CMS Info Systems Limited (CMSINFO) Q1 2027 Earnings Call Transcript

Ladies and gentlemen, good day and welcome to the Q1FI27 Earnings Conference Call of CMS Infosystems Ltd. hosted by JM Financials. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions at the end of today's presentation. Should you need assistance during this conference call, please signal an operator by pressing star then zero on your touchstone phone. Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Shaleen Choksi from JM Financials. Thank you, and over to you, sir.

Thank you, Manav. Good afternoon, everyone. On behalf of JM Financials Institute and Securities, I welcome you all to the Q1 FY27 Earnings Call of CMS Infosystems. We have with us the management of the company represented by Mr. Rajiv Kohl, Executive Vice Chairman and Chief Executive Officer, Mr. Pankaj Khandelwal, Chief Financial Officer, Mr. Anush Raghavan, Chief Business Officer, and Mr. Puneet Birani, 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 609 crores in Q4 to 650 crores. In Q1, we came in at 625 crores. This is some modest growth on Q4, but is 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 intended for on a daily basis. This is a risk we had called out in our May call, and this 25 crore's revenue loss has an operating deal average 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 2650 to 2750 crores against the 2700 to 2800 crores earlier. The total revenue, including product revenue, is estimated accordingly at 2750 to 2850 crores. 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 Banking 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 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 in fuel inflation in the cost base. This is a result of the investments we have made over the last two 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 of 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 four 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 chess 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 a 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 2 and Tier 3 locations, where our transaction BLA status. This has a direct impact on the operating day leverage 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% So, transactions fall by 27%. So, in effect, there is almost a near one-to-one correlation between currency supply and the impact on transactions at these ATMs. This, in effect, has lowered our revenues by 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 7 crores. As of today, the currency fulfillment has recovered partially through Q2 to about 80% of intended 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 I've 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 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. For the market share fight, 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 500 crores of orders in Q1. The largest of these is the HGSE bank mandate, which we announced in May, 6,000 ATMs over 5 years at a TCB of 400 crores. This win effectively cements our market position with large long-term contract wins at all three of India's largest banks in the last 18 months. Our tech and payment segment is seeing strong traction. Over the last year, we have invested significantly in creating a world-class Hawkeye enterprise product. on the back of a large win at a large PSA band. 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 two 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 help.

Thank you, Anush. Total revenue for the quarter was 635 Crores, with services revenue at all-time high at 625 Crores, up 9.3% year-on-year basis and 2.6% quarter-on-quarter basis. Rajiv and Anush have called out the currency supply impacting services revenue by 25 Crores, out of which 18 Crores in the managed services segment and 7 Crores in the cash segment. Abita came in at 173 crore, up 8.9% on 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 Abita margin expansion. One, the automation and the technology investment for route and process automation, which have structurally lowered our unit costs. Pricing focus and yield management. And, increasing share of the higher margin tech and payment revenue grows in this phase. 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 18 crore rupees revenue drop in BLS business. The EBIT for Q1 was 32 crore rupees at 10.3% margin versus 14.1% a year ago. If not for the 18 crore revenue impact, the EBIT would have been 15%. As and when the supply normalize and transition come back to earlier trend, the increased revenue will have positive impact. Depreciation is higher, mainly due to higher capex incurred in H2. Towards Hawkeye and Algo product development and incremental depreciation related to FSS acquisition impacting in Q1. For reference, FY26 saw peak capex of 350 crore as against our average capex run rate of 200 crores. For FY27, we currently estimate capex to be substantially lower at 100 crore to 125 crore rupees 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 sequence acquisition turned around operationally, which allowed us to recognize the deferred tax asset. Pat for Q1 is 84 crore, down 10.6% year-on-year and 5.8% sequentially. Pat margin is 13.2% down 170 basis point year-on-year but up 70 basis point quarter-on-quarter basis. As you are aware, we completed the share buyback on June 19, 26 for 49.39 lakh shares at 340. 340 rupees per share totaling to 168 crore rupees. With this, I would like to hand over to Rajiv for closing remarks.

