AGS Transact Technologies Ltd Management Discussions

Global Economy

The global economy remains remarkably resilient, with growth holding steady as inflation returns to target. The journey has been eventful, starting with supply-chain disruptions in the aftermath of the pandemic, the Russian- Ukraine war that triggered a global energy and food crisis, and a considerable surge in inflation, followed by a globally synchronized monetary policy tightening. Despite many gloomy predictions, the world avoided a recession, the banking system proved largely resilient, and major emerging market economies did not suffer sudden stops. Moreover, the inflation surge—despite its severity and the associated cost-of living crisis— did not trigger uncontrolled wage-price spirals. Instead, almost as quickly as global inflation went up, it has been coming down. On a year-over-year basis, global growth bottomed out at the end of 2022, at 2.3 percent, shortly after median headline inflation peaked at 9.4 percent. According to the latest projections, growth for 2024 and 2025 will hold steady around 3.2 percent, with median headline inflation declining from 2.8 percent at the end of 2024 to 2.4 percent at the end of 2025. Most indicators point to a soft landing.

Faster disinflation and resilient growth ind?cate positive supply dynamics, such as the abatement of previous energy price shocks and the remarkable labor supply rebound fuelled by robust immigrant flows in many developed economies. Inflation expectations have been stabilized in part by decisive monetary policy actions and enhanced monetary policy frameworks, particularly in developing market nations. In nations like the United States, where a higher percentage of fixed-rate mortgages and lower levels of family debt since the global financial crisis may have lessened the drag on aggregate demand up to this point, the transmission of monetary policy may have been more muted this time around.

The immediate goal of central banks as the world economy gets closer to a soft landing is to make sure that inflation rises gradually, without going too far in the other direction and hitting target undershoots. In addition, as central banks become less interventionist, there needs to be a renewed emphasis on medium-term fiscal consolidation in order to restore flexibility in the budget and prioritize investments while still maintaining debt sustainability.

Indian Economy

Indias economy surprised observers in the fourth quarter of 2023, growing 8.4% over the previous year thanks to increased government spending and investment. In February 2024,

Indias composite purchasing managers index (PMI) was 60.6, significantly higher than the world average of 52.1, suggesting growth. The Reserve Bank of Indias (RBI) goal range for inflation has been maintained, and the financial environment has remained supportive.

December 2023 saw a 14% year-over-year (YoY) increase in domestic credit issuance to the commercial sector, and financial soundness metrics continued to improve. The yearly rise in foreign reserves up to January 2024 was 8%.

Recent years have seen a sharp rise in digital payments, thanks to efforts by the Government of India that have been coordinated with all stakeholders. The Ministry of Finance stated that the Government in coordination with RBI continuously aims to make digital payments user friendly while ensuring payment security. The efforts taken include, inter alia,

i. conversational payments in UPI which enables users to engage in a conversation with an AI-powered system to initiate and complete transactions in a safe and secure environment,

ii. offline payments in UPI to increase the speed of small value transactions on UPI,

iii. expanding the scope and reach of e-RUPI vouchers,

iv. Linking RuPay Credit Cards to UPI, and

v. Interoperable Card-less Cash Withdrawal (ICCW) at ATMs.

Indian Economy Outlook

High-frequency indicators (HFIs) showed strong performance in July and August of 2023, and the growing momentum from the first quarter was maintained in the second quarter of FY 2023-24. Indias favourable forecast for economic growth and rising employment rates is reflected in the countrys relatively good position in the external sector.

Indias economic story in the first half of the current fiscal year demonstrated the governments unwavering support for capital investment, which increased by 37.4% in 2023-24 over the same period the previous year. Capital expenditures took the lead in the 2023-24 budget, with a sharp increase of 37.4% in BE 2023-24 to 10 Lakh Crores (US$ 120.12 Billion) compared to 7.28 Lakh Crores (US$ 87.45 Billion) in RE 2022-23. The current year had a 1.2% increase in the revenue expenditure to capital outlay ratio, indicating a clear shift in favour of higher-quality spending.

