AGS Transact Technologies Ltd Management Discussions

ECONOMIC OUTLOOK Global Economy:

The global economy has shown signs of recovery in the post- epidemic period, despite significant interruptions to economic activity. Major central banks worldwide played a crucial role in assisting policymakers to address rising living expenses and an adverse economic climate. Notably, advanced nations experienced most of the upside inflation surprises, while emerging and developing economies saw more varied outcomes.

This trend has been influenced by several factors, including supply chain bottlenecks, generous government expenditure, competitive labour markets, and a commodities shock brought on unrest globally. Financial markets have experienced notable swings as a result of the ongoing volatility brought on by high inflation, increased recession risks, and uncertainty in monetary policy. In response, major central banks have shifted from loose to tighter monetary policies in an attempt to control inflation. Although inflation is expected to gradually ease in 2023, interest rates will likely remain at peak levels for some time, with significant implications for GDP growth, bond yields, exchange rates, and economic risks. However, thanks to coordinated efforts, there are promising signs of improvement in both inflation and core inflation.

According to the International Monetary Fund (IMF), Global growth is expected to reach 3% in 2024 after a fall to 2.8% in 2023 from 3.4% in 2022. This is driven by a recovery in economic activity supported by strong labour markets, large consumer consumption, and increase in business investment. This impetus exists notwithstanding the turmoil brought on by trade disputes, incremental inflation, and geopolitical conflicts. On the supply side, fewer bottlenecks and falling transportation costs have relieved pressure on input prices and allowed for a recovery in formerly limited industries.

Outlook

The year 2023 is once again characterised by a significant degree of uncertainty. It is anticipated that advanced economies will experience a substantial reduction in the projected growth rate, decreasing from 2.7% in 2022 to 1.3% in 2023. By contrast, it is anticipated that emerging markets and developing economies will undergo a moderate increase in their growth rate, ascending from 3.9% in 2022 to 4.0% in 2023.

The calibration of macroeconomic policies is crucial for achieving a balance between the objectives of enhancing economic output and regulating inflation. It is anticipated that the efficient synchronisation of monetary and fiscal policies will alleviate the possibility of a prolonged and severe economic recession. Enhanced international cooperation is imperative for the optimal utilisation of resources and the prevention of additional disruptions, thereby serving the best interests of all nations.

Indian Economy:

The FY 2022-23 witnessed India maintaining a steady trajectory of economic recovery, continued from 2021-22. The resilience of Indian economy owes it to a host of factors, such as an optimistic business environment and robust industrial output, that has provided a strong momentum for the growth of Indias economy. Several indicators including total GST collections, digital transaction volume, electricity demand, rail & air passenger and freight traffic, petroleum product consumption, and coal production have pointed towards a positive recovery trajectory. Private consumption has rebounded, and overtaken export stimuli as the primary growth driver. This increase in private consumption has further augmented production activity, resulting in higher capacity utilisation across various sectors.

India has experienced notable growth rates for a period of approximately two decades. However, the convergence of various fundamental factors has only recently taken place within the past few years. These factors possess the capability to propel India towards becoming a USD 7 Trillion economy by the year 2030. In addition to the demographic advantage, the implementation of policy reforms aimed at fostering a favourable investment and entrepreneurial climate has played a crucial role in augmenting consumption, investments, and savings.

The consistent growth exhibited by Indias GDP for FY23 not only reinforces the countrys resilience but also positions it as an important player in the global economic landscape.

Within a span of less than ten years, almost the entire populace of the nation has been bestowed with a digital identity, which has subsequently facilitated a digital transformation, resulting in significant enhancements in efficacy across both public and private domains.

With the aforementioned trends serving as a catalyst, the extensive informal sector of the nation is presently undergoing a swift integration into the formal economy, resulting in a rise in asset financialisation. The various alterations in the structure have established a foundation for India to attain the position of the fourth largest economy globally by the conclusion of the current decade.

Outlook

According to projections, India is expected to achieve the status of the worlds fastest-growing major economy by 2023, with a growth rate ranging between 6.5% and 7.0%. India has sustained its status as the most rapidly expanding economy, not only in the FY 2022-23, but is anticipated to maintain this position throughout the year 2023-24. Indias economic prospects remain optimistic as a surge in investments has led to significant growth in factory production, bank loans, and consumer spending. Furthermore, it is anticipated that this economic growth will enhance the trust of businesses and function as a stimulant for amplified investment in the private sector. The prevailing positive outlook and eagerness exhibited by investors are poised to provide additional impetus to the expansion of the Indian economy.