We have signed large, long-term contracts with State Bank of India, ICICI Bank, and AGFC Bank. Execution for all of these is on track. Midsize and some large banks are preparing for a product refresh after pausing this in FY26. We have won two of these mandates in Q1 for ATM recyclers to be executed by the year end. The technology and payment segment is growing ahead and now a meaningful part of our revenue. All of this should help us deliver a good growth here in FI27. 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're expecting this to be a stronger than what we told you in May. Last year, we invested about 350 crores of capex against an average of 200 crores in prior years. This investment was for large project wins and also for the product development for our Hawkeye and Algo MBS products. The P&L now carry the full depreciation of 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 FI27 will drop to 100 to 125 crores, in line with our long-term average. So, depreciation should normalize over FI27 and FI28. Now, Q and EBITDA margins are strong at 27.2%. This is something I want to reinforce. This is one of 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 five years. For those of you who know us well, we run this company for margin, cash, and returns. If we 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 BLS state. We are executing as per the basis we set out at the Analyst Day in September 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 payment segment, which is 7% of our services revenue in FY22, has grown to 16% in FY26, is 18% in this quarter, And we... We expect this to cross 20% contribution by the end of Q4. The Hawkeye 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. of hardware and software. We are operating a national scale, and our models are tuned on Vision AI and cache operations data over a decade, which a new entrant does not have and cannot build quickly. to machine learning, and we are now using AI inside our own operations. Cash forecasting and end-to-end world 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 am 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. Before that, he built and scaled platform businesses at Microsoft. That is the judgment we want in the room to help scale this part of our business. Overall, FI27 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.

Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touch-toe telephone. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use handsets while asking our question. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in the conference, please limit your questions to only two per participant. Should you have a follow-up question, we request you to rejoin the queue. Ladies and gentlemen, we will wait for a moment while the question queue adjourned. We have a first question from the line of Raveen Kumar from AQTS Capital Advisors. Please go ahead.

Yeah, hi. Thanks for the opportunity. I had a couple of questions. The first one was on the cash crunch, the cash supply crunch issue I talked about. The question was, how much of it do you see as being transient versus being more structured 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. 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 other way around, meaning that, you know, the banks chose to supply lesser to ATMs where they saw lesser potential, right? That's my first question. Second question was on broadly, you know, over the last couple of years, there have been multiple, I would say, exogenous kind of shocks. Which have, you know, 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 model to be able to, you know, give a better sense of what could happen? Yeah, those are my two questions. Thank you.

Hi, Praveen. Very interesting questions. Let me tackle the first part in some, you know, 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, you know, 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 are 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 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 bank, 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 in. I think this is just a situation where, you know, I don't think anybody has a perfect answer on why and what, but we don't know that, unfortunately, implications have been quite severe for the industry as a whole. With respect to the second part of your question on the supply of currency to ATMs of different transaction levels, I don't think there was any such, sorry to use the language, but I don't think there was any conspiracy theory of that nature. Banks give us currency in bulk against indents that we face. Now, at some point, from a forecasting perspective, we need to figure out what is the best way to supply the currency to ATMs. And this disparity 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 was 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.

Yeah, Preet, just to add to Anish's comments on this, you know, 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, you know, the various banks which are fulfilling the currency needs in the country. And a shortfall consistently overall builds more pressure in the system because indent levels just keep going up. Now, I think we're seeing this, you know, situation improve. It isn't back to novel. 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'll be very futile of us to try and estimate that right now. So we'll just track the trends 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 as I reflect, and we do reflect on this, just to put context, I think 522, 23, 24 were three years where we met or exceeded all forecast and high growth. 25, 26, I think we have come under. Now, I think 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 you think is a realistic, but a stretched 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. 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 one, one and a half years. I do think that we are putting in the right investments to manage the quality of the business. So, you know, 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 fell, 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 best foot forward and hope in the next nine months, we are able to cross the growth numbers which we are indicating right now.

Thank you. A reminder to all participants, please restrict yourself to only two questions for participants. Should you have a follow-up question, we request you to rejoin the queue. Next question is from the line of Omanksha from Banyan Tree Advisors. Please go ahead.

Hi, sir. Thank you for taking my question. My first question was, in queue 1, how much of our revenues will be coming from FSS acquisition?

