Description

Findi, an illiquid Australian microcap, controls Transaction Solutions International (India) Pvt Ltd (TSI India), an owner and operator of ATMs in India with about 8% market share in a fragmented market. TSI India has struggled in the past to build up its business but now appears to have turned the corner with huge guidance increases.

Findi’s thinly traded listing in Australia is a historical oddity due to having Australian founders and it aims to list its operating business in India in the near future. The Indian stock market has gone up eight years in a row and IPOs are especially hot. Ahead of its future IPO it recently issued 8% bonds to an Indian investment group compulsorily convertible to 16.7% of equity at a future IPO at a A$190.6 million valuation (AUD - all dollars are Australian). Depending on how much capital is raised from the exercise of listed options in a few days time, Findi’s market price would value the Indian business at a future IPO between $71.0 and $92.7 million.

Capitalization

Findi is currently capitalized with 40.7 million common shares (FND.ASX), 14.4 million listed 01/17/24 $0.90 call options (FNDOB.ASX), 6 million $0.90 director options and 0.5 million $0.90 options, totaling 61.6 million fully-diluted shares. There are also 3 million out-of-the-money $2.00 director options. TSI India is expected to have $13.1 million in net debt on March 31, 2024 plus $37.6 million in convertible bonds.

Options

Findi still has 14.4 million $0.90 options outstanding, unexercised and expiring on January 17th. It is likely that a large number of them will expire but it is difficult to estimate. Findi’s market cap depends on how many options are exercised between today and expiration. If they all expire it would reduce the fully diluted equity market capitalization to $47.7 million. If they are all exercised fully-diluted equity market cap would be $62.2 million and eliminate net debt. The implied valuation of the Indian business would be $71.0 and $92.7 million, respectively.

The listed options last traded at $0.013, opening a potential arbitrage for the couple of days left until expiration.

Guidance

Two months ago, Findi announced a 10-year contract with State Bank of India (SBI), a large commercial bank in India, to install and operate 4,219 new ATMs on its behalf, estimating $550-620 million in revenue, $250-280 million in EBITDA and $120 million in FCF. That single contract discounted to present value would account for much of Findi’s current market cap. TSI India also has 20,500 existing ATMs under other shorter-term contracts that it has generally been able to extend.

Findi has given TSI India earnings guidance for FY24 ending on March 31st (unadjusted for existing and future non-controlling interest in TSI India totaling 32.8%):

Revenue 67.3M (H124: $30.5M already achieved)

EBITDA 23.6M (H124: $12.6M already achieved)

FCF 14.5M (H124: $12.4M already achieved)

Unit economics per ATM

The ATM business is highly capital intensive and requires scale to be viable. According to Findi, initial capex per ATM is about $12,000, it has about a 12-14-year life and it takes up to a few years to build up a customer base for a brand new location. Building up its ATM base has been a struggle for TSI India and several upstarts have failed to achieve sufficient scale and gone out of business.

Figure: unit economics per ATM (Brown Label)

Brown Label ATM license

TSI India bids on ATM outsourcing contracts from Indian banks. TSI India is responsible for incurring all the capex to install ATMs in return for a pre-negotiated share of the interchange fee revenue and the bank is granted an option for a limited term to purchase the ATM hardware from TSI India but typically extends the contract instead. Market conditions have improved lately as TSI India lately targets a 35% IRR on its bids and is still the lowest bidder.

White Label ATM license

TSI India is currently only operating bank ATMs but is planning to get its own White Label ATM license to operate some of its own ATMs independently of banks. Interchange fee rates would be the same, just no longer shared with the bank. It would substantially improve receivables turnover because currently banks pay TSI India only within 60-120 days. TSI India would have to borrow the ATM cash from banks at around 6-8% interest rate. Capex would be lower because they would recondition and extend the life by 5+ years of some existing ATMs currently operated under bank licenses and later would seek a franchising relationship with merchants at the ATM locations.

TSI India as a subcontractor operates all 12,500 ATMs of India1 Payments, the current largest owner of White Label ATMs in semi-urban and rural areas of India. This is likely a decently capital-light business for TSI India. India1 plans to double its ATM count over the next five years.

Payments

TSI India has increasingly been signing up merchants for its payments business FindiPay that generates around 10% of revenue. This is an app used by small shops to facilitate customer payments in cash for expenses like utility bills, money transfers, tickets and phone credits. In December it had over 18,000 merchants and was adding about 2,000 monthly. Gross transaction volume was $160 million.

