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Edited Transcript of VAKRANGEE.NSE earnings conference call or presentation 13-Nov-19 12:30pm GMT

Q2 2020 Vakrangee Ltd Earnings Call

Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Vakrangee Ltd earnings conference call or presentation Wednesday, November 13, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ammeet Sabarwal

Vakrangee Limited - Chief Corporate Communication Officer & Strategy

* Anil Khanna

Vakrangee Limited - MD, Group CEO & Executive Director

* Dinesh Nandwana

Vakrangee Limited - Executive Chairman

* Subhash Singhania

Vakrangee Limited - CFO

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Conference Call Participants

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* Nimish Shah;Fortune Equities;Vice Chairman/Mng Dir/Co-Founder

* Sameer Deshpande

Fair Deal Investments Limited - Owner

* Tanvi Jain

Hem Securities Limited, Research Division - Research Analyst

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Presentation

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Dinesh Nandwana, Vakrangee Limited - Executive Chairman [1]

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Good day, dear, ladies and gentlemen. It is pleasure to greet you all once again, on behalf of our Board of Directors and senior management. We begin by thanking all of you for having spare time and joining us here today to discuss our second quarter earnings for the financial year 2019/'20. As with respect to our business strategy, we had guided in December last year that the worst is behind us, and we shall be showcasing better growth and improved financials every quarter-on-quarter basis, as more and more Nextgen outlets become operational and mature going forward.

Our financials are improving and showing healthy growth on quarter-on-quarter basis as our Nextgen outlets grew better revenue and our enhanced profitability due to focused efforts on Vakrangee services due to exclusive store format. Also incremental footfalls and revenue stream added because of additions of the new services.

Further with respect to future visibility on number of Nextgen outlets, I would like to share that we have received 74,000 plus formal expressions of interest. Out of these, around 12,500 plus have been qualified and approved, hence currently under onboarding process. These exclude the 8,500 plus outlets, which are already operational. These 12,500 plus outlets are under process and would become operational over the next 3 to 6 months. We have a clear visibility and we are well on target to achieve the mass 2020 plan target of 25,000 Nextgen Vakrangee Kendra outlets. We have further increased our presence by entering into new states such as Assam, Manipur, Telangana, Meghalaya, and Tripura. We have further concentrated our presence in key states such as Maharashtra, Rajasthan, Uttar Pradesh and Madhya Pradesh.

Currently, these outlets are spread across 29 states and union territories, 500 plus districts, 5,800 plus postal codes and 70% of the outlets are in Tier 5, Tier 6 cities. These Nextgen outlets are much better than earlier Kendra due to better brand visibility and exclusive store format, complete [digitalization] and enhanced profitability. Also, we have been able to maintain a robust balance sheet with debt-free status and entire CapEx has been funded through internal accruals. Further our balance sheet is cash reach with more than INR 11 billion in cash and cash equivalents.

I would like to take this opportunity to thank the shareholders for their support.

I would now like to hand over to Mr. Anil Khanna for his comments on the results.

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Anil Khanna, Vakrangee Limited - MD, Group CEO & Executive Director [2]

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Thank you, Dinesh Ji. Good day. Dear, ladies and gentlemen, I would like to spend some time on explaining the operational and financial results for the quarter. On the operational performance, our Nextgen outlets have crossed the throughput of more than INR 37.5 billion during the September quarter, with more than 15 million transactions. On a quarter-over-quarter basis, our overall throughput has increased by 17%, and number of transactions have increased by 28%. It is very heartening to see this performance as these Nextgen outlets are just over 3 to 9 months old.

Even if we analyze this performance, we would cross USD 2.1 billion of throughput on our platform, however, we expect that as these outlets mature over the next 6 to 9 months, we have the potential to reach an annualized throughput of USD 4.5 -- USD 4 billion to USD 5 billion. With more and more outlets becoming operational and mature, this would significantly increase over a period of time.

On the financial performance during the quarter, our total income stood at INR 172.75 crores, registering a quarter-over-quarter growth of 17.28%, whereas EBIDTA stood at INR 20.46 crores registering a growth of 6.2% quarter-over-quarter, and profit after tax stood at INR 10.87 crores, registering a quarter-over-quarter growth of 39.1%. EBIDTA growth is comparatively lower due to decline in gross margins, which is essentially because of change in revenue mix. However, our PAT has grown at a very healthy rate of 39.1% due to strong operating leverage as well as lower tax rates. Here, I would like to highlight that during the last quarter, I'm sure all of you are aware that Northern India experienced very heavy rains leading to floods in the most part of the northern states, especially in the states where we have a very large presence like Bihar, Jharkhand, Eastern UP, Rajasthan, MP, parts of Maharashtra, despite the fact that quite a few of our Kendras were underwater, we've been able to give these results. We expect the financials to keep improving on quarter-over-quarter basis as more Nextgen outlets become operational. And as the stores get more and more mature.