The FSS deal the last time in terms of the overall revenue and effective valuation. As we speak right now, the contracts are in process of getting nominated. In Q1, I think it will be roughly close to a 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 transactions?

Yeah, I think… I think that's the flavor of the season right now. We have spoken to some of our direct customers to try and get a sense of how they're 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'll be in range of 30 to 50 pips. What I can try and tell you is that I think the two... Aspects that we are trying to keep in mind. First is we go back and look at what is the fundamental mission that we have of CMS and what we set for ourselves when I look at it 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 compared to any other payment systems option. 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... We'll have to see how that... If you sort of take the cost of a cash transaction to a merchant, it will be anywhere between 10 to 20 pips. 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 a new PI, 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 when 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.

Understood. Understood. All right. Thank you so much.

Thank you. We have our next question from the line of Khrushy Parikh from Bajal Rock. Please go ahead.

Yeah, hi Dean. So, one of my questions 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 touchpoints? 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 acquisitions, what kind of growth are we witnessing in our touchpoints?

So, Krish, 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 was to try to We need to weed out some of the lower-yield, long-tail businesses that have induced certain churns. 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 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... And as we speak, more than 50% of our overall ATM touchpoints are today from those end-to-end integrated ATM contracts. I think Rajiv had mentioned in the beginning part of his commentary that overall, across both ATM as well as retail, we expect to grow between 10% to 13% on both those platforms and closer to 30% on the payments and tech.

Okay, my second question is related to the Hawkeye. We are talking about a TAM of 3,000 crores for BFSI, 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, you know, replace with the Hawkeye? Is it some kind of an internal study or it's, you know, an extrapolation of what is? The current market is an extra politic to the existing number of, you know, the retail stores or the ATMs, etcetera.

So I think on the BFSI, it's a lot easier because we've been a lot more approximate to that, and that's exactly the customer set where we started incubating Hawkeye four years back, and also the one where we've had the fastest historical growth rate just because of our present size in the customer accounts for 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 outsource market is annually between 100,000 to 120,000. So our estimate of the opportunity sizing is really saying in some time frame of the next five to seven years. We anticipate the ones which are not covered under the Hawkeye 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 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. This could be around border fencing, this could be around, you know, and to sort of weed out potential, you know, discrepancies in those. So I think there's a world of opportunity for that. We just need to pick and choose where we, you know, where we are the best position, 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 the call. Okay.

Sure, sure.

Thank you. Thank you. A reminder to all participants, please restrict yourself to only two questions per participant. Should you have a follow-up question, we request you to rejoin the queue. Next question is from the line of Ankit Kanodia from Zen Nivesh. Please go ahead.

Yeah, thank you for taking my question. 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.

Thank you. 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, you know, 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.

Thank you so much.

Thank you.

We have our next question from the line of Kusha from Vivo Commercial. Please go ahead.

Yeah, congratulations for the good set of numbers.

Sorry to interrupt you, Kush. Can you please speak actually louder?

Yeah, my question would be related to the future outlook of the polymer, as there has been news by the government or in the news that there has been tool-out of new polymer sheets of the cache. So, I just want to understand the future outlook of what would be the polymer, as you are saying, for your view, as a cache logistics business.

I think, um... 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 10, 20s, 50s, and may possibly go through this, but typically 10, 20s, and 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 an RBI statistic, they said the life of an Indian currency note is about 11 months on average. Which means the 100s, 200s, and 500s possibly last a little bit longer, because the frequency of handling is a little lesser, and the lower denominations 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 lifecycle cost of currency printing and handling. So, right now, if India is incurring roughly about 5,000 crores in currency printing annually, the polymer may have a slightly higher upfront cost, but over a longer-term period, it should reduce this. In UAS, I think the implications are a lot lesser, because ATMs are still not configured for doing some of the lower denomination, right? There are still 100, 200, and 500. But in terms of some of the work that we do for our CIT work and the currency chest 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 three to five years, I guess, would be, it would take time. More or less three to five years or more than five years from the point of view.

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

Okay, okay. Thank you so much. That's for myself.

Thank you. We have our next question from Lino, Manav Batra, from Desvilado Advisory. Please go ahead.