Peers

Most bank ATMs are outsourced to many specialized suppliers in a fragmented market and TSI India with 8% is one of the larger players. TSI India’s direct peers are all privately held. CMS Info Systems is listed but not directly comparable because while it is an ATM and cash management company, it operates a capex-light model. CMS provides cash management for 72,000 ATMs and end-to-end management for 17,500 ATMs. CMS trades at a market cap of $1.05bn and 20x PE multiple, in line with international peer Euronet Worldwide.

History

TSI India was established in 2006 by two Australians who were joined by ex-Citibank Director Mohnish Kumar as CEO. Early investors included SAC Capital and GLG Partners. In 2010 it obtained a listing and raised more capital in a private placement at a $56 million valuation with only 350 ATMs in place at that time. A further $7.5 million was raised in April 2011 to fund the purchase of more ATMs. In 2013, as competition for contracts heated up, transactions per ATM dipped and EBITDA almost disappeared, $22 million was raised from Indian PE firm CX Partners in exchange for 75% of TSI India with 1,000 ATMs deployed ($29 million valuation).

In late 2016, India carried out a drastic demonetization policy purging all 500 and 1000 rupee banknotes, amounting to over 86% of all currency in circulation. This caused a shock for TSI India, reducing revenue and transaction numbers for a number of years, negative EBITDA, as well as a spike in capex. Just a month before, Findi had entered into an option agreement to buy back the stake (minus 8% earmarked for management) from CX for $48 million in cash ($71 million valuation). Due to poor market conditions it let the option lapse in 2017, however retained a right of first offer to buy TSI India. At the end of 2021, Findi acquired the remaining 65% of TSI India for just $4.1 million, a 0.8x EBITDA multiple.

Future

Demand for ATMs is linked to currency in circulation. Cash continues to be very important in India and its value and volume are increasing. Most Indians pay in cash on delivery for e-commerce transactions, including 90% in rural areas where TSI India is concentrated. Even post-covid two-thirds of transactions continue to be settled in cash. Despite this heavy cash use India has only 18 ATMs per 100,000 people compared to the global average of 39. Currency in circulation has more than doubled in the last 8 years even despite the demonetization and is still growing high single digits in value and mid-single digits in volume. Digital payments are not a significant risk just yet.

A major business risk is the interchange fee, which is a flat fee of 17 rupees per financial transaction set by the Reserve Bank of India and while it has slowly been raising it, once it deems the number of ATMs sufficient this can change.

Another large-scale demonetization could disrupt the ATM business again. However, several studies written after it was done showed that it failed to accomplish its objective and yet resulted in many adverse collateral effects, including politically. It is highly unlikely to be tried again.

Capital allocation

Findi announced a new dividend policy of paying out 30% of after-tax earnings. However, it doesn’t appear sensible at this stage, especially as there has been talk of potentially doing acquisitions and there hasn’t been any date provided when this policy would take effect.

Listing in India

The number of Indian IPOs in 2023 was the second highest in the past decade. Optimism is high with large over-subscriptions and post-IPO gains both for small-caps and large-caps. The plan is to take TSI India to IPO in the next few years as earnings increase but there is a risk that the market cools down before the company is ready for IPO.

Corporate governance

Findi’s board is comprised of 3 Australian businessmen collectively owning around 7% who got involved around the time that Findi solely focused on the Indian business. A large portion of their holdings were in the $0.90 listed options which they have recently exercised by paying the exercise price at similar levels as today’s market price and retained the stock. The value of each director’s stock holdings is 6-15x their salaries. Directors’ interests seem aligned but there is a risk of unreasonably high stock option compensation. Current director options outstanding are already for 15% of the company.

Findi’s chairman Nicholas Smedley is son of well-known Australian CEO Peter Smedley who built the Colonial financial services group until its sale for $8.2 billion in 2000. However, the son has a different record. His official bio doesn’t mention that he spent 2006-2019 running a large real estate business until it collapsed in high-profile bankruptcy, owing creditors hundreds of millions. It’s uncertain where the blame lied but his business partner got disqualified from managing corporations in Australia and he did not. Later Smedley invested in an ASX-listed medical business where he is Executive Chairman, however the company hasn’t been successful in launching its products. However, here Smedley is in more of a stewardship role compared to Mohnish Kumar and Deepak Verma who have been running the business in India for many years and have earned themselves a 20% stake in the operating subsidiary.

Catalyst

- Elimination of options overhang

- Potential Indian IPO