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Q3FY24 PAT at Rs 871 mn, up 15% YoY, was in line with our estimate. Revenue at Rs 5.8 bn, up 19% YoY, was 4% ahead of estimate driven by 11% YoY growth in cash management and 36% YoY growth in managed services. While FY24 and FY25 revenue guidance remains intact, increasing competitive intensity and higher share of managed services can somewhat pressure the margins. We cut our target price to Rs 455 (Rs 481 earlier) to factor in – (1) 3-6% EPS cuts and (2) roll forward of target P/E to Dec’25E from June’25E. Maintain BUY.

Q3FY24 PAT in line

* Q3FY24 PAT at Rs 871 mn, up 15% YoY, was in line with our estimate.

* Revenue at Rs 5.8 bn, up 19% YoY, was 4% ahead of estimate, driven by 11% YoY growth in cash management (64% revenue share) and 36% YoY growth in the managed services business (37% revenue share).

* EBITDA margin at 25.9% was 68 bps below our estimate and 185 bps lower YoY. The YoY drop was due to higher purchase of traded goods (due to change in revenue mix of managed services) and the resulting drop in gross margin (351 bps YoY), which nullified the impact of operating leverage (lower employee and other costs as a % of revenue).

Steady growth continues; revenue guidance remains unchanged

* The management is confident of achieving FY24E revenue of Rs 22.5-23 bn. FY25 revenue guidance of Rs 25-27 bn remains intact. It is confident of achieving the upward half of the guided range.

* New business wins of Rs 6 bn during the quarter take the YTD wins to Rs 12.5 bn. This is in the managed services and technology solution verticals. CMS also won mandates for ALGO AIoT Remote Monitoring Solution for 2,000 new sites.

* RFPs for ATMs, predominantly those from PSU banks, which were earlier deferred, are now closing out. While RFPs for ~33,000 ATMs were closed through 9MFY24, another 20,000 are expected in Q4FY24 and Q1FY25.

Margins likely to be under pressure on increasing competitive intensity

While revenue from the managed services vertical was up 36% YoY, segmental EBIT margin at 17.7% was 236 bps lower. Although a part of this decline was attributable to change in revenue mix tilting towards product sales, management’s conscious decision to prioritize market share amid an environment of increasing competitive intensity also contributed to margin decline.

Takeaways from results conference call

Guidance and performance update

* Confident of achieving FY24E revenue of Rs 22.5-23 bn. FY25 revenue outlook of 25-27 bn remains intact, and the management confident of achieving the upward half of the range. This implies ~27% YoY growth in Q4.

* The management is confident of achieving this given (1) realization of revenue from the already executed order book expected through Q4, (2) execution of existing order book, and (3) Q4 generally being a strong quarter.

* Seeing strong momentum in both business lines – cash management and managed services. New business wins of Rs 6 bn during the quarter takes the YTD wins to Rs 12.5 bn (FY23 wins –Rs 9.5bn). This is in the managed services and technology solution verticals.CMS also won a mandate for ALGO AIoT Remote Monitoring Solution for 2,000 new sites.

* Managed services, retail cash management, and AIoT services will be key growth drivers. ? Capex: Earlier guidance was Rs 1.5-1.75 bn for FY24. Revised FY24 capex guidance at Rs 1 bn. Investments have been pushed into FY25E.

* Margin trajectory: Expect competitive intensity; hence, the company will prioritize market share. Although the management intends to attempt to maintain its margin profile, it does not expect it to remain linear.

* Recognition of ESOP expenses will be: (1) Rs 110 mn/quarter from Q2FY24 till Q1FY25, (2) Rs 60 mn/quarter from Q2FY25 to Q1FY26, (3) Rs 40 mn/quarter from Q2FY26 to Q1FY27 and (4) Rs 10-20 mn/quarter from Q2FY27 to Q1FY28.

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