Hi, Mr. Prime Audible.

Yes, please go ahead with the questions.

Yeah, thank you for taking my question.

I just had one question around the CAPEX. The FI26 CAPEX was around 350 euros and the guidance for FI27 is around 100 to 125 euros. So, does that mean that the CAPEX that has already been done in 2020, it's like, is it enough for F-27, or are you becoming more

selective on the incremental deployment?

The FI26 Capex was mainly for the order distribution, but we won around 2,000 crore rupees of orders. This year, as we have earlier also explained that we are not going for the transition-based BLA model, etc. So we are focusing more on the Hawkeye and Algo's platform, where the investment we are looking for. That is the reason the Capex investment has reduced to 100 to 125 crore rupees.

Okay. Okay. Understood. Thank you. Thank you. Thank you.

Thank you. We have our next question from the line of Priyam Srivastava from MyCapital. Please go ahead.

Hi, thank you so much for the opportunity. So, I understand there are 1,000 banked ATMs that have not yet outsourced cash logistics. So, what would you expect the pace of outsourcing for those ATMs to be? And also, are there any ongoing tangles or advance negotiations for outsourcing deals?

Sorry, could you just repeat the last part of your question? It wasn't very clear. Ongoing tenders.

Yeah, so I wanted to ask if there are any ongoing tenders or advanced negotiations for these outsourcing deals?

Yeah, if there were, I don't think I would be able to talk about them, given that ultimately there's a competitive element to it. But in all seriousness, I think... If you look at the longer-term trend of what the outsource market has been, I go back 10 years, I think that was closer to about 50%. Right now, I think it's closer to 60%, 65%. So generally, the theory is that as and when the public sector banks primarily, and when I look at these 100,000 ATMs, they would be primarily split into two cohorts. They would be the public sector banks. Where the on-site ATMs, which are co-located to the bank branch, are serviced by themselves, and then you would have the white-level ATMs companies, which typically fulfill a bulk of their ATMs through what we call the franchisee model, where, you know, effectively it is managed in a much more decentralized manner. I think the public sector bank number would be closer to 75,000, which are managed by themselves. And with each RFP cycle, a larger percentage of this keeps getting outsourced. And I think that's a trend that we've been seeing, and we'll continue to sort of see that. Coming to your second part of your question, from an industry RFP pipeline, I think two things I would call up. The first is FY26 was mostly when RFPs had taken a pause. In 27, we started seeing the banks get back into the refresh cycle. In Q1, we won two of those RFPs for, you know, replacement and growth of about 1,000 recyclers for banks. Between Q2 to Q4, we continue to see a fairly healthy RFP pipeline on the resectler side. The other area where I think we are quite excited looking at the RFP pipeline is, especially in our payments and technology parts of the business, where across both Hawk AI, the enterprise solution, which is what we sell into the bank branches, and the Algo MVS, both of those seem to be sort of having a fair degree of activity.

Okay, got it.

Thank you. A reminder to all participants, if you wish to ask any questions, you may press star and one on your touchtone phone. We have our next question from the line of Praveen Kumar from Acutex Capital Advisors. Please go ahead.

Yeah, hi. Thanks again for the opportunity. My question was on the EBIT margins. I mean, while on a YOY basis, EBIT margins are better, but due to the higher depreciation, EBIT margins have been lower. So I just wanted to get a sense of where do you see the fruits of the investment coming through and improving our EBIT margins back, hopefully back to the FI 25.

Also, this quarter, the depreciation was higher due to the FSS acquisition and the higher capacity we have done in the Q4, mainly in the Hawkeye and the Algo product development.

The FSS, we believe that the FSS integration and the synergy

benefit will start from H2 onwards. As well as the Hawkeye and Algo product development across what we have incurred, there is a lot of pipeline which are there, and Rajiv has mentioned that we are expecting a high degree of growth in that particular segment, which will give us a better result, and in the H2 or the coming year, the benefit will come.

I think Rohit does to summarize the answer, the depreciation of the ratio should trend back to a better level in FI 28, but in H2, you should start seeing a lesser percentage and then getting better in FI 28. I think the way you should think about it, there is an acquisition link cost where the returns will come in, hopefully in H2 itself. That is the track record we have when we did security. And as per Hawkeye, we, there are a couple of large bits. Pipelines right now, depending on bidding process and if we win them, I think that will help us get good revenue where the development cost has already been mostly entailed.