Enhanced tax compliance, more business profitability, and a rise in economic activity all led to stronger revenue generation and higher levels of capital spending. In February 2024, the Finance Ministry announced the total expenditure in Interim 2024-25 estimated at 47,65,768 Crores (US$ 571.64 Billion) of which total capital expenditure is 11,11,111 Crores (US$ 133.27 Billion).

Indias exports increased at the second-highest rate since its strong rise in spite of the global pandemic, with a year-over-year (YoY) gain in merchandise exports of 8.39% and a growth in service exports of 29.82% through April 2023. Supply networks are being restored as port congestion decreases. The impact is already seen in the June 2022 CPI-C inflation drop. CPI-C inflation decreased to 5.02% in September 2023 (Provisional) from 7.01% in June 2022. Overall, inflationary pressures in India appear to be decreasing due to a proactive set of administrative measures taken by the government, flexible monetary policy, and a softening of global commodity prices and supply-chain bottlenecks.

Indian Banking and Payments Industry OverView

The past few years has been instrumental for India in the banking sector due to a period of low non-performing assets and sufficient capital and liquidity cushion. The Reserve Bank of India (RBI) believes that the banking industry in India is adequately capitalized and subject to strict regulations. The nation has significantly better financial and economic circumstances than any other nation on the planet. Studies on credit, market, and liquidity risk indicate that Indian banks have fared well during the global financial crisis and are generally robust. Through the initiatives undertaken by the RBI to promote and boost digital infrastructure in India the India banking system has undergone a revolution with the introduction of different payment instruments and the changes in consumer preferences and the shift to digital modes for various transaction types.

New banking concepts such as payments and small financing banks have recently been introduced to the Indian banking sector. Through various initiatives such asthe Pradhan Mantri Jan Dhan Yojana and India Post Payment Banks, the country has also concentrated on expanding the reach of the banking system in recent years. These programs when paired with significant banking sector reforms like neo-banking, digital payments, the growth of Indian NBFCs, and fintech, have greatly improved Indias financial inclusion and fuelled the nations credit cycle.

Given the ongoing efforts of the Reserve Bank of India (RBI) and National Payments Corporation of India (NPCI) to introduce

innovative features, such as the rise of UPI payments, have been a major contributor to the overall success story of digital payments in India. This growth trajectory is anticipated to continue in future. The success of UPI is evident from its widespread adoption, not only in India but also internationally, as new partnerships are formed.

In the past few years, digital payment methods have expanded rapidly. Consequently, traditional paper-based instruments like demand drafts and checks now make up a very small portion of both the volume and value of payments.

Over a ten-year period, the digital lending market in India grew at a CAGR of 39.5%. By 2030, it is expected that the digital consumer lending market in India will have grown to over US$ 720 Billion, or around 55% of the US$ 1.3 Trillion total digital lending market opportunity in the nation.

India has become a leader in digital payments in recent years because of the creation of an environment that makes it easier to embrace and use digital payment modes. The volume of digital payments transactions increased by 44% in a year from 113.9 billion transactions in FY 2022-23 to 164.4 billion in FY 2023-24.

Cash in Circulation

Cash in circulation refers to the total amount of physical currency in the form of banknotes and coins that is actively used and available within an economy. It is a key indicator to determine the overall liquidity within a countrys financial system. Cash remains an indispensable part of the economy as evident with the increase in cash in circulation, more than doubled from 13.35 Lakh Crores in March 2017 to 35.15 Lakh Crores in the end of March 2024. Cash remains a widely used form of payment and with an increased economic activity often leads to higher demand for cash as people engage in more transactions. Also, the Reserve Banks assessments on currency in circulation shows that currency demand often tends to be higher during festivals and prior to big elections underscoring the importance of cash in the system. Thus, cash in circulation reflects the ongoing for physical currency within an economy and remains an essential component of the financial system, alongside digital payment methods.

Bank accounts opened under Government of India Pradhan Mantri Jan Dhan Yojana have deposits of over~US$25.13 Billion in beneficiary accounts. About 51.11 Crores beneficiaries have banked till 15 December 2023.

CRMs / ATMs

Automated Teller Machine (ATM) is a self-service banking outlet. Customers can withdraw money, check balances, or even transfer funds at ATM. Different banks provide their ATM services by installing cash machines in different parts of the country. They can withdraw money from any of these machines whether or not they are an account holder in the same bank.

