CMS Info Systems: Blazing a trail; building scale

20 Sep 2023 , 11:42 AM

Recommendation: Buy; Target price: Rs 449

In its FY23 AR, CMS Info Systems reiterated its target of doubling revenue between FY21 and FY25 (the company is tracking slightly ahead of this currently), while strengthening its core and expanding TAM by investing in adjacencies. While CMS grew overall revenue at 21% Cagr over FY21-23, services revenue Cagr was higher at 27.5%. Operating leverage and favourable mix change drove ~560bps Ebitda margin during FY21-23. Risk cost remained stable YoY at ~5% of revenue; cassette swap implementation could bring this down. Rs4.5bn cash balance makes CMS well-placed to invest in the right LT growth opportunities. The stock trades at an attractive 13.8x 1YF PER for 18% EPS Cagr over FY23-26ii. Maintain BUY. 

Beneficiary from higher formalisation and outsourcing by banks: Data points from the AR that highlight healthy medium-term prospects: 1) Formal retail cash collection by cash logistics and BC networks is ~15% of the cash dispensation through ATMs, micro-ATMs and bank branches. 2) In FY23, currency handled by CMS across India grew by 16%, and in metros, it grew by 19%. 3) 10% growth in monthly average cash replenishment at ATMs and a 1.3x increase in average cash collection per point with e-commerce companies in FY23. Analysts of IIFL Capital Services illustrate with a few charts how cash-based payments have thrived in the past few years despite the most conducive conditions for proliferation of UPI. A potential introduction of a nominal fee on UPI eventually may boost the resilience of cash usage. 

Improved mix drove ~300bps Ebitda margin expansion for 2nd consecutive year: ~360bps decline in COGS as % of revenue due to improved mix and operating leverage negated the jump in other expenses led by investments in new businesses like AIoT Remote Monitoring. 

Strong FCF generation; clearly articulated M&A philosophy: Improvement in Ebitda-to-OCF conversion ratio to 76% and lower capex (from FY22 peak) led to ~Rs1.4bn FCF generation in FY23. Capex intensity should come off further going forward. CMS’ diversification initiatives have resulted in contribution from cash management falling from 78% to 66% in four years; the company would look at inorganic opportunities but remain highly selective based on fit, valuation and ability of the target to scale.