IPO Size: Rs. 1,100 cr

– Entirely OFS, by promoter Baring Private Equity (100% to reduce to 66%)

Price band: Rs. 205-216 per share

Mcap: Rs. 3,200 cr, implying 34% dilution

IPO Date: Tue 21^st Dec to Thu 23^rd Dec 2021, Listing: Fri 31^st Dec 2021

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

Strengths:

1. 7% revenue and 21% EBITDA CAGR between FY19-21: Company clocked 1,383 cr revenue in FY20, but covid-induced lockdown led to 6% YoY decline in FY21 revenue to Rs. 1,306 cr. Annualising 5MFY22 revenue of Rs. 626 cr leads to 9% revenue growth over FY20, which is healthy. EBITDA margins of 18% pre-covid, rose to 24% during 5 months ended 31Aug21, with PAT margin jumping from 8% to 13%.  
2. Company is a leader in Rs. 2,800 cr ATM cash management market, which accounts for 2/3^rd of FY21 revenue. But larger opportunity lies in Rs. 6,800 cr managed IT services industry, revenue for which has grown at 36% CAGR between FY19-21 and now accounts for 30% of company’s revenue. With ~Rs.2,000 cr order book for brown label ATMs and remote monitoring from SBI/other public sector banks (PSBs) in past 15 months, recurring-natured managed services division has healthy growth visibility.
3. Attractive Valuation: Annualising 5MFY22 EPS of Rs. 5.5, PE multiple for current year is about 16x, which is at a significant discount to closest peer SIS, trading at FY22E PE of 26x, despite lower net margin and slower PAT growth. CMS Info’s EBIT margin of 18% is also higher than unlisted peer AGS Transact’s 12%, which is in the process of launching an IPO.

Concerns:

1. Cash in use / currency in circulation rose to 14.5% of GDP in FY21, vis-à-vis historic average of 12%, due to uncertainty caused by the pandemic. This aberration, which is positive for the company, is likely to correct post-pandemic.
2. Margin Pressure in faster growing segment: While segmental profit for managed services grew from Rs. 35 cr in FY19 to Rs.55 cr in FY21, the segmental margin, on a percentage basis, declined from 17.5% pre-covid to 15% in FY21.

Based on 1 & 2 concerns above, 13.5% net margin reported for 5MFY22 may not sustain.

3. Digital dims prospects: Indian Government and regulators are working towards formalization of economy and are encouraging digital adoption. Thus, over the long term, as share of digital payments in the GDP rises, growth of the cash or informal economy (different from parallel economy) will be slower than country’s GDP growth.