The Cash Recycler machine (CRM) is a self-service terminal that lets customers make deposit and withdrawal transactions of cash. All successful transactions are immediately credited or debited in real time and they will be issued an acknowledgment slip confirming the transaction. CRMs in India have RBI supported note identification protocols and mechanisms.

The Indian Managed Services and Outsourcing industry has been playing a key role in faster expansion of ATM network to achieve the last mile financial inclusion.

There are about 126,116 on-site ATMs and Cash Recycling Machines (CRMs) and 92,699 off-site ATMs and CRMs as of March 2024.

The need for cash for most payment transactions complemented with the withdrawal through ATMs indicates a significant usage of ATMs. The need to address under penetration in Semi, rural and urban areas as well as the shift from capex to opex models for banks acts as growth drivers for the ATMs in India.

The ATM sector is experiencing a positive revival with an increase in the deployment of Cash Recycler Machines (CRMs), fresh pipelines for request for proposal (RFP) by both public and private sector banks, and the introduction of e-lobbies or digital banking units (DBUs). These developments are set to revolutionise the banking experience for the average Indian, offering transformative changes in the near future.

OverView of Digital Payments in India:

India is fast becoming a financially inclusive nation through successful adoption of digital payments, by Indian consumers across urban and emerging cities. Lowering transaction times and improving the consumer experience overall have been made possible by actions taken by the RBI, the government, and financial institutions. Over the past ten years, digital payments have grown at an unprecedented rate in India. By removing the difficulties associated with cash transactions, the use of digital payments is promoting the expansion of other industry sectors. Everybody benefits from digital payments, from a big corporation to a little neighbourhood kirana business. At the forefront of this growth story, UPI continues to represent more than 75% of digital retail payments made in India.

To support future expansion, other payment methods like Central Banking Digital Currency (CBDC) are also being developed. Adoption of CBDC has the power to transform business transactions and open the door for the development of digital payments for particular use cases in retail and wholesale.

UPI

UPI (Unified Payments Interface) payment system eliminates the requirement for account numbers or IFSC codes, ensuring transactions occur in real time, with payments being credited into bank accounts instantly.

UPI started in FY 2016-17 as a payment method for small ticket-size person-to-person (P2P) and person-to-merchant (P2M) transactions. It has now expanded to a mode for real- time cross-border payments, as well as cash withdrawals from ATMs. Further, PPIs can also be integrated with UPI for seamless payments on third-party apps. In India, UPI constituted more than 78% of all retail digital payments and it is expected to contribute 90% of total retail digital payments in India by FY 2026-27. In FY 2023-24, transaction value of UPI payments reached 200 Trillion and transaction volume stood at 131.12 Billion

Cards - Debit Cards and Credit Cards

The card industry contin?es to grow at a rapid pace. Debit and credit cards continu? to be among the most widely used forms of payment for online retail transactions. The number and val?e of credit card transactions reached 3.5 Billion and 18.3 Trillion, respectively, in FY 2023-24, demonstrating the continued growth of credit cards. In FY 2022-23 debit card transactions fell 13% in terms of volume and 1% in terms of val?e YoY. The trend is expected to contin?e in FY 2023-24, as the transaction val?e of 5.9 Trillion and transaction vol?me of 2.2 Billion both reflect this. The recent history of digital payments in India demonstrates credit cards increasing pop?larity. Monthly data reveals that in Jan?ary and thro?gho?t FY 2023-24, credit card transaction vol?mes exceeded debit card transaction vol?mes.

This change is mostly due to the availability of an interest-free credit period ranging from 30 to 45 days, as well as additional features like reward points and cashback, in addition to numerous other savings options. The widespread ?se of credit cards, together with technological advancements like contactless cards and UPI on credit cards, have contributed to the expansion of both the c?stomer base and transaction vol?me.

Transaction volume of cards (Billion)

UPI on credit cards

The usage of credit cards and UPI payments has increased, and the merger of the two payment methods is generating excitement in the ind?stry. C?rrently, this facility is available on R?Pay Credit cards only. C?stomers now have greater freedom as they can now utilize UPI in rural areas where merchants were previously unable to accept credit cards due to unavailability of point of sale (PoS) machines and merchant discount rate (MDR) rates. Paying ?sing a UPI card earns reward points and cashback. F?rthermore, initiatives s?ch as zero f?el s?rcharge for UPI transactions will further encourage consumers to spend more and save more.