INDUSTRY OUTLOOK:

India has emerged as a dynamic and thriving start-up ecosystem, currently ranking as the third-largest in the world. This remarkable growth and success can be attributed, in large part, to the widespread access to digital payments, digital information, data, and various platforms that have been developed and made available over time.

Despite the stupendous growth of digital transactions led by digital India initiatives of the Government of India, Cash in circulation continues to rise. Indias payment segment will continue to witness co-existence of cash and digital payments, together driving the growth of the overall payment sector.

Government of Indias Pradhan Mantri Jan-Dhan Yojana (PMJDY) was introduced with the aim to achieve financial inclusion by providing all adult Indians with a bank account to realise the benefits of governments direct benefit schemes. So far, about 48.9cr Jan Dhan accounts have been created and have been instrumental in driving total ATM transactions and usage in rural areas. Historically, ATMs have been instrumental in expanding financial services, but their benefits were primarily limited to urban regions. However, with the widespread adoption of PMJDY and the subsequent rise in Jan Dhan accounts, the usage of ATMs has been extended to rural areas, promoting financial inclusion across the country.

During FY23, the ATM/CRMs (Automated Teller Machines/Cash Recycler Machines) industry experienced a notable uptick in growth, primarily driven by a strong demand from leading banks. This growth was evident from the release of Requests for Proposals (RFPs) for more than 20,000+ ATM/CRMs by these prominent banks. The growth trajectory is expected to strengthen in the following year, FY24, with the introduction of a fresh RFP for an additional 15,000+ ATM/CRMs at the start of the fiscal year. This indicates that the industry is poised for further expansion and that leading banks remain committed to enhancing their ATM/CRM networks to better serve their customers.

Cash in Circulation:

The cash in circulation is defined as the total amount of cash kept with banks and currency with the public. Indian economy is highly dependent on cash-based transactions as compared to non-cash transactions or cashless transactions. However, in India usage of electronic payments (for instance, M-wallets, UPI, IMPS, NEFT and RTGS) coupled with increasing penetration of debit/credit/Prepaid cards have created a positive impact. After a dip to 13.5 Trillion in 2017 post demonetisation, CIC has grown rapidly and currently stands over 33.5 Trillion rupees as of March 2023.

Digital Banking Units or DBUs:

The increasing internet penetration across India has accelerated the demand for digital banking. RBI had proposed to set up 75 Digital Banking Units (DBUs) in 75 districts of the country by Scheduled Commercial Banks to further financial inclusion and enhance banking experience for citizens. While DBUs simplify the banking procedure they will also provide a robust and secure banking system. Overall, in the long run, setting up DBUs are more cost efficient for Banks than setting up a Bank branch.

DBUs or e-lobbies are allowing banks to offer customers all banking transactions, information and solutions round the clock through deployment of cash recyclers, cash dispensers and multi-functioning kiosks. E-lobbies deployed by banks provide self-service facilities including cash withdrawals, cash deposits, card-to-card transfers, passbook printing, NEFT, SMS alerts and many such banking services without the help of the physical staff of the bank.

CRM or Cash Recycler Machines:

The Cash Recycler machine (CRM) is a self-service terminal that lets the customer make deposit and withdrawal transactions of cash. All successful transactions are immediately credited or debited in real time and customers are issued an acknowledgment slip confirming the transaction. CRMs in India have RBI supported note identification protocols and mechanisms. The deposited notes are then stored into separate cassettes in the machines automatically for dispensing to the customers.

It is anticipated that the quantity of Cash Recycling Machines will increase from 40,000 during the fiscal year 2022 to 90,595 by the end of the fiscal year 2027. The expansion of Cash Recycling Machines (CRMs) is expected to bolster the revenue growth of the automated teller machine (ATM) supply market in India with the increased requirement in alignment with the automation initiatives at bank branches.

Future Outlook & Projections:

• It is anticipated that with the expansion of the banking services reach to a larger population, there will be a subsequent rise in the volume of transactions conducted. It is anticipated that the ATM managed services will yield a revenue exceeding ? 149.8 Billion by the conclusion of the fiscal year 2027.

