourced for cash management.
The AIoT Remote Monitoring business presents a large untapped opportunity within the banking and the broader BFSI sector as well as non-BFSI sectors.
Larger-than-normal direct benefit transfer (DBT)-based cash transfers
This will increase the Cash in circulation, as happened during the time of pandemic. Expansion in the Banking cycle and Easing of Liquidity into the system will increase the cash in circulation in economy.
Increase in Interchange ATM Fee
ATM Interchange Fee was increased from INR 15 to INR 17 and from INR 5 to INR 6 for non-cash transactions with effect from August 2021, setting upper limit to INR 21 per transaction. Now, the Confederation of ATM Industry (CATMI) has formally approached RBI to increase this to INR 23 per transaction. (June 2024)
Healthy Dividend
Company has almost been paying ~25% of its profits as Dividend to its shareholders. The company has INR ~7500 Mn of Cash on its books.
Investment Anti-thesis
Reduction in cash in circulation - Challenges from alternative payment methods
Cash in Circulation has expanded as a % of GDP in past 7 years, despite the proliferation of digital payment modes. Proportion of cash payments came down from 80% in FY15 to 68% in FY21, and this down-trend could accelerate going forward, especially with government encouraging transition to a less-cash economy supporting digital transactions.
A sharper-than-expected fall in proportion of cash payments could result in slower deployment of ATMs. (Rise in Digital Payments, adoption of UPI)
Operational Risk
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Since large amount of cash is handled, certain Business-related risks like Thefts, robberies, frauds & embezzlements, penalties and chargebacks due to non-compliance and Safety in transit may pose some costs on the company. An increase in such costs in future could result in potential loss of business and higher insurance costs.
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As a Percentage of Revenues these are at around 5% in FY24, this has reduced to around 4% in H1FY25 which is the average for 3-5 years
Client Concentration Risk
Top 2 Clients Contribute 22% and 11% of the total Revenues of the Company.
Regulated Sector
The cash management services have been regulated by the Reserve Bank of India (RBI) with regular interventions and increase in compliance requirements, leading to increase in costs for the ATM service provider.
Empirical Evidence suggests that these costs have been passed onto the customers, but they still remain vulnerable to unforeseen actions.
Disc - Not Invested But, tracking Closely.
