Company Name – Radiant Cash Management Services Limited (RCMS) Current Share Price – INR 94.4 (May 22, 2023) Market Cap – INR 1,007 cr |
1. What is interesting about the stock?
The implementation of the Unified Payments Interface (UPI) in India in 2016 brought about a major transformation in how people conduct transactions. UPI is a mobile payment system that enables individuals to instantly transfer and receive payments from other users and merchants in real-time, both person-to-person (P2P) and person-to-merchant (P2M).
After the announcement of demonetization by the Indian government in November 2016, there was a notable surge in the adoption of UPI. With cash becoming scarce, consumers had to look for alternative payment methods, and UPI emerged as one of the most prevalent options.
In the span of 5-6 years, UPI has seen incredible growth. In 2016, the number of UPI transactions was just above 100 million, but as of 2022, it has increased to over 7.8 billion, with transaction values amounting to more than INR 12 lakh crore.
UPI dominates the narrative which could lead investors to believe that the surge in popularity of UPI indicates a decline in cash transactions, especially since the bulk of investors’ ecosystem is concentrated in metropolitan areas and Tier 1 cities. However, cash transactions are still thriving.
With cash growing – one of the high-growth areas is retail cash management systems which are driven by the formalization of the economy and the rise of organized retail. Among the market leaders in this sector is Radiant Cash Management Services Limited, which was established in 2005 by Col. David Devasahayam, a former Army officer. RCMS provides a comprehensive range of cash management services, which include cash pick-up and delivery, network currency management, cash processing, and other value-added services.
Cash pick-up and delivery services provided by the Company are highly beneficial to banks, as they collect cash from various sources and deposit it in bank branches. A fixed charge per outlet per month is charged to the banks for this service, which contributes significantly to the Company's revenue (69% in FY23). At present, the Company operates at around 60,000 outlets, while the industry serves approximately 1.5 lakh outlets. This market has a lot of potential for growth, as very few outlets use cash management services.
Network cash management is the second largest part of the Company's business. In this vertical, the Company deposits cash in its own bank account and then electronically transfers it to the banking client. This service is particularly useful in areas where the client bank does not have a branch. The Company's charges are based on the volume of cash deposited in its account, which accounts for approximately 18% of revenue.
The Company's clients include banks, financial institutions, organized retail, and e-commerce companies.
Why invest in Radiant Cash?
Strong network of cash collection and distribution centers: Radiant Cash Management Services has a strong network of cash collection and distribution centers across India
Experienced and qualified professionals: 21% of the workforce including the top leadership team is from the armed forces. Operations are run with military discipline, a great deal of integrity, and frugality
Market leader in Retail Cash Management segments – Second largest player, CMS Info Systems, caters to 40-50,000 outlets vs Company’s ~ 60,000
Underpenetrated market provides growth impetus
~3% of retail outlets use cash management services vs 85% in the US
Banking infrastructure is still underpenetrated in Tier 3/4 towns and rural areas
Cash on delivery is the most prevalent method for e-commerce in Tier 3/4 towns and rural areas
~70% of revenues for the 9MFY23 came from Tier 3 plus locations
2. Key Historical Financials
Company revenue and net profit have grown at a CAGR of 13% and 64% respectively in the last 5 years. Management has guided towards 22-24% CAGR up to FY25
Revenue growth was 24% in FY23 on a YoY basis which is quite healthy at a time when UPI was growing at a furious pace
EBITDA margin contracted in FY23 and Q4FY23
High asset-light business model – An asset base of INR 14 cr is needed to generate revenue of INR 355 cr in FY23
Cash flow conversion (CFO/EBITDA) was 85% in FY23 which is quite healthy
ROCE and ROE were 40% and 34% respectively in FY23 – Company doesn’t need any significant capital expenditure so the cash generation is expected to be strong in future
3. What is my view on company valuation?
RCMS made its debut on the NSE and BSE on December 29, 2022, raising INR 257 crore via a successful IPO at INR 94 per share. The shares opened at INR 103 on the NSE, representing a 9.6% premium over the IPO price, and closed at INR 106.5. IPO was oversubscribed 4.8x with the retail portion subscribed 5.3x. The current share is flat vis-à-vis IPO price.
The Company has a P/E (TTM) ratio of 16x, while its competitor, CMS Infosystems, trades at a slightly higher P/E multiple of 17x. This indicates that the Company's valuation is comparable to that of its peers and is reasonable considering its expected growth rate.
4. What are the risks to the investment analysis?
Risks to the analysis are:
RBI recently introduced regulations for cash management companies – increasing regulatory risks for the Company in future
Competitive pressure from UPI as smartphone penetration increases in Tier 3/4 towns and rural areas
High customer concentration – Top 5 clients and 10 clients contribute to ~60% and ~80% of revenue respectively in FY23
About the Author
I have over 17 years of experience in venture capital, private equity, and investment banking across various sectors in India and the Middle East. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
Disclosure
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.
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