• It is anticipated that the revenue will experience growth over the course of the period due to the implementation of Financial Inclusion and Jan Dhan Yojana initiatives, as well as the heightened awareness among residents of semi-urban and rural regions within the country.

• The utilisation of automated teller machines (ATMs) is expected to increase in the future due to the emergence of advanced technologies such as bunch note acceptors and cash recyclers in the market. These machines offer a range of functionalities beyond cash withdrawal, including cash deposit, passbook updates, user KYC, and other features.

• The proliferation of debit cards and the rise in direct benefit transfers are anticipated to result in a notable escalation in cash withdrawals and a subsequent surge in demand for automated teller machines (ATMs) in the future. Consequently, banks may be compelled to outsource a greater number of ATMs to meet this demand.

• It is anticipated that the prevalence of ATM recycling machines will escalate in the future, with banks potentially opting to outsource these machines. Interoperability is expected to have a significant impact.

• In the future, the confidence of consumers is expected to increase with the implementation of a new circular by the Reserve Bank of India aimed at enhancing the security of ATMs.

• The adoption of Cassette swap, as mandated by the Reserve Bank of India, is expected to result in a rise in the revenues generated from Cash management.

• The banking industry is increasingly adopting a branchless banking model, which entails a greater deployment of Cash Recycler Machines or CRM in the near future.

Overview of Digital Payments in India

Aided by its large and thriving information technology sector, the government has digitised not only most of its services, but also enabled stacks for vertical services like payments and e-commerce marketplaces.

The UPI (Unified Payments Interface) is probably the most successful digital payments stack worldwide. Linking all banks and account holders through mobile numbers, it enables individuals to transfer money to each other or to businesses seamlessly. It has now the highest payment transaction volumes globally 2-10 times those of many developed nations.

UPI (Unified Payments Interface) has also been making remarkable strides in expanding its international presence, with successful implementations in Singapore, France, and the UAE.

The latest initiative ONDC (Open Network for Digital Commerce) aims to revolutionise e commerce, by offering a network centric model for connecting buyers and sellers, irrespective of the platforms they originate from, a UPI for online marketplaces.

Each of these initiatives has boosted productivity, sharply reduced transaction costs and leapfrogged the country into a digital era in way unparalleled across the world.

The growth of the digital payments ecosystem has been supported by an expanding e-commerce marketplace and the wider availability of acceptance infrastructure at physical stores. With changing customer preferences, new use cases are being made a part of product offerings. New product offerings developed with technological and infrastructural advancements are ushering in an era of innovative and fast digital payments and nurturing the growth of retail payments.

India is one of the worlds largest growing FinTech markets. Its overall FinTech market opportunity is estimated to be USD 1.3 Trillion by 2025. Banks and card networks are collaborating with FinTechs to redefine product offerings and enhance customer experience, in order to create effective solutions and thrive in the new payments landscape.

Some of the leading mobile-based payment applications, which till recently had UPI and wallets as the only modes, have enabled tokenisation of card details. This can be further leveraged for QR-based transactions where customers will get an additional payment option for cards.

As the number and usage of wearable devices across segments increase, tokenisation will help propel small-value transactions for in-store and transit payments. Also, use cases like IoT in retail, automotive and FMCG will need to leverage tokenisation for embedding card-based payments in the ecosystem.

COMPANY OVERVIEW:

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

With approx. 483,561 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 (Source: Ken Research).

Also, it is one of the largest deployers of PoS terminals at petroleum outlets in India. In addition to the physical presence, the Company has built digital payment platforms such as Ongo & Fastlane. 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 REVIEW

Payment Solutions (Cash):

Under our ATM/CRM Outsourcing Business we deploy ATMs on behalf of banks on a transaction or a fixed fee basis. This is fast becoming a preferred option for banks as they can outsource such an essential function to a professional third-party, scale up faster and more efficiently serve their customers. This business has contributed approximately 47% of our FY 2022-23 top line and will continue to grow.

We offer our Cash management services through our wholly owned subsidiary Securevalue India Limited. We manage approx. 42,426 ATMs in 1800+ locations through a fleet of 2485 secured Cash Vans. Our other cash management services include vaulting services, bullion management and cash processing. It is expected that the share of the outsourcing of currency chest to cash management companies will increase significantly as banks can save approximately 35% to 50% of their expenditure incurred on maintaining the currency chest. This business has contributed approximately 15.5% of our FY23 (revenue from operations) top line.

