Although a projected increase in market competition has led to margin pressure, Cielo SA can maintain its dominant market position with its solid business model, financial flexibility, large scale and innovation capacity, Moody's said.
The rating agency noted that the combined market share of smaller companies, including Banco do Estado do Rio Grande do Sul SA, PagSeguro Digital Ltd. and Stone Pagamentos SA, has grown to 15% from a minimal 2% in 2015. The increase in combined market share by these companies led to a drop in Cielo's transaction volume to hit 41% in the fourth quarter of 2018 from 48% in December 2017.
Moody's also noted that a stronger competitive environment drove the payment processor to reinforce tougher pricing in the second half of 2018, which could result in low revenues through 2019. The company also strengthened its commercial team and expended in marketing to mitigate its share deterioration seen in 2018.
Cielo's recent innovation Stelo SA, which offers prepaid cards to users who do not own a checking account, has helped propagate the company's leading role in Brazil's payment processing market with a footprint of 483,000 machines in December 2018 from just 4,000 machines in the first quarter of 2018. Stelo also expanded Cielo's incomes by generating 1.3 billion Brazilian reais in the fourth quarter of 2018.
The rating agency highlighted that Cielo has proved successful in generating diverse and innovative sources of income: "Cielo has been pushing the rental of their 'LIO POS' and 'LIO+' — equipment that bundles functions such as bar-code readers, cashier and inventory management applications (Android platform), and invoice printers — on top of the regular POS functionalities; this was another factor that helped reverse the downward trend in POS numbers."
Moody's believes that a stronger POS base will result in higher transactions volume, purchase of receivables and additional services.
As of March 13, US$1 was equivalent to 3.83 Brazilian reais.