Prepaid instruments (PPIs)

Paying with prepaid cards is emerging as an alternate payment option. Prepaid cards are freq?ently ?sed for online transactions in India as a res?lt of the co?ntrys remarkable advancements in the e-commerce sector over the past ten years, which is mostly d?e to the co?ntrys growing ?sage of smartphones and the internet. An additional advantage is that these instr?ments can be opened with ease and restrict direct expos?re to ?sers bank acco?nt. PPIs processed 7.8 Billion transactions totalling 2.8 Trillion in FY 2023-24. In the f?t?re, it is anticipated that the n?mber of transactions wo?ld rise at a CAGR of 7%. The n?mber of wallets and digital gift cards iss?ed by FinTechs has increased significantly, which is the main driver of the expansion in transaction vol?me. With new initiatives from the Government of India such as openloop prepaid cards like the NCMC, and integration of UPI on PPIs through third party apps, prepaid card adoption is expected to increase. Expense Management thro?gh PPI is also expected to increase use of prepaid cards as it provides better control with minim?m risk.

Transaction volume of PPIs (Billion)

Innovation and Developments:

Digitalization of Agri-finance was conceptualized jointly by the Reserve Bank and the Reserve Bank Innovation Hub (RBIH). This will enable delivery of Kisan Credit Card (KCC) loans in a fully digital and hassle-free manner.

In Union Budget 2023, the KYC process has been proposed to be streamlined by using a risk-based strategy rather than a one size fits all approach.

According to data released by the National Payments Corporation of India (NPCI), UPI transactions reached 10.241 Billion until 30 August 2023.

Policy Support:

The RBI has launched a pilot to digitalize Kisan Credit Card (KCC) lending in a bid for efficiency, higher cost savings, and reduction of TAT. This is expected to transform the flow of credit in the rural.

In November 2022, RBI launched a pilot project on central bank digital currency (CBDC).

In Union Budget 2023, a national financial information registry would be constructed to serve as the central repository for financial and ancillary data.

In March 2023, India Post Payments Bank (IPPB), in collaboration with Airtel, announced the launch of WhatsApp Banking Services for IPPB customers in Delhi.

National Payments Corporation India (NPCI) launched UPI lite which provides offline UPI services for digital payments. Payments of up to 200 (US$ 2.67) can be made using this.

In September 2023, IREDA partners with banks to boost renewable energy projects in India.

Regulatory Framework

The Reserve Bank of India (RBI) plays a critical role in regulating and ensuring the stability, security, and efficiency of the digital payments industry in India. It is essential for all the parties involved in the digital payments, including banks, payment service providers, fintech companies and other financial institution to be compliant with the RBI guidelines. It aims to balance innovation with security and consumer protection, fostering a robust and inclusive digital payment environment. It is mandatory to report various operational, financial, and compliance-related information to the RBI on a periodic basis. This includes transaction volumes, security incidents, and compliance audits.

A growing number of counterfeit websites and merchants attract clients by providing goods and services at deeply discounted prices. Various platforms, including social media, information and media-sharing services, and goods platforms, are susceptible to fraudulent access.

As the number of options for digital payments has increased parallelly has also increased in the number of fraudulent transactions. UPI has witnessed a higher share of fraudulent transactions in terms of volume but is substantially lower in terms of the ticket size as compared to other modes of payments.

The government in collaboration with RBI has launched various initiatives such as:

Consumer Education and Protection Department (CEPD):

The department will run various awareness programmes throughout the year to educate end consumers.

RBIs fourth cohort on ‘Prevention and Mitigation of Financial Frauds:

The RBI shortlisted six entities that will test their products in the sandbox environment. These entities use AI and ML technologies to build solutions that aim to prevent and mitigate traditional and new types of frauds.

Amendment to Know Your Customer (KYC) master direction:

The RBI released an amendment to its KYC master direction circular to guide registered entities on enhancing their KYC process.