Cash payment solutions contributed 63% of revenue from operations in FY23. This growth is being largely driven by expansion in our overall cash management network.

Implementation of Cassette Swapping in ATMs/CRMs

In a circular dated April 2018, RBI convened a committee on currency movement to review security of the treasury in transit. To mitigate risks involved in open cash replenishment/ top-up, the committee advised that banks may consider using lockable cassettes in their ATMs which shall be swapped at the time of the cash replenishment.

Securevalue India Limited (SVIL) is one of the few providers to implement the cassette swapping system across multiple ATM locations in Mumbai, Pune and Bangalore.

RBIs MHA Guidelines for ATM Industry

The RBI released certain MHA guidelines in 2018 ("MHA Guidelines") to strengthen security in the cash management industry.

Our wholly-owned subsidiary SVIL is among the few cash management companies to follow complete MHA guidelines on a pan-India basis.

Currency Distribution and Exchange Scheme (CDES)

The RBI has formulated the Currency Distribution and Exchange Scheme (CDES) to ensure that all bank branches provide better customer services to members of the public.

Payment Solutions (Digital)

Our digital payments solutions comprise a payments platform, customised solutions and related managed services catering to end-users, merchants, banks, bank agents as well as other ecosystem partners. In addition, we provide a secure transaction switching platform for providing integrated payments processing, card management and merchant solutions and Fastlane - Indias first mobile fuelling application which utilises advanced RFID technology to enable cashless, contactless, and paperless payment.

Offered on our Ongo digital payment platform, our merchant services include device-based and device-less payment solutions, issuance of co-branded prepaid cards, prepaid and loyalty programs, Cash@PoS, loans against card receivables 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. Additionally, we will soon be launching open-loop co-branded prepaid cards on our PPI license for a leading Indian FMCG conglomerate.

Further, with a focus on the OMC sector, we pioneered an Integrated Payment Solution (IPS) for OMCs. IPS provides us an opportunity to monetise Ongo PoS machines across OMC retail outlets. We have developed an integrated payments proposition for petroleum retail outlets where the PoS machine is connected with the existing fuel automation, to provide control over transactions on the PoS machine. According to Ken Research, in FY22, we were one of the largest deployer of PoS terminals across leading OMC retail outlets in India.

Our Digital solutions segment contributed 17% of the total revenues in FY23. This growth is driven by leveraging our existing presence in the consumer-oriented sectors and the acquisition of new merchants through the focused efforts of our sales and marketing team.

Key Government initiatives

An initiative that has contributed significantly towards adoption of digital payments is the setting up of Payments Infrastructure Development Fund (PIDF). Through PIDF, the RBI has subsidised the deployment of PoS infrastructure (physical and digital modes) in tier-3 to tier-6 centres and north-eastern states as well as J&K and Ladakh regions of the country. According to the RBI report, approximately 1.87 Crores physical and digital payment acceptance devices were set up under the Payments Infrastructure Development Fund (PIDF) Scheme as of December 31, 2022.

MeitY has further alluded that the Government is committed to a multi-faceted approach by way of investing in digital

Sources:

1. India Payments Handbook 2021-2026 (PwC), 2. Decoding Indias credit card market (PwC), 3. RBI Data, 4. Ken Research Report, 5. Payment Systems in India - RBI Notebook, 6. Press Information Bureau (PIB), 7. Deutsche Bank report, 8. Media Reports

infrastructure, collaborating with industry leaders and startups, and privatising digital skilling and education. Digital transformation would allow the country to optimise resource utilisation, reduce waste, and mitigate the environmental impact of activities.

The RBI has allowed interoperability on PPI instruments which enables wallet users to seamlessly transfer funds from one wallet to another (of another issuer) and from their wallets to bank accounts through the Unified Payments Interface (UPI) platform. This will provide better acceptability of PPI instruments by making them integral to a larger financial ecosystem. Further, The National Payments Corporation of India (NPCI) has recently introduced interchange fees of up to 1.1% on merchant UPI transactions done using prepaid payment instruments from 1 April 2023. This is expected to increase the scope and usability of PPI instruments such as wallets, as they can now be used to make UPI payments across QR codes and devices.

BUSINESS SEGMENT REVIEW 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.