Further, we have seen a phenomenal response during the Diwali period for our assisted online shopping services at our Nextgen outlets. We achieved 160% of new customer target and 130% of order per store target set by our partner. And I must mention that the targets were fairly stiff.

Consistent store experience has resulted into better service levels and better consumer experience, which has been a major reason for this performance. Based on this performance, we received a very good appreciation note from our partners. And also as stores mature, we see assisted e-commerce services to be a major contributor going forward for the Nextgen ecosystem.

In terms of service activation, assisted e-commerce services have been activated across all the operational outlets, which are close to about 9,000, whereas banking and ATM services are in progress. Franchisee has a 6-month time frame to make the final installment, post which ATM services are activated and hence, we would get the ATM service activation over the next 6 months. Already, more than 4,500 ATMs have been activated. Also for banking services, it takes almost about 3 to 6 months process as banking BC code needs to be generated as well as franchisee needs to clear the banking IIBF certification. Therefore, we expect to witness further strong growth going forward as these services get activated over the next few months. We shall witness growth on these 3 parts, which is increasing number of outlets, activation of all services across outlets and maturity of the services over a period of time. I'd like to take this opportunity to thank our shareholders for their support.

We can now open the floor for Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question from the line of Anup Kumar, who is a retail investor.

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Unidentified Participant, [2]

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Yes, sir, this is Anup Kumar. I'm calling from Ahmedabad. My question is in the last year, Mr. Nandwana said that he has published the Grant Thornton audit report of all the Kendras every quarter -- no, in future. But we have not seen that audit report after given the report of 97 Kendras. So when can we expect that?

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [3]

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Yes. So that Grant Thornton report is on track, and we would be expecting a report within the next 2 weeks. So within the next 2 weeks, you will be getting an updated report where Grant Thornton would be showcasing their observations and their survey of the audit done by them at the physical store level.

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Unidentified Participant, [4]

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Okay. And will they cover around 3,500 stores or all the 8,500 stores?

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [5]

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Yes, more than 3,000 stores.

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Operator [6]

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We have next question from the line of Tanvi Jain from Hem Securities.

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Tanvi Jain, Hem Securities Limited, Research Division - Research Analyst [7]

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I have two questions. The first one is in respect of the number of outlets. You've mentioned that a number of operational outlets in June '19 were 8,500 and so the number is intact for the next quarter in terms of the operational outlets. So as an outlet matures, that is 3 more months for outlet, so don't you see any revenue increase in those terms? And secondly, sir, if you see the average number of transactions on ATM and the banking and ATM throughput. All these numbers have remained the same for both the -- in both the investor presentations for June '19 and the September '19, despite the number of operational outlets have increased. So why isn't there any increase in the number of ATM transactions or banking throughputs?

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [8]

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See, first of all, if you see in the June quarter, we had said that there was 3,504, which was fully operational live outlet and 5,000 outlets had just opened, basically. So they were not contributing in the -- during the last quarter. In the current quarter, if you see 8,500 is the overall operational outlets, now in this also basically banking and ATM service is where there have been no major activation because it takes a 3- to 6 month process. That is what we -- Anil Ji also explained the thing is the introductory speech.

Also with respect to the average throughput, what we have shared on a per outlet basis, we have shared that for a mature -- which is more than 6 to 9 months old outlet, what is the typical contribution that outlet is doing. And in that also if you see, the banking has increased from INR 10 billion to INR 11 billion. We have mentioned around INR 12 billion -- INR 10 billion to INR 12 billion. So there has been a marginal increase of almost 5% to 8% in terms of quarter-on-quarter basis.

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Tanvi Jain, Hem Securities Limited, Research Division - Research Analyst [9]

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So other than that, there's no other increase in the average GMV or the average number of bill payments? They'll all remain intact despite that 3,500 units were -- Kendras were operational since March '19?

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [10]

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See, basically, what happens, you are seeing the number of transactions as well as the volume, if you see, if I compare on an apple-to-apple basis, there has been a growth of around 8% to 10% on an apple-to-apple basis.