Fraud reporting and sensitisation of NBFCs:

This reporting system has been introduced by the RBI for NBFCs to report fraud cases.

Apart from these initiatives, the RBI has also launched various technology frameworks to curtail financial fraud such as Utkarsh 2.0, DAKSH and Centralised Information Management System (CIMS).

Indian Banking and Payments Industry Outlook:

The banking industry is anticipated to grow further as a result of increased infrastructure spending, swift project delivery, and ongoing reforms. As fast expanding enterprises will need loans from banks, it appears that Indias banking industry is well-positioned for strong development. Technology progress has made online and mobile banking services more popular. The banking industry is placing more focus on offering their customers better services and modernizing their technological

Source:

1. IMF World Economic Outlook, 2. Ministry of Finance, 3. Livemint, 4. IBEF, 5. RBI, 6. PWC: India Payments Handbook

infrastructure in order to improve customers overall experiences and provide banks a competitive edge.

By 2025, the Indian fintech market is projected to be worth $150 Billion USD. The worlds third-largest FinTech ecosystem is located in India. Over a ten-year period, the digital lending market in India grew at a CAGR of 39.5%. By 2030, it is expected that the digital consumer lending market in India will have grown to over US$ 720 Billion, or around 55% of the US$ 1.3 Trillion total digital lending market opportunity in the nation.

Company OverView

AGS Transact Limited is one of the largest integrated omnichannel payment solutions providers in India, catering to banks & corporate clients across retail, petroleum, ecommerce and fintech sectors.

With approx 486,400+ customer touch points across 2,200 cities and towns, it has established leadership position in the Indian ATM Industry: being the second largest ATM managed service & cash management company in India.

Also, it is one of the largest deployers of PoS terminals at petroleum fuel retail outlets in India. In addition to the physical presence, the Company has built digital payment platforms such as Ongo. To leverage these offerings and to stay ahead of the curve the Company has built a dedicated in-house infrastructure & technology capabilities with the ability to innovate and offer customised payment solutions.

Our payment solutions segment includes cash and digital solutions, wherein, the cash segment includes ATM/CRM Outsourcing Business and Cash Management Solutions.

BUSINESS SEGMENT OVERVIEW Payment Solutions - Cash:

Under this segment we deploy ATMs / CRMs on behalf of the banks on a transaction or a monthly fee based model. This is the lucrative option for the banks as it allows them to focus on the core operations and outsource this function to the third party. The revenue contribution under this segment is 9,817 Million for FY 2023-24 and will continue to grow. The growth is driven by the expansion of the banks as more branches are added it provides significant opportunity for the company to cater to the increasing demand.

Under the Cash Management Services through our wholly owned subsidiary Securevalue India Limited (SVIL) we offer cash management services like vaulting services, bullion management and cash processing through a fleet of 2,370+ secured Cash Vans (DCVs) across 38,418 ATMs in 1,800+ locations. This is a cost-effective option for the banks and this operation is mainly outsourced to the third parties. The revenue contribution under this segment is 4,325 Million (gross) in FY 2023-24. The growth

is mainly driven by the expansion of the vaults, ATMs / CRMs in the banking network.

Implementation of Cassette Swapping in ATMs/CRMs:

There are consistent efforts by the RBI as an initiative to implement the use of cassette swaps as it will security and reduce accounting discrepancies and will eliminate the current practice of open cash replenishment. The implementation of the cassette-swap mode has been delayed multiple times due to disagreements among banks, CITs, and managed service providers over the execution and cost of the system.

Payment Solutions - Digital:

Under the digital payment segment our brand Ongo offers state-of-the-art and creative omni-channel merchant digital payment solutions. A payments platform, customized solutions, and associated services for end users, merchants, banks, bank agents, and other ecosystem partners make up our digital payments solutions.

