Objects of the issue:
- Funding working capital requirements;
- Funding capital expenditure requirements for the purchase of specially fabricated armored vans;
- General corporate purposes.
Investment Rationale:
Higher focus on network currency management and other value-added services and favorable industry dynamics to drive business growth.
The RCM market is estimated at Rs.6.8 billion in FY2021 and is projected to grow at a CAGR of 20.3% to reach a market size of Rs.20.4 billion in FY2027. The company provides retail cash management services (except ATM related services), with a focus on network currency management and other value-added services. This provides the company with better pricing power and operating leverage compared to ATM-related services, leading to higher margin realizations. It is to be noted that RCMS is in the top three players that account for more than 75% of the total market share of the RCM market. Moreover, regulations in the industry are designed to ensure that cash management companies meet certain operating standards concerning the handling of cash. This industry policy is in the company’s favor as it is expected to drive further consolidation and create high entry-level barriers for other
new players.
Strong presence in Tier 2 and Tier 3+ locations
As of July 31, 2022, out of the total touch points covered by the company, 86.1% of touch points were located in tier 2 and tier 3+ towns and cities which contributed about 85.6% of the total revenues of the company. With the government’s financial inclusion programs like Pradhan Mantri Jan Dhan Yojana and other direct benefit transfers in place, cash utilization and circulation is expected to grow further in tier 2 and tier 3+ towns and cities, leading to an increase in the demand for cash management services in these areas. Moreover, a higher preference for cash management services among retailers, NBFCs, restaurants, insurance companies, and railways, especially in lower-tier cities, is likely to fuel growth for the company’s business.
Valuation and Outlook:
Radiant Cash Management Services Ltd. is one of the largest players in the RCM segment in terms of network locations served in the industry. The company believes that increased financialization and formalization of theIndian economy will require a greater amount of cash to be processed and in circulation, benefitting the company in the long run. In addition, the company aims to shift its business mix towards providing more value-added services which will help to improve the margin profile. However, RCMSL is exposed to multiple operational risks and is subject to seasonal fluctuations in the end-user industries. On the upper end of the price band, the issue is valued at a P/E of 26.3x based on FY2022 earnings which we feel is on the steeper side compared to its peer
group (SIS Limited and CMS Info Systems). We, therefore, recommend an “AVOID” rating for the issue.
