CMS Info Systems: Strong core; rapid diversification in store

21 Jun 2023 , 10:38 AM

Recommendation: Buy; Target price: Rs 419

 

Analysts of IIFL Capital Services recently hosted Rajiv Kaul (Exec. Vice Chairman and MD) and Pankaj Khandelwal (CFO) for investor meetings in Mumbai and the US. After having achieved 17%/20% revenue/Ebitda Cagr over FY09-23, CMS’ revenue aspiration of Rs34-38bn by FY27 entails 17% Cagr (at mid-point). The managed services (MS) business should grow faster; 40-42% target contribution to overall revenue vs. 32% in FY23. While CMS would endeavour to maintain margin, the company’s primary focus would be on ensuring revenue growth amid increasing competitive intensity. It would continue to explore inorganic opportunities which offer the right capabilities and meet healthy IRR thresholds. The stock is attractive at ~14x 1YF PE considering 20% EPS Cagr over FY23-25. Maintain BUY.

Cash management to benefit from ATM rollouts, more outsourcing and market share gains: 

In ATM cash management, continued ATM additions (3-4% pa), rising proportion of outsourcing (current 60% can increase to 75-80% over time) and market share gains (47% can potentially go to 60%) should drive volume growth. While regulatory tailwinds will aid realisation in the next 3-4 years, CMS targets 10-15% cash management revenue growth even in the medium-term.

Cash mgmt. revenue should be resilient even if cash in circulation drops: 

Cash management revenue is linked to the number of points served and not cash in circulation (CIC). Volume of cash handled by CMS grew 16% YoY in FY23; even if CIC comes off, higher velocity and movement of cash from unorganized to organized channels should act as tailwinds.

Revenue growth to take precedence over margins: 

MS revenue can potentially double as there are only 2-3 strong players. IoT-based remote monitoring capabilities can be extended to other verticals such as warehousing, retail, NBFC/insurance branches. Though CMS’ industry leading Ebitda margins could improve if competitive intensity is stable, the primary focus would be on revenue growth amid rising competitive intensity. Separately, risk costs (related to theft, pilferage and reconciliation issues) could potentially fall by 0.5-1% as % of revenue from the current ~5%, on cassette swap implementation.