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‘Best in Class’ at attractive valuation

CMS Info Systems (CMS), India’s largest cash management player and one of the biggest managed services providers, will be a major beneficiary of emerging industry tailwinds such as a) increase in number of ATMs (replacement/new), b) ongoing industry consolidation (top 2 players enjoy c.72% market share vs c.60%% in FY18), and c) increasing compliance requirement and, hence, better pricing scenario (price hike ~30-40%).

On top of this, CMS possesses a) an unparalleled pan-India presence of vans/branches that serve ATMs in 96% of India’s districts, b) strong customer relationships, c) ability to diversify into allied businesses, and d) excellent balance sheet management (post tax RoIC>30%), brilliant cash flow generation (FCF positive in all the past 8 years and future), and net cash balance sheet (since the past 5 years).

Notwithstanding the sharp rise in digital payment penetration, we see a sharp jump in CIC in the past 2 years (apart from macro disruptions such as GST/Demonetisation in the past) reflecting sustained co-existence of cash and digital payments.

We estimate CMS to post a robust 27% CAGR in PAT and 26% CAGR in FCF (FY21-24E). We initiate coverage on CMS with a BUY rating and a Mar’23 TP of INR350 (~35% upside from CMP), basis 17xFY24EPS (adequately backed by DCF valuation methodology). Key Risks: a) Sharp reduction in CIC, and b) delay in implementation of compliance requirements.

Best capability and execution track record: CMS is the market leader in the cash management business (41% market share in outsourced ATM cash management) with an enviable presence (112k ATM and RCM touch points covering 96% of India’s districts), robust infrastructure (vans, branches/offices), and strong customer relationships. This puts it in an opportune position to improve market share/margins further. Moreover, CMS has successfully added several allied businesses including Multi-vendor Software (MVS), Brown Label ATM (BLA), Cards, Product Sales, AMC, Spare Parts, and most recently Remote Monitoring (achieved top tier position within 12 months of foray).

Sector tailwinds: The Cash Management industry is estimated to see 17% CAGR (from INR 96bn in FY21 to INR250bn in FY26), resulting in strong tailwinds for CMS in the form of a) renewal and replacement of ATMs over the next three years, b) compliance requirements leading to higher realisation (route and cassette swap), c) consolidation in the cash management industry into a duopoly (like in global markets) with players exiting the market space owing to strict compliance regulations (require upfront costs), and d) increased outsourcing of various activities and shift to the Opex-based model by banks (help CMS’ managed service business).

Robust earnings growth with ‘best in class’ balance sheet: We estimate CMS to post a strong Revenue/EBITDA/PAT CAGR of 19%/28%/27% in FY21-24 with RoIC>33% in FY24 (20% in FY18-21). CMS has been OCF/FCF positive in all the past 8 years and this is expected to improve further in future.

Initiate Coverage with BUY; attractive valuation (12.2xFY24EPS): We value CMS at 17xFY24EPS and arrive at a Mar’23 TP of INR350 (~35% upside from CMP), backed by DCF evaluation (assume 2% terminal growth for cash management business). We believe the current price ignores possible value accretion through organic/inorganic foray into newer related businesses. Key risks: a) Sharp reduction in CIC, and b) delay in compliance implementation.

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