CMS Info Systems

Largest cash management company

Benefiting from high cash in circulation, outsourcing of ATMs cash management, low ATM penetration and pan India presence

CMS Info Systems is Indias largest cash management company based on number of ATM points and number of retail pick-up points end March 2021, as well as one of the largest ATM cash management companies worldwide based on number of ATM points end March 2021. India is the third largest ATM market in the world based on the number of installed ATMs.

For FY2021, total currency throughput of the company, or the total value of the currency passing through all its ATM and retail cash management businesses of the company, amounted to Rs 915886 crore. The business includes installing, maintaining, and managing assets and technology solutions on end-to-end outsourced basis for banks under long term contracts.

The integrated business platform of the company is supported by customized technology and process controls, which enables it to offer a wide range of tailored cash management and managed services solutions to its customers, while generating cross-selling opportunities and driving synergies and efficiencies across the business.

CMS Info Systems cater to broad set of outsourcing requirements for banks, financial institutions, organized retail, and e-commerce companies in India.

Rajiv Kaul is the Executive Vice Chairman, Whole Time Director and CEO of the company. He has been associated with the company since 1 July 2009. He is responsible for the overall management of the company. He has over 24 years of experience across technology, private equity and cash management industry.

The business operates in three segments:

Cash management services include end-to-end ATM replenishment services, cash pick-up and delivery, network cash management and verification services and cash-in-transit services for banks, accounting for 68.61% of revenues in FY2021.

Managed services include banking automation product sales, deployment and associated annual maintenance, end-to-end Brown Label deployment and managed services for banks, common control systems and software solutions, including multi-vendor software solutions and other security and automation software solutions as well as remote monitoring for ATMs, accounting for 27.88% of revenue. The segment revenue grew at a CAGR of 35.88% from FY2019 to FY2021.

Others include end-to-end financial cards issuance and management for banks and card personalization services, accounting for 3.51% of revenues.

The cash management business is largely route-based in nature with 78.11% of revenues in FY2021 being generated from activities where route density drives profitability and enables operating leverage. The managed services business on the other hand is largely recurring in nature with 52.45% of revenue from managed services business is being generated from long-term contracts, which provides high revenue visibility for managed services business.

The services offered by the company helps to increase the velocity of cash through the cash cycle by assisting customers to meet their outsourcing needs and increase the speed with which they handle cash by automating and decreasing duplication in the processing and turnaround of cash. This also allows customers to improve their productivity and reduce their cash handling and processing costs.

As the amount of cash in circulation increases, so does the need for cash and cash-related services. Cash in circulation in India increased at a faster rate than GDP at a CAGR of approximately 13% from FY2001 to FY2021. As the demand for cash and cash related services in India has increased, banks and other participants in India are increasingly outsourcing their ATM operations and management to process and distribute cash to consumers more quickly and efficiently.

The cash replenishment services are outsourced to third-party cash management companies for 60% of 255,000 total ATMs in India as of August 2021. The revenue of cash management market in India grew from Rs 1000 crore in FY2010 to approximately Rs 2770 crore in FY2021, a CAGR of 10.88% due mainly to an increase in the services offered by cash management companies, including cash vault services, bullion management, cash processing and other services.

CMS Info Systems also has a track record of successfully incubating and building multiple new service lines in areas adjacent to its business, which has allowed them to offer a broader range of services and products, as well as realize synergies within managed services business. The integrated service and product offering has enabled the company to shift business mix towards providing more integrated end-to-end services to customers.

Banks and other participants in India are increasingly outsourcing their managed services needs, such as through Brown Label ATMs, where the company deploy, maintain, and manage ATMs on an end-to-end basis under a banks brand name, and other services, such as multi-vendor software solutions and remote monitoring, to drive better ATM management and accountability. As the ATM market continues to shift from bank-managed ATMs to end-to-end deployment by service providers such as us, the business of outsourcing ATM managed services is expected to continue to grow in India.

India has one of the lowest ATM penetration rates in the world, with only 22 ATMs per 100,000 adults, compared to a global average of 47 ATMs per 100,000 adults end December 2020, and the government has undertaken initiatives aimed at increasing financial inclusion to give greater access to bank branches and ATMs, particular in semi-urban and rural regions where ATM penetration is very low at 15 ATMs per 100,000 adults. The payments in cash continue to be the primary medium of transaction in India, and accounted for approximately 89% of all payment transactions in 2020. In FY2021, approximately 85% to 88% of all transactions by volume were anticipated to be cash transactions.

CMS Info Systems has pan-India fleet of 3,965 cash vans and network of 238 branches and offices end August 2021 cover all of Indias states and union territories, except remote union territory of Lakshwadeep, 97.04% of Indias 742 districts and 14,949, or 77.46%, Indian postal codes, including difficult to reach and remote rural and semi-urban areas. Through network, the company serves 141,977 business points across ATM cash management, retail cash management and managed services businesses end August 2021.