Understood. My next question was broadly on capital allocation. I just wanted to get a sense of how are you thinking about capitalization at this point in time. I understand that you have referred to spending more on technology and investments in technology from here on. But, you know, given that we have already done a buyback a few months back and the stock, if at all, is somewhat cheaper compared to then. I understand that you can't do a buyback for some more time, but I wanted to get your broad thoughts on how you are looking at capital allocation.

At the board, we discussed, you know, both capital allocation plans are thinking and the buyback is a result of that at the last quarter. You know, buybacks at that time were done with, you know, at some premium to market prices, right? Where we stand right now, I think we have roughly about 400% of cash on books. Looking at our cash flow generating capacity at the end of the year, I would see that We will always keep a buffer with us to invest for inorganic opportunities. We have been working in inorganic opportunities to diversify the business and also move more into tech and payments. That's an area of serious interest. That's something which we have maintained. There are opportunities there, but the pricing and the value is what we keep focusing on. I think anything which is surplus other than what we think we need realistically in the next one, one and a half years would already return through a mix of dividend and, you know, if… I think I would refer to my letter, which I wrote two, three months ago. I think that's the principle we'll follow. I don't think every quarter there'll be dramatic change to the way we think. I think we'll look at it only towards the end of the year.

Understood. Thank you. Thank you. We have our next question from the line of Amit, an individual investor. Please go ahead.

Hi, I'm out of it.

Yes, Amit, please proceed with the question.

Okay, so just a data keeping question. What was the CAPEX for Q1 net of CWIP? And also, if you were to look at CAPEX, since historically, we've talked about CAPEX as a block of two to three years. So what's the CAPEX plan for, let's say, the FI 27 to 29 block? And how much of this is estimated to be, say, growth towards growth?

So, last year, we have done a capex of 350 crore rupees. The year before, the capex was much lower. That's the reason that it was 350 crore rupees. And we have explained that we are expecting a capex of around 200 crore rupees year on year basis, if you will say over last 4-5 years. This year, we are giving a guidance of around capex of 125 crore rupees, mainly in the tech business. Right now, based on how there is a lot of opportunity, especially in the tech and Algo MVS side, if that comes, right now, whatever the visibility we have, we have given the estimate based on that. If that comes, the capex may increase, but right now, looking to that, it should not cross more than 200 crore rupees.

Okay.

Thanks. That's quite helpful. Thank you.

Thank you. We have our next question from the line of Shivaram Prasad, an individual investor.

Please, go ahead.

Baby, within one year, I have to...

That is a diversion, huh? Shivaram, are you there? We have a next question from the line of Drew, an individual investor.

Thank you.

I'm going to go along the lines of capital allocation. I think one of the things that I was concerned about being an individual investor is that despite the company doing well and producing strong cash flows, I think stock is trading at extremely low multiples, forward multiples of all. Mr. Barr's 10 to 12x on a PE basis. So I was just wondering, how is the management thinking about rewarding shareholders, especially given the fact that there was a buyback, which was done right now, and the stock reaction, the market reaction to that, it's still not very positive. So just wondering if there are any further thoughts on that.

And for our management to answer, we will obviously focus on what we can do, which is run a good quality business and deliver growth in line with it. Markets over time should hopefully normalize. Thank you for your patience on holding the stock. I don't think the buyback is, I don't think you should think in terms of the buyback as a reward. I think you should think it just as a way to, you know. Give back the capital, which we don't need, either through a dividend or a buyback format, where we felt the stock was very cheap and therefore it makes sense to invest and own stock. If we are able to perform on a journey and as the business continues to grow, we hope the stock price will reflect a fair multiple in the coming year.

Good. Thank you.

Thank you. We have our next question from the line of Komang Shah from Banyan Tea Advisors. Please go ahead.

Hi, thank you for the opportunity again. Sir, we are guiding for strong double-digit growth. In this, I am understanding that Hawk AI and Algo NDS will be having a larger chunk of growth. Would we also have a similar growth in brown-label ATM product business also?

