Buy CMS Info Systems Ltd For Target Rs. 620 - Elara Capita
Execution delays impact quarter
CMS Info Systems (CMSINFO IN) posted flat revenue in Q3 as a 10% decline in the Managed Services segment (mainly on account of a delay in orderbook execution) offset an 8% YoY growth in Cash Logistics. The company has executed ~30% of past five quarters’ order wins (INR 1.9bn) and thus, delayed execution has deferred revenue. EBITDA margin rose 150bps YoY and 290bps QoQ to 27.4%. Margin improvement was mainly attributable to the cards segment. Margin for Managed Services rose 220bps sequentially due to a mix change towards services segments. Overall EBITDA grew by 6% YoY and PAT by 7% YoY.
Guidance cut, expect muted Q4 on higher base: CMSINFO has cut its FY25 revenue guidance to INR 2.45-2.5bn from INR 2.5-2.6bn, which translates into a muted revenue trajectory for Q4FY25. Q4FY24 revenue had higher revenue from sales of lumpy products. We believe revenue recognition from pending orderbook will be delayed till FY26. The orderbook challenges are only a case of revenue deferment. For Q4, we estimate revenue growth of 2% YoY, translating into FY25E revenue growth of 8% YoY to INR 24.4bn, lower than guided. Subsequently, we expect FY26 revenue to be higher as the base for FY25 resets.
New businesses seeing good traction: CMSINFO has been piloting remote monitoring projects with retail and e-commerce clients and has subsequently won an order from a quick commerce player to implement remote monitoring services at dark stores. This segment has an internal rate of return (IRR) of 15-18%. Total order wins for 9MFY25 stood at INR 7bn (Q3: INR 3bn). We believe the foray beyond BFSI space provides substantial opportunity for CMSINFO.
Industry consolidation playing out; opportunity for CMSINFO over medium term: CMSINFO’s large competitor in Cash Logistics and Managed Services segments has faced operational challenges due to high balance sheet leverage leading to disruption and instability for bank partners. This will likely lead to a shift in relationships and contracts to CMSINFO, thereby aiding growth.
Reiterate BUY at enticing valuations: We pare down our TP from INR 720 to INR 620 on account of downward revision in estimates and valuation multiples – We revise our one-year forward EPS to INR 31 from INR 33 and valuation multiple to 20x P/E from 22x P/E (factoring in lower growth).
However, we view the recent price corrections as excessive, as the current price does not fully reflect the value of cash on balance sheet (13% of market capitalisation), and stable operating cash flows owing to annuity and long-term contracts. The unexecuted order wins in the past five quarters of ~INR 13bn represent ~18% of market capitalization. Retain BUY.
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SEBI Registration number is INH000000933