CMS Info Systems is also supported by Promoter, Sion Investment Holdings Pte, which acquired the Company in 2015 and is an affiliate of Baring Private Equity Asia, a private equity firm that has over US$27 billion assets under management end June 2021. Promoter held 100% of share capital end August 2021.

The Offer and the Objects

The initial public offer (IPO) consists entirely of a offer of sale (OFS) comprising raising of Rs 1100 crore by issuing 5.37 crore equity shares of face value of Rs 10 each at lower price band of Rs 205 and 5.09 crore equity shares at upper price band of Rs 216.

The issue is to be made through the book-building process and will open on 21 December 2021 and will close on 23 December 2021.

The company expects to receive the benefits of listing of the Equity Shares, including to enhance visibility and brand image among existing and potential customers.

The promoter shareholding at 100% would decline post issue to 65.59%.

Strengths

CMS Info Systems is Indias largest cash management company and had a market share of 24.7%, based on the total number of ATMs in India, as well as a market share of 41.1%, based on the total number of outsourced ATMs in India.

India is the third largest ATM market in the world based on number of installed ATMs, after China and the United States, and is expected to grow at a CAGR of 6.16% from 255,000 end March 2021 to 365,000 by March 2027.

An industry is having a positive correlation between market share, network size and profitability. The industry is also consolidating due to changes in regulations designed to ensure that cash management companies meet certain operating standards with respect to the handing of cash, as well as trends in customer preference favouring larger cash management companies with more scaled and stable operations.

The market share of the two largest ATM cash management companies, one of which being the company itself, has increased from 60.0% in FY2018 to 72.0% in FY2021

The company provides a wide range of services across each stage of the entire cash cycle in India. The size and wide reach of network enables to realize further economies of scale, allowing to increase the productivity of operations and profit margins.

Increasing cash in circulation, which has grown at a CAGR of approximately 10% to 12% year-on-year from 2001 to 2021 and is expected to continue to increase at a CAGR of approximately 10% from FY2021 to FY2025 as GDP continues to grow.

The number of ATMs is rising in India, while the number of banks outsourcing their ATM servicing is also rising as banks focus increasingly on their core business and operations and seek to increase their productivity and reduce costs.

The access to banking services is growing rapidly, such as debit cards have increased at a CAGR of 8% from 2015 to 2021 and numbered 913.8 million cards end August 2021 and are expected to increase the number of debit card transactions as the number of ATMs and ATM penetration in rural areas increases and drive further investments by banks in their ATM networks.

Government initiatives aimed at increasing financial inclusion to give greater access to bank branches and ATMs in regions of India where penetration is relatively low has resulted in an increase in the amount of cash that is utilized through banking and ATM channels

An increase in the interchange fee per ATM transaction from Rs 15 to Rs 17 for financial transactions in India is expected to further support ATM infrastructure growth and deployment.

Brown label ATMs are expected to more than double over next six years from 86,000 end March 2021.

The outsourcing of ATM cash management services is expected to increase from 60.0% end March 2021 as a percentage of the total number of ATMs in India to 75.0% end March 2027.

The company has pan-India footprint with deep penetration in growing markets with a fleet of 3,965 cash vans and network of 238 branches and offices.

The company has longstanding customer relationships leading to increased business opportunities. The company has built up trust through track record of providing efficient, cost-effective, and quality-oriented services, while using risk management systems and processes.

The company has integrated business platform offering a broad range of services and products. The company is present in all major market segments in the cash management and ATM managed services industry.

The systems and processes and their integration into operations give the company a competitive advantage relative to its competitors.

The company has exhibited the healthy track record of strong productivity and operational excellence. The company has increased profitability and the efficiency increasing the density of stops in the routes of cash vans, leveraging the fixed costs of cash processing infrastructure and introducing other efficiencies, such as by standardizing and automating processes.

Weaknesses

The business significantly depends on the use of cash remaining the predominant mode of payment in India. However, the non-cash payments have increased significantly in India and could result in a significant reduction in the use of cash and affect business.

If the RBI introduces a digital currency in the future, it may also impact the amount of cash in circulation.

Any shift in consumer trends with respect to the use of cashless payment methods may lead to a reduction in the amount of cash in circulation, less need for cash to be transported and a decrease in the number of ATMs deployed, less need for cash management services and managed services. This would also adversely affect plans and strategies and Brown Label ATMs business.

The business is highly dependent on the banking sector and any adverse development with respect to Indian banks that adversely affects their utilization of and demand for cash management services or their deployment or utilization of ATMs could have an adverse effect on business.