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Tanvi Jain, Hem Securities Limited, Research Division - Research Analyst [11]

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In fact the number remains intact, so even on the apple-to-apple basis there should be some increase, because new units have already...

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [12]

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Because that is the range what we had shared. You have to see the range is given as 40 to 50. Now whether that 42 has become 45. That is within a range.

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Tanvi Jain, Hem Securities Limited, Research Division - Research Analyst [13]

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And sir, one more question, that's again, on the same line, that despite there's an increase in revenue, what would be the reason for the increase and or the pressure on the margins of your company? If you could just guide us, you know?

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [14]

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Yes. Yes. So because if you see in terms of our margins, typically, our margin changes based on service to service. So as the revenue mix changes, the margins will change. As for -- I will just give you an example. For example, in case of ATM services, we do a sharing of 65-35 that out of the INR 15 that we get, we pay INR 10 to the franchisee and we keep INR 5. So there is a revenue-sharing of 65% to 35%. Whereas in terms of some of the other services, say, for example, banking, the sharing is 80-20. Now as I -- the momentum of the services change or the mix change, the contribution will depend -- the margin contribution will depend accordingly. Therefore, if you see on a longer-term sustainable basis, we have always guided that we are -- our margins will finally move towards 20%. So if you see currently also, my gross margins are higher than 20% because of the mix being changed, but we have always guided for a 20% kind of gross margin.

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Tanvi Jain, Hem Securities Limited, Research Division - Research Analyst [15]

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Sir, but your margins -- that is EBIDTA by revenue from operations is coming approximately 13% for the reporting quarter. And that has deteriorated from June quarter and again from March quarter.

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [16]

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No. Therefore, I'm saying, so if you see my gross margin, my gross margin was 27% last quarter, whereas in this quarter, the gross margin is at around 21%. The cost below the gross margins are remaining the same. So whether it is my employee expenses, whether it is my other expenses. Now if you see my gross margin target on a longer-term basis is going to remain at 20%, and as I hit the operating leverage, as I scale up, my EBIDTA margins will stabilize at around 16% to 18%.

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Tanvi Jain, Hem Securities Limited, Research Division - Research Analyst [17]

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Okay. This is a revenue guidance for FY '20 full year or may be...

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [18]

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So, we -- we don't give any financial guidance, whatever operational guidance we have already shared -- our target is of 25,000 stores over the next 6 months. So that is where we are focusing on.

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Tanvi Jain, Hem Securities Limited, Research Division - Research Analyst [19]

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Okay. Sir, just one last question. You said on the formal inquiry...

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Operator [20]

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Ma'am this is the operator, would you like to come back in the queue?

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Tanvi Jain, Hem Securities Limited, Research Division - Research Analyst [21]

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's

Okay.

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Operator [22]

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(Operator Instructions) We have next question from the line of [Ilango Thangavelu] who is an individual investor.

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Unidentified Participant, [23]

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I have two questions. First question, last quarter, when we had 3,500 fully operational and another 5,000 just getting in, the profit after tax was INR 8.5 crores. And now we have 8,500 fully operational, it has almost doubled, but the profit after tax has come to only INR 10 crores. So the growth in terms of active franchisees against profit is not matching.

My second question is related to any updates that you have on your receivables?

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [24]

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So sir, as we have also explained during the introductory speech also that the banking and ATM services are not yet operational across all the 8,500 stores so, right? We said that ATM services are activated at 4,500 stores. And even banking services take 3 to 6 months because the franchisee has to clear a banking certification exam as well as we need to get a BC code generated. Therefore, the revenue contribution from the incremental 5,000 stores has been comparatively much lower because of these 2 major services, being in the stage of getting activated. This impact will be able to see in the next 3 to 6 months when these services become operational at these stores, in addition to the other services getting mature.

So therefore, the numbers are not comparable in a linear fashion that stores have increased from 3,500 to 8,500. And therefore, the revenue and the profitability should increase in the same amount. Because even the 3,500 stores have been operating since January of this year. So they are 9 months old, so their maturity level is very different versus a store which has opened just 2 months back or 3 months back. Therefore, you have to see in terms of same-store sales growth comparison, and that is what I said in my previous question, but if you compare on apple-to-apple basis, we have seen 8% kind of growth on an apple-to-apple basis in terms of the same-store sales growth. Rest of the contribution has been coming primarily from the new stores, but new stores are in very nascent stage. They will take around 6 months to get mature.

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Anil Khanna, Vakrangee Limited - MD, Group CEO & Executive Director [25]

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Plus, I had also mentioned that quite a few of our stores got impacted because of the floods.

