Updated: Sep 21
Company Name – CMS Info Systems Limited (CMS)
Current Share Price – INR 322 (May 29, 2023)
Market Cap – INR 4,971 cr
1. What is interesting about the stock?
The economic and social growth of tier 3 or tier 4 towns and rural areas in India is severely hampered by the low penetration of banking services. Access to formal banking services is restricted by things like low income, low literacy, poor infrastructure (such as branches or ATMs), and lack of awareness & trust.
Since they are unable to access loans, savings, insurance, and other financial products and services that can enhance their livelihoods and well-being, it hinders their financial inclusion and empowerment. Their ability to make use of the advantages of online transactions, e-commerce, and fintech solutions also restricts their engagement in the digital economy. Additionally, it puts individuals in danger of financial shocks brought on by calamities or natural disasters, theft, fraud, cash loss, and destruction.
Cash-on-delivery transactions account for more than 90% of e-commerce transactions in these areas. Cash is the lifeline for these places, providing growth opportunities for cash management companies.
In India, CMS Info Systems is the market leader in the cash management business. It is in cash management, ATM management, card solutions, and related managed & technology services business. The Blackstone Group, in collaboration with Mr. Rajiv Kaul (ex-CEO of Microsoft India), invested in it in 2009 with the goal of acquiring the majority ownership (53%) in CMS for INR 280 cr.
Back in 2015, Baring Private Equity Asia made a deal to purchase Blackstone's 57% stake in CMS Info Systems at a valuation of INR 2,000 cr. Additionally, Baring Private Equity obtained the remaining 43% stake from the Grover family and the management team headed by Kaul. Kaul and the management team opted to reinvest in the company to foster growth and remain at the helm.
Barings currently own ~60% stake in the Company.
The company possesses over 4,000 cash vans and a strong network of 240 branches and offices, allowing it to manage over 150,000 business points. Its services reach all of India's states and union territories, with the exception of the distant Union Territory of Lakshadweep, covering 96.36% of India's districts and 78.63% of Indian postal codes.
CMS Info Systems has three main business segments:
Cash Management (~69% of revenue in FY23): This segment provides cash-in-transit, cash processing, ATM replenishment and maintenance, retail cash management, and other related services to banks and retail outlets.
Managed Services (~29% of revenue in FY23): This division offers comprehensive outsourcing solutions for ATM network management, banking automation, card personalization, remote monitoring, and multi-vendor software for banks and financial institutions. As of December 31, 2022, the order book is around INR 3,000 crore. These contracts are of longer duration, ranging from four to seven years, and are expected to generate recurring revenue, thereby providing revenue visibility for the near to medium term.
Tech Solutions (~2% of revenue in FY23): This segment provides technology products and solutions for digital payments, artificial intelligence, blockchain, cybersecurity, and other emerging domains.
Why invest in CMS?
The Company has built long-term relationships with reputable and well-established players, who make up its clientele. Among its clients are SBI, HDFC Bank, Axis Bank, ICICI Bank, Citi Bank, Hitachi Payment Services Private Limited, Financial Software, and Systems Private Limited. CMS' revenue growth has been supported over the years by incremental business from these key clients.
Private Equity owned; professional management
CMS is a dominant force in the cash management industry across all verticals. Alongside its subsidiary, Securitrans India Private Limited, it oversees nearly 70,000 ATMs as of March 2022, representing approximately 46% of all outsourced ATMs in India and about 28% of all ATMs in the country.
2. Key Historical Financials
Company revenue and net profit have grown at a CAGR of 11% and 31% respectively in the last 3 years. Management is looking to revenue by 3x in the next 7 years – implying CAGR of ~18%
Revenue growth was 20% in FY23 on a YoY basis which is quite healthy at a time when UPI was growing at a furious pace but the growth rate has come down in Q4FY23
EBITDA margin expanded from 18% in FY20 to 28% in FY23 and 29% in Q4FY23
Cash flow conversion (CFO/EBITDA) was 76% in FY23
ROCE and ROE were 28% and 21% respectively in FY23 – broadly stable in the last 3 years
3. What is my view on company valuation?
CMS made its debut on the NSE and BSE on December 31, 2021, via a successful IPO at INR 216 per share. The shares opened at INR 218.5 on the NSE, representing a ~1% premium over the IPO price, and closed at INR 220. IPO was subscribed ~2x. The current share is ~50% higher than the IPO price.
The Company has a P/E (TTM) ratio of 17x, while its competitors, Radiant Cash, and SIS, trades at a slightly lower P/E multiple of 16x. This indicates that the Company's valuation is comparable to that of its peers.
The potential for valuation multiple expansion is limited due to the overwhelming dominance of the digital economy (specifically UPI) in the media and the minds of investors.
Long-term investors could evaluate investing at slightly lower levels which would also provide a margin of safety.
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 10 clients contribute to ~75% of revenue in FY23
Private Equity owners may be looking for sale in the next couple of years
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.
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.