Should you subscribe to the CMS Infosystems IPO ?

The IPO of CMS Info Systems (CMS), a company providing cash management services and technology solutions for ATM management to banks, financial institutions, and organised retailers has garnered an overall subscription of 0.42 times as of 5 pm on Tuesday, the opening day.

The IPO ask price of ₹205-216 a piece which values the company at 18-19 times its FY21 earnings, is not forbiddingly expensive. However, investors need not rush and subscribe to the issue as the prospects seem muted at this juncture. The company’s heavy reliance on cash movement in the organised space, the ever-increasing use of digital cash, and the RBI’s dis-incentivisation of cash usage may limit its top-line growth, despite the company enjoying market leadership positions, across its business segments.

Besides, while operating margins have expanded quite well in the last three years to touch 23.4 per cent in FY21, with outsourced security services, vehicle maintenance and fuel forming major chunk of its expenses, further improvements in margins may not be easy. But given that the company has been following an inorganic growth strategy, any acquisition of a substantial margin yielding business may help further expansion and spur the earnings growth for the company. Investors can watch out for such developments later and then take a call on investing in the stock at that point.

The IPO entirely comprises of an offer for sale by the company’s sole shareholder Sion Investment Holdings Pte (an affiliate of Baring Private Equity Asia), which is offloading 34.4 per cent of its stake for ₹1,100 crore (issue size). The company has been professionally managed and run by PE investors – Blackstone since 2009, which sold its stake to Sion in 2015.

Business

The company’s current product offerings can be segregated as – Cash management services (comprising 68.6 per cent of FY21’s consolidated revenue), managed services (27.9 per cent), and others. The cash management services segment includes end-to-end ATM replenishment services, cash pick-up and delivery, network cash management and verification services, and cash-in-transit services for banks. The managed services segment includes banking automation product sales, deployment and associated annual maintenance; end-to-end Brown Label deployment and managed services for banks as well as remote monitoring for ATMs.

Besides, it also provides end-to-end financial cards issuance and management for banks and card personalisation services, currently comprising 3.5 per cent of revenue in FY21. The company has forayed into such diverse solutions, through the inorganic route. Its notable acquisitions include Securitrans India in 2011 (ATM cash management services and Cash in Transit), Clover in 2017 (Managed Services and Brown-label ATMs), Checkmate in 2018 (Retail cash management), Logicash in 2020 (ATM cash management) and Hemabh in 2021 (Remote monitoring).

Given its strong balance sheet, the company may continue this strategy in the future, which can help drive further growth if the businesses acquired are value adding.

Serving over 15,000 pin codes, with a fleet of over 3,900 vans, the company achieved a total currency throughput (total value of the currency passing through all ATMs and retail cash management businesses of CMS) of ₹9.15-lakh crore in FY21.

India’s under penetration of ATMs (only 22 ATMs per 1 lakh adults, compared to world average of 47 ATMs, as of December 2020), the RBI’s strict IT compliance requirements and increasing outsourcing of ATMs by banks, continue to provide scope for expansion for CMS. However, with growing use of smartphones and internet, consumers are moving towards digital cash at a faster pace, which could limit the use of both cash and ATMs by large. Besides, RBI has not just heightened the technology compliance standards for ATMs but has also helped third parties monetise on their services (recent announcement to increase ATM interchange fee to ₹17 per transaction) provided to banks.

This, coupled with the Centre’s tax rules (on cash transactions), may continue to disincentivise consumers for cash usage. While CMS does enjoy a strong market share of 41 per cent of the outsourced ATMs in FY21, the presence of numerous players in the various segments (including international ones), may limit both its area of expansion and pricing power.

Despite the wide range of services it provides across the cash movement cycle – from currency chests to bank branches and ATMs, to further managing retail cash with large corporates – it dependency on formal cash sources continues to be an overhang on growth.

Financials

CMS’s consolidated revenues grew at a muted pace of 6.8 per cent compounded annual growth rate (CAGR) over FY19-21 to ₹1,321.9 crore. However, with operational efficiencies having set in, the company’s operating margins improved from 18.2 per cent in FY19 to 23.4 per cent in FY21. Consequently, following a 4.5 percentage points increase in its net profit margins (12.7 per cent in FY21), over FY19 to FY21, the company’s PAT grew by a 32.4 per cent CAGR to ₹168.5 crore.

Vehicle maintenance, hire and fuel costs and services and security charges— that are essential for cash movement across businesses — form about 35 per cent of the company's total expenses in FY21 (28.5 per cent of its revenues). Employee expenses comprise about 19 per cent of FY21’s total expenses (15.3 per cent of revenues). Substantial growth in earnings from here on hinges largely on the growth of newly acquired risk monitoring business and likely acquisition of other high margin yielding businesses in the future.

CMS is a debt-free company with about 63 per cent of EBITDA being churned as cash.