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [26]

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So our major presence primarily being in Uttar Pradesh being one of the largest state where we have a major presence was fairly impacted because of the heavy flooding and heavy rains that there were also a lot of stores, which were closed for a few days during this period of heavy rains and heavy flooding. In spite of that, if you see, we have showcased a growth of almost 18% to 20% in revenue terms and almost in 39% at the profit level at the bottom level.

With respect to the receivables, which was your second question. So with respect to the receivables, as we had explained earlier also in our last quarter that this is typically the withhold amount from the legacy business, and this is going to get accrued or get -- getting realized over the next 12 to 18 months.

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Operator [27]

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Sir, we have next question from the line of Sameer Deshpande from Fair Deal Investments.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [28]

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See, regarding this receivables now you mentioned that this will -- retention amount of the old legacy projects, but now we are looking for the last 1.5 years, not a single rupee has been realized. How you can mention another 12 to 18 months, if the matter is disputed. The government will not pay you anything also.

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [29]

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So sir, basically, if you see, it is not that they were due in the last 1 year that it has not been realized. They have been meant to be due only in a period of, say 2 years, or some of the receivables will be due only after a period of 24 months. Because every legacy business project that we do, they have a withhold amount, and once we complete, hand over the project back to the government. They have a service level contribution where they see that for a period of 18 to 24 months, whether the service level performance has been intact for the project. And after that, only to the satisfaction, if it is there, that is where they release. So it is not that it was due, and they have not paid. It was due and it was not paid, then I would have to make a provision for it. It is not due, hence therefore, there is no provision and we are expecting that over the next 12 months as these amounts get due, we will be getting it realized.

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Subhash Singhania, Vakrangee Limited - CFO [30]

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I'd like to add that due to the auditors if they need balance confirmation letters to certify the receivables, yes, right? So auditors have satisfied themselves. MCA did a forensic audit on Vakrangee. You are all aware of it. And they have also not raised any objection on it. They have also satisfied with the genuineness of the debtors.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [31]

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So that is good, basically. But what we feel normally throughout the -- 1 year, we are not aware of that it will between 24 months -- some projects, it takes 24 months or some more, but now in this next 12 months, can you have an idea for what will be the amount, because that amount will help us in investing that amount in our Vakrangee Kendras, because now we have managed so with the other income because we have some of the investable resources. And now if the 30% on INR 1,200 crores odd is debtors so over suppose this next 6 months, do you have a ballpark figure what would be receivable during this 6 months?

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [32]

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Sir, that information is not in public domain as such. So there is no detail showcase on that. However, also with respect to the question that -- whether that will get reinvested in the Vakrangee Kendra, so as such, our business model does not require any heavy CapEx from our side. So even today, we are sitting with the cash balance of almost INR 1,000 crores plus, almost INR 1,100 crores plus. So the entire model is asset-light, and it is free cash flow positive from that perspective?

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Sameer Deshpande, Fair Deal Investments Limited - Owner [33]

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No, no. But when you invest in new Kendras, you will be requiring the...

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [34]

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No, it is a franchisee who invest in the new Kendras, so it is a complete franchise-based model, so there is no CapEx to the company.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [35]

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And regarding this ATM and banking financial services, which were not operational for more -- almost 50% of our total outlets, which are operational now. How soon it is expected to get operational, because in Q3, are we in a position to get some substantial improvement there?

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [36]

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Yes. Some partial improvement will be there, but I will tell you, for example, as it is a franchisee model, the franchisee gets a period of 6 months to make the final installments. So there is an installment scheme for the franchisee, which you can also see in my franchisee presentation. So he gets a period of 6 months. Once the store is operational after that, he has a period of 6 months, whether he can arrange the loan or he can arrange his funds for the ATM, and accordingly, the ATM gets operational. So you will be able to see the impact of that only after another 3 months is what we see. So maybe in the March quarter or in the June quarter is where you will see the major impact coming in from this ATM services as well as the banking services.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [37]

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Because currently, what is actually our estimation that how much will ATM for -- pertaining Kendra, roughly, what will be the contribution of our income from ATMs overall the total percent income expected.

