When we use a banking service or an ATM service, the bank or the ATM is just the front-end interface. Behind that front-end there are millions of processes in action like the hardware aspects, the software support, the maintenance contracts, the logistics of moving cash etc. Once such company with a leadership position in this space is CMS Info Systems Ltd. The company is 100% owned by Baring Private Equity through its unit Sion Investments Pvt Ltd.
CMS competes with the likes of NCR, Hitachi, SIS and Brinks Arya in providing these support and enabling solutions to banks for their cash management and their ATM managed services. It counts most of the large PSU and private banks among its clients. CMS also offers ATM replenishment; bank automation and maintenance; and end-to-end card issuance and management services for banks and financial institutions.
CMS Info Systems has a pan-India fleet of 3,965 vans supported by a physical network of 238 offices and branches across India.
Let us first check how the IPO of CMS Info Systems Ltd is structured
- The Rs.1,100 crore IPO of CMS is entirely an offer for sale and there is no fresh issue. The IPO is being undertaken purely from the point of view of listing the stock, giving partial exit to the promoter and to facilitate the use of stock as currency for valuations.
- Sion Investments, a unit of Baring Private Equity Asia will offer 509.26 lakh shares, which translates into a total issue size of Rs.1,100 crore at the upper price band of Rs.216.
- Currently, Sion Investments owns 100% of the issued capital of CMS Info Systems comprising of 1480 lakh shares. After Sion offers 509.26 lakh shares in the OFS, its holding will come down from 100% to 65.59%. Public holding post IPO will be 34.41%.
While revenues were flat over the last 1 year, it must be said that the impact of the pandemic although visible was minimal. On a comparison of FY21 with FY19, the sales revenues are up 14%. During the same period, CMS Info Systems reported 74.8% growth in net profits largely on the back of better cost management.
What would be supportive of valuations for CMS is that most of the key profitability ratios like EBITDA margins, net margins and ROE have shown substantial improvement in FY21 compared to FY19. On the strength of better operational cost management, the margins are nearly 50% higher across the board compared to FY19.
How should investors approach the CMS Info Systems IPO?
Here are key factors to consider before investing in the CMS Info Systems Ltd IPO.
1. The company has strong financials as evidenced by the robust 2 year growth in sales, profits and EBITDA profit margins. The fact that the company is not diluting its total equity will also be value accretive for the stock.
2. CMS is poised to benefit from deep linkages and relationships with banks and financial institutions. Handling cash is a relationship of trust and that is where pedigree matters. Its in-depth understanding and expertise in technology and process is a boost.
3. At a P/E of 19X and ROE of over 17%, the valuation of the company does look interesting from a medium to long term perspective. Also, the highest margins are from the cash margins business which accounts for 68% of revenues. There is merit in the mix.
There are some risks for the investor to be conscious about. Digital shift could be a big risk to the viability of cash management. Also, the dependence on the top 10 customers is 70%, which is always a risk.
Should you INVEST in the IPO of CMS Info Systems Ltd?
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