I think our capital allocation from a business perspective, I think we're fairly clear on the way we want to focus and the way we would not want to invest incremental capital. The transaction, ATM, BLA business is clearly one. I think we've been very vocal about this in the past, and we continue to maintain the same position going forward. This is not an area we would look at investing our capital at all. I think if there are interesting opportunities around fixed-fee outsourcing and working with high-quality banks, we will look at it. But from our business and growth, I think we'll be very choosy and try to direct an outsourced proportion or outsized proportion of our investment towards taken payments.

Understood. And second question here was, we also see consolidation happening in the managed services space with you guys, we are acquiring FSS. With this consolidation also happening, do you see more public sector banks looking to outsource their ATMs to players like us?

There are multiple types of orders and deals which come up there. We will see, and we've said this before, we will see a big shift in newer contracts to either fixed-free models. Because I don't think the industry is going to be bidding for transaction models anymore. And when they come to fixed fee, these will be integrated contracts, right, from supply to management of managed services, cash management, whatnot. We are amongst the one of the two players who have these services in-house. Will that result in a bigger win rate? Logically, yes. But again, we don't know how people will compete at what prices. The fact that we've had a fairly decent track record in the last 12-18 months of the VINs is a reflection of the nature of the services being offered from us and the quality and also the pricing. So, over time, do we see fewer companies doing majority of the work? I do think so. But let's see how these RFPs come and how the win rate is.

Got it. Got it. And just last clarification, you mentioned that private sector renegotiation will end by Q2. We are targeting closure by Q2. Public sector banks, you mentioned that IBA is constituting a committee. Any idea by when can the rates be transitioned or by when can we get the rates increased?

I mean, from our side, I think the ideal goal is to have it happen as soon as possible. And, but again, given the... Given the nuances of managing a complex set of customers with multiple legacy contracts and RFPs, which are fairly binding on them, I think we're just being a little cognizant of that and, you know, still hoping to close as soon as possible. But, you know, I think why don't we come back to you and hope that by the end of Q2, we should have a more positive update.

Understood. Thank you so much. All the best.

Thank you. We have a follow-up question from the line-up. Krushi Parekh from Bajal Rock, please go ahead.

Yeah, I just, if you guys can give a sense on when most of the, you know, the contracts are coming up for the renewals over next two, three years, whereby, you know, you may look for upgradation cycle and maybe even integrate our managed services along with those contracts.

So, that is the first question. Um...

So, just trying to, you know, so for the contracts which CMS is directly servicing as a managed service partner, I think those are fairly long-term contracts, and given that this is a business that has just scaled up in the last two, three years, I think they're some time away from having a cliff in terms of the renewal cycle. As far as some of the other banks are concerned, I think they've sort of, you know, are more spread out. You know, come up as different opportunities through the year. Again, our goal is simple, which is being one of the largest market participants with an ability to deliver into an integrated service of a very high quality. We just continually keep betting on the fact that our incremental wins should be higher than our current market share, leading to, you know, continuing to grow that share of business.

Okay.

And secondly, in terms of gaining share in the retail sector,

especially when it comes to our direct efforts,

how are we doing that right now? And what is something, what is it that we are looking to do in the near future, which is one year? I specifically remember we were looking to gain, share. So, you know, aggression was our strategy to gain volumes over here.

No change in the strategy or approach, Krish. I think we continue to be very focused on that. I think if I look at our current number of logos, there will be around 170 to 175 logos that we're working with. So every quarter, every month, we continue to chip away and keep adding to our set of customers that we work with. I think the solution and the offering that we have there is fairly compelling and quite solid. Having said that, there is also a constant effort to try and work on improving overall yield and realizations. Simply put, as we keep widening the base of the pyramid, you will tend to sort of pick up a mix of businesses. It takes a while, six months, one year, or maybe longer to evaluate what is really fitting into our core thesis versus not. So we continue to be very focused and very aggressive on that.

Thank you, Anush. Thank you. Ladies and gentlemen, thank you for joining the call. That was the last question of the day. On behalf of JM Financials, that concludes the conference. Thank you for joining us, and you may not disconnect your lines.