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [38]

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So if you see from any Kendra perspective, we have shared that what is the average transaction that my Kendras are doing. So we are doing say, for example, 40 to 50 transactions a day, now this 40 to 50 transactions a day, if I take a 40 transactions a day, it is around INR 15 per financial transaction. So from a franchisee perspective, he ends up making around INR 400, whereas from our perspective, we end up making around INR 200 per day per ATM. So from a monthly perspective, if you see, if I take 30 working days, then it is around INR 10,000 to INR 12,000 is what the franchisee makes. And then on an average, a mature franchisee is doing it around a INR 1,00,000 of revenue per month per outlet. So you may say around 10% to 15% in what a typical franchisee is making from an ATM perspective.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [39]

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Because when this -- more number of units come under this ATM ambit, particularly, as you mentioned suppose in Q4. Then we can see a substantial jump up in the -- our revenue [growth]?

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [40]

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Yes. Yes. Yes. So that is what even Anil Ji mentioned in his speech that as we go forward, we are going to see growth coming from 3 ways. One is the increase in the number of outlets, the other is addition of the new services, which is activation of ATM and banking services (inaudible). And the third is basically the maturity of the outlet as it grows over a period of time.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [41]

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And there was one regulation from basically some change in RBI, which mentions some that CATMI method or something. So -- and many banks were also mentioning that they will have to increase their ATM charges and ATM fees. Otherwise, the ATM business is not viable as was mentioned by many banks. So does white label ATM also come under that same type of --

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Anil Khanna, Vakrangee Limited - MD, Group CEO & Executive Director [42]

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Yes. Yes. So that rate is under discussion. So maybe to CATMI is they had done a presentation to RBI, and they have, as per our substantial increase, RBI has principally accepted that, yes, there has to be an increase. But how much they will increase, we do not know.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [43]

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And at this -- currently, are we facing pressure on our margins also in this particular -- because of this rise?

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Anil Khanna, Vakrangee Limited - MD, Group CEO & Executive Director [44]

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No. So if you see how we are better off with respect to any standalone ATM business is, if you see for any standalone ATM operator, there are 3 mirror cost to run the ATM business. One is the rental cost of the store because there is a standalone ATM inside the store. Second is basically, there is a security guard requirement because it is an unmanned outlet. So there is a cost of security guard. And third is the cash replenishment cost, which is a CRA agency cost. So someone has to go and refill the cash. In case of our model, if you see, all the 3 costs are not there because if you see our Vakrangee Kendra outlet is already there. We are putting an ATM inside the store. So there is no incremental rental as such. There is no security guard requirement because it is a manned outlet. The ATM, the franchisee himself is sitting inside the store, and we are running a business hour ATM. So we are not running a 24-hour ATM. So my outlet is typically when it is opened by the franchisees, the ATM is operational. And the third is basically, since my outlet is also a banking point, if it is a BC point. So therefore, we are able to refill the cash accordingly. So we do not require CRA agency for that. So if you see from our perspective, all the 3 major costs are not there. And therefore, ATM is a very lucrative vertical for us. It is a fairly incremental revenue adding and profitability adding revenue segment for us.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [45]

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Compared to the bank ATMs.

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Operator [46]

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We have last question from the line of Nimish Shah from Fortune Equities.

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Nimish Shah;Fortune Equities;Vice Chairman/Mng Dir/Co-Founder, [47]

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On these -- debtors which was mentioned in the last reply you've given the last question. What is the amount which is due at the moment?

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [48]

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So currently, you see the -- hardly there is any amount, hardly, only 2% or 3% of the debtors is due over the next couple of months. The major due is coming in is post June next year.

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Nimish Shah;Fortune Equities;Vice Chairman/Mng Dir/Co-Founder, [49]

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So this businesses were done with that kind of contract, that payments will fall due after 12 months or 15 months?

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [50]

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Yes. So basically, these were some of the projects where there is a withhold amount with the particular government entity team, which is primarily due once the project has been handed over back. So all these projects are typically like a BOT project, build-operate-transfer. So once you transfer it back to the government, there is a stipulated period of around 12 to 24 months based on project to project. If there is no problem in the performance or the service level post that, that is where they release it.

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Nimish Shah;Fortune Equities;Vice Chairman/Mng Dir/Co-Founder, [51]

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And they've given those confirmations that this amount is due, whichever the agencies are?

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [52]

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Yes. Yes.

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Operator [53]

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Thank you very much. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Ammeet Sabarwal from Vakrangee for closing comments. Sir, over to you.

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Ammeet Sabarwal, Vakrangee Limited - Chief Corporate Communication Officer & Strategy [54]

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Thank you, everyone, for taking time out and attending our Q2 FY '20 conference call. Please feel free to get in touch with us in case of any further queries or any details. Our details are mentioned in the -- on the website and our e-mail address are also available, so please get in touch in case of any further queries. Thank you.