The merchant services which are available on our Ongo digital payment platform, consist of device-based and device-less payment solutions, co-branded prepaid card issuance, prepaid and loans against card receivables loyalty programs, Cash@ PoS, and other value-added services. We powered the National Common Mobility Card or NCMC, an open-loop Prepaid Rupay Card issued by RBL Bank for Bangalore Metro Rail Corporation, countrys second largest metro line. We have also recently launched instant ready-to-use NCMC cards namely Ongo Ride at Chennai metro which can be purchased via unique card dispensers installed across select metro stations. Additionally, we launched an open-loop co-branded prepaid cards on our PPI license for a Patanjali Ayurved Limited. Further, we will soon launch an open loop program in collaboration with one of the leading OMC on a PAN India basis after successful pilot testing on the Ongo app and in discussion with the Indian Oil Corporation Limited for the commencement of on demand delivery of fuel. This solution is powered through the digital app created by the AGS.

On the acquiring side, we offer a payment platform that takes payments via a variety of methods, such as contactless, chip and pin, magnetic stripe, Bharat QR, and Unified Payment Interface ("UPI"), which we believe sets us apart as a merchants preferred partner.

In addition we provide a secure transaction switching platform for providing integrated payments processing, card management and merchant solutions.

The revenue contribution is 2,968 Million in FY 2023-24. This growth is driven by leveraging our existing presence in the consumer-oriented sectors and the acquisition of new merchants through the focused efforts ofour sales and marketing team.

As of 31 March 2024 Number of PoS termin?is

Key Initiatives:

The Reserve Bank of India has taken steps to reg?late and enhance the Indian Financial system and includes measures to promote financial inclusi?n, enhance digital payments and strengthen regulatory frameworks. There are certain initiatives that the RBI is encouraging to promote and give further push to

boost digital infrastructure in the country like RBI has proposed to permit the linking of prepaid payment instruments (PPIs) with third-party unified payments interface (UPI) applications to make the digital wallet market more compatible, enabling UPI for cash deposit facility distribution of Central Bank Digital Currency (CBDC) through Non-Bank Payment System Operators.

Enabling UPI for Cash Deposit Facility:

Deposit of cash through Cash Deposit Machines (CDMs) is primarily being done through the use of debit cards. To make it easier to deposit cash Given the experience gained from card-less cash withdrawal using UPI at the ATMs, it is now proposed to also facilitate deposit of cash in CDMs using UPI. This measure will further enhance customer convenience and make the currency handling process at banks more efficient.

UPI Access for Prepaid Payment Instruments (PPIs) through Third Party Apps:

At present, UPI payments from Prepaid Payment Instruments (PPIs) can be made only by using the web or mobile app provided by the PPI issuer. It is now proposed to permit the use of third- party UPI apps for making UPI payments from PPI wallets. This will further enhance customer convenience and boost adoption of digital payments for small value transactions.

Distribution of Central Bank Digital Currency (CBDC) through Non-bank Payment System Operators:

The CBDC pilots are currently in operation with increasing number of use-cases and participating banks. It is proposed to make CBDC- Retail accessible to a broader segment of users by enabling non- bank payment system operators to offer CBDC wallets. This will also facilitate testing of the resiliency of CBDC platform to handle multi-channel transactions.

The RBI has also encouraged the banks to actively participate in its FinTech initiatives and focus on increasing the penetration of the Digital Banking Units (DBUs) in the country.

Banking Automation Solutions:

Banking Automation Solutions segment covers sale of ATMs and Cash Recycling Machines or CRMs, currency technology products and self-service terminals and related services and upgrades.

We provide complete life-cycle management of ATMs & CRMs after their respective warranty periods have expired and Upgrades & Software for a fixed, one-time fee. Additionally, we stock spare parts for the repair of ATMs, CRMs and other automated banking hardware products.

KEY FINANCIAL RATIOS

Particulars	31 March 2024	31 March 2023	Variance
Current ratio	1.3	1.5	-11%
Debt / Equity ratio	1.2	1.2	-1%
Debt Service Coverage ratio	1.2	1.4	-11%
Return on Equity (ROE)	-12.3%	2.6%	566%
Inventory turnover ratio	13.1	17.7	-26%
Trade receivables turnover ratio	1.6	1.6	-1%
Trade payables turnover ratio	2.0	1.9	6%
Net capital turnover ratio	5.3	4.0	32%
Net profit ratio	-6.1%	1.2%	610%
Return on capital employed (ROCE)	-2.5%	9.6%	-126%
Return on investment (ROI)	7.5%	0.0%	NA