Top five customers contributed 55.73% of total revenue in FY2021.

The demand for services of the company and the services of customers has been significantly impacted due to covid-19. The business is exposed to lockdowns, economic disruptions, and loss of lives for employees and third-party personnel. While India is accelerating its vaccination drive, further waves of new covid-19 cases are still possible.

To the extent that the covid-19 pandemic worsens or there are further waves of the virus of the future, the company could suffer additional losses, which could adversely affect business and profitability.

The business has significant expenses in relation to employee benefits and cash vans and transportation amounting to 28.89% of total expenses and any material increase in any of these expenses could affect ability to competitively price services, maintain or increase profitability.

The company derives a substantial portion of its revenue from a limited number of customers. Top three customers in terms of revenue contributed 42.36% and top five customers contributed 55.73% and top 10 customers contributed 75.13%. The largest customer is a public sector bank which contributed 17.90% of revenues.

The company is exposed to various operational risks given the large volumes of cash it handles, and the large base of ATMs managed.

By virtue of the nature of industry and being in the business of handling large volumes of cash, the company is exposed to various security risks and crimes that may originate from within the company.

While industry has consolidated over the years, it still has many industry participants, and is subject to competition, including in respect of pricing of services.

The Promoter has availed a US$60 million offshore loan facility dated 14 August 2017 and the holding company of Promoter has pledged all its shareholding in Promoter as security.

The businesses of certain of customers are regulated by the RBI and the government, and business can be affected by the policies, decisions and frameworks of the RBI and the government that relate to those customers.

The success of businesses depends in part upon ability to effectively deploy, implement and use information technology systems and advanced technology initiatives in a cost effective and timely basis.

There are outstanding legal proceedings against the company, directors, subsidiaries, and promoter. Further, Rs 56.16 crore is reflecting as contingent liabilities with respect to the outstanding litigation in the Restated Financial Information end August 2021.

Any change to the features of Indian bank notes that are processed or dispensed from ATMs and other automated cash machines serviced or deployed by the company, such as to the size or the addition of tactile features onto notes, could require modifications to the ATMs or automated cash machines that result in delays or inefficiencies in ability to service or deploy those machines.

The offer is entirely an OFS and the proceeds from this Offer will not be available to the company.

Valuation

CMS Info Systems witnessed 6% decline in revenues to Rs 1306.09 crore in FY2021, while snapping strong 21% growth to Rs 1383.24 crore for FY2020. However, the company has continued to improve the OPM from 17.3% in FY2019 to 18.4% in FY2020, 22.5% in FY2021 and further higher to 23.9% in five months ended August 2021. The revenues of CMS Info Systems have increased at CAGR of 7% between FY2019 to FY2021.

Despite the decline in revenues for FY2021, the company has posted 25% growth in the net profit to Rs 168.52 crore in FY2021 after strong 40% surge in the net profit to Rs 134.71 crore in FY2020. The net profit stood at Rs 84.47 crore for five months ended August 2021. CMS Info Systems has consistently improved RoE from 12.9% in FY2019 to 15.8% in FY2020, 17.1% in FY2021 and 19.1% (annualized) for five months ended August 2021.

The post issue book value (BV) of CMS Info Systems is Rs 71.6. P/BV works out to 2.9 times at the lower price band of Rs 205 per share and 3.0 times at the upper price band of Rs 216 per share.

EPS of CMS Info Systems for FY2021 works out to Rs 11.4 and offer is made at PE of 19.0 times at upper price band of Rs 216. EPS for five months ended August 2021 works out to Rs 13.7 annualized and PE is 15.8 times.

The post issue m-cap for CMS Info Systems works out to Rs 3197 crore at upper price band.

Among the comparable peers, SIS, the second largest cash logistics services provider in India with diversified business, operates over 2,119 cash vans, service 10,800 ATMs and provide doorstep banking services across 11,183 pickup points and operate 50 vaults and strong rooms covering over 300 cities across India. The cash logistics segment revenues of SIS have increased 2.3% to Rs 330.4 crore in FY2021, while EBITDA margin was steady at 8.6%. The company has substantially improved EBITDA margin 10.8% in H1FY2022 from 8.3% in H1FY2021 with 17.5% surge in revenues to Rs 174.8 crore in H1FY2022. A cash logistics segment contributes 3.5% of overall revenues of SIS and 5.2% of EBIDTA in FY2021.

The overall OPM of SIS has hovered in the range of 5% to 6% for last five years. The revenues of SIS have increased at CAGR of 13% between FY2019 to FY2021. SIS has also posted healthy RoE of 16-20% during last five years.

SIS is trading at 3.6 times its book value and PE of 18.2 times FY2021 consolidated EPS and 26.1 times H1FY2022 annualized consolidated EPS.