BUSINESS SEGMENT REVIEW Other Automation Solutions

We provide technology solutions to customers in the retail, petroleum and colour sectors in our Other Automation Solutions business segment that enables them to provide technology driven automated payments and dispensing solutions to their end customers.

Our Retail Sector Operations include Cash billing terminals and digital signage & related software.

Our Petroleum Sector Operations involve the automation of downstream supply chain operations of petroleum companies, including outlet automation. Further, our service offerings to oil companies comprise operational, implementation and support services, maintenance support services, and remote support services, and software upgrade and customisation services.

Our Colour Sector Operations include automatic paint dispensers capable of delivering the right shade of colour, which we supply to paint companies. We manage the entire life cycle of these machines including deployment, implementation, and maintenance.

KEY FINANCIAL RATIOS

Key Financial Ratios as per SEBI (Listing Obligations and Disclosure requirements 2018) (Amendment) Regulations 2018 with Change of 25% or more as compared to the immediately previous financial year. For detailed ratios, please refer Financial Statements on Page No. 189 and 190.

Standalone Financial Ratios
Ratios	FY2022-23	FY2021-22	Variance (%)	Reason for variance
Current ratio	1.5	1.2	26%	Reduction in current liabilities primarily led to improvement in Current Ratio
Debt Service Coverage ratio	1.4	1.1	32%	Movement in Debt Service Coverage Ratio during the year ended 31 March 2023 was primarily due to repayment of long-term borrowings
Return on Equity (ROE)	2.6%	-14.9%	118%	Company has reported profit during the year ended 31 March 2023 vis-a-vis loss during the year ended 31 March 2022 which has led to the variance in Return on Equity (ROE) and Net Profit ratio
Net capital turnover ratio	4.0	10.0	-60%	Increase in working capital has primarily led to movement in Net Capital Turnover Ratio
Net profit ratio	1.2%	-6.7%	118%	Company has reported profit during the year ended 31 March 2023 vis-a-vis loss during the year ended 31 March 2022 which has led to the variance in Return on Equity (ROE) and Net Profit ratio
Return on investment (ROI)	0.0%	3.4%	-100%	There is no investment in quoted instruments during the year ended 31 March 2023

KEY OPPORTUNITIES AND THREATS

The payment segment presents significant opportunities driven by the increasing digital adoption and government- led financial inclusion initiatives. As more individuals and businesses embrace digital payment methods, payment service providers such as AGS Transact, have a vast potential market to cater to. Demand for ATM/CRM is also witnessing a healthy uptick. This growth is being driven from non-urban regions especially Tier 3, 4 and so on.

However, the payment segment faces cybersecurity risks and potential data breaches due to the growing reliance on digital payments. Further, changes to the existing Regulations will impact payment service providers and could affect our business segments.

INTERNAL CONTROLS SYSTEMS AND ADEQUACY

The Company has a proper and adequate system of internal controls to ensure that all the assets are safeguarded, protected against loss from unauthorised use or disposition, and that transactions are authorised, recorded, and reported correctly. The Company conducts audits of various departments based on an annual audit plan through an independent internal auditor and reports significant observations along with ‘Action Taken Reports to the Audit Committee from time to time. The Company regularly updates its risk management policy to protect the property, earnings, and personnel of the Company against losses and legal liabilities that might be incurred due to various risks.

HUMAN RESOURCES

As of 31 March 2023, AGS Transact has 10,000+ employees (including subcontracted and subsidiaries) across our offices pan India. As the Company is focused on overall growth & expansion of its various business segments, we emphasise on imparting specific skills to the employees across the value chain, through various offline & online training programs. For instance, our field engineers are imparted training on various soft skills as well as business requirements through our internal Learning & Development portal called Digital Smart Learning System (DSLS).

Aligning with the overall companys vision, select KMPs are chosen for specialised training programs/courses designed towards creating future-ready business/strategic leaders. The company strongly supports a diverse and inclusive workforce and is committed towards creating an environment that promotes equal work opportunities for all. The company encourages lateral movement through Internal Job Postings.

CAUTIONARY STATEMENT

This report contains statements that may include forward- looking remarks within the meaning of applicable Securities Law and Regulations. It is important to note that numerous factors could cause the actual results, performances or achievements of the Company to be materially different from any future results, performances or achievements. Significant factors that could impact the Companys operations include changes in domestic and international economic conditions, alterations in Government regulations, changes to the tax regime and modifications to other statutes.