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The Business of CMS Info Systems 🏦
Expanding margins and accelerating growth, will it sustain?
Rajiv Kaul had it all.
By 2008, he had won the proverbial game of life.
Armed with an engineering degree from BIT Mesra and an MBA from XLRI Jamshedpur, Rajiv joined Microsoft in 1992 and quickly rose the ranks to become its youngest managing director at the age of 33.
After a stint of 14 years, Rajiv left the comfort and familiarity of Microsoft for the shores of Private Equity.
Yet, that entrepreneurial echo within, nagged him. He wanted something more.
So, in 2008 as a global financial crisis was brewing, Rajiv made his way back home to India. Rajiv’s plan was to hunt for a struggling company (no shortage of those in 2008) and help turn it around into a success.
His search would end in 2009, when he came across ‘Subhiksha Realty Private Limited’. Subhiksha was a small private real estate developer in Mumbai but had an even smaller IT Infra services division within it called - CMS Computers.
Rajiv would convince Blackstone to back him and help purchase CMS Computers from the erstwhile promoters.
Fast forward 14 years, and a change of promoters (Blackstone would later sell entire stake to Barings Private Equity), CMS Info Systems, as its now called, is the leading end to end cash management solutions company operating in India.
The company is debt free, growing its topline by 20% every quarter and boasts return ratios greater than 25% with an EBITDA margin of almost 30%.
This is how the business of CMS Info Systems works.
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Current Business of CMS Info Systems
The current business of CMS can be broadly classified into three main categories
Cash Management (contributes about 65% to the overall revenue)
Managed Services (contributes about 30% to the overall revenue)
Technology Solutions (recent but fast growing - contributes about 5% to overall revenue)
Here is detailed explanation of each business line:
ATM Cash Management
This is the bread and butter for CMS and accounts for the largest share of the overall revenue pie. In this segment, CMS helps banks replenish their ATMs with cash as and when required.
The revenue structure is based on a fee per trip along with a fixed yearly fee. CMS has over 72,000+ ATMs across India under its management. Every 1 out of 2 outsourced ATMs in the country is managed by CMS. This is a mature steady line of business and 90% of revenues are annuity based.
CMS has a 46% overall market share in India for ATM Cash Management.
Retail Cash Management
Similar to ATM Cash Management but for retail outlets. CMS here helps retail chains like DMART, Reliance Retail, petrol pumps etc. transfer cash from their outlets to respective banks.
One of technology innovations in this area by CMS is their offering called Cash-X. Via Cash-X, CMS offers retail outlets deposits in their bank accounts as soon as the cash is picked up and reconciled by a CMS pick up van. This enables a retail chain to get access to their cash deposits within hours instead of days.
The revenue structure in this segment is linked to volume along with pick up points, with 70% of total revenues being annuity based.
CMS has a 36% overall market share in India for Retail Cash Management.
Cash In Transit
In this offering, CMS works with banks to transfer cash from one branch to another within a city or across cities.
CMS helps 12,000+ bank branches transfer cash every single day.
Revenue structure is based on 3 to 5 year contracts with 80% revenues being fixed in nature. CMS has a 26% overall market share in India for Cash In Transit services.
Together, the above three business lines (ATM Cash Management, Retail Cash Management and Cash in Transit), form the overall cash management vertical of CMS.
Self developed efficient route technology helps CMS generate industry leading margins of 25%+ for the cash management business. As the number of touchpoints in this line of business expands, so will these margins due to high operating leverage built in to the nature of the business.
Banking Automation Solutions
CMS helps banks automate their banking functions via ATMs. If you have ever used an ATM that both accepts and dispenses cash - it is an example of a banking automation. Similarly, ATMs that help you change card pins, print passbooks, deposit cheques etc. are examples of banking automation.
In this business line, revenues are linked to sale of banking automation services along with a 7 to 10 year maintenance revenue contract.
Sale and Maintenance of ATMs
CMS also engages in sales as well as routine maintenance and repair of new and existing ATMs. To participate in the ‘Make in India’ movement, CMS has also recently set up an ATM manufacturing plant in Chennai, India.
Card Personalization Services
Anytime a bank issues a credit or debit card, it has the customer name and other details on it. This is usually outsourced by banks to authorized vendors like CMS.
Card personalization is a very tiny part of overall revenue for CMS.
Brown Label ATMs
Brown Label ATMs refer to those ATMs that are owned (by a bank) but operated by a third party service provider like CMS. Usually banks float tender offers and require the third party to purchase and maintain a brown label ATM on their behalf.
In exchange, the banks pays a yearly fee to the third party service provider.
This is a capex intensive business area and as such CMS tends to participate very selectively. It has a target of setting up less than 1,000 Brown Label ATMs per year and is happy to cede market share to other competitors.
The above four business lines, together form the managed services vertical of the business - which generates about 30% of the overall revenue pie.
Overall EBITDA margins for managed services tend to stay below 20%.
This is the most exciting and rapidly growing business segment for CMS today. Via remote monitoring, CMS enables banks to leverage sensors, cameras and other software based automations to effectively govern the security of their ATM sites.
In a simplified manner of speaking, CMS is automating the job of security guards at ATMs. A typical bank spends about Rs 45,000 per month to provide round the clock security for each ATM site. Via CMS remote monitoring offering, banks can achieve the same (if not more efficient security) at less than Rs 10,000 per month.
CMS is also able to provide this service at scale by monitoring all ATM locations from a central site, there by further reducing the cost.
The remote monitoring business is rapidly growing, with revenues scaling from 0 to 100cr in less than 12 months.
CMS envisions providing the remote monitoring solution to retail chains, gold loan branches, NBFCs etc.
Being a software and fixed recurring revenue business, margins are also north of 40% in this segment.
Security Software Solutions (CMS Algo OTC)
This is an ATM access security software service. Whenever an ATM needs to be unlocked to add or remove cash, a bank needs to verify the person performing that service is legit.
Via CMS’s Algo OTC software, a bank can perform this service remotely and in an automated fashion. CMS also helps the banks meet any new RBI guidelines by updating the software on the fly to be compliant in real time.
Multi Vendor ATM Software Management Solution
Another offering by CMS is Algo MVS - which enables banks to upgrade and maintain the software on their ATMs irrespective of which vendors they purchased the ATM from.
In both CMS Algo OTC and Multi Vendor Software Solution, CMS is a market leader in India.
In mature economies like US and Europe, cash management is a consolidated oligopoly industry with the top two players owning more than 90% market share.
The biggest names worldwide are the likes of NCR Corporation, Brinks Incorporated, Loomis AB and Diebold Nixdorf. All these four companies have been around for a while, with NCR being the oldest and the largest among them, having been incorporated in 1884.
While revenue from cash management still contributes to a large chunk of the overall pie for all of them, all four players have, in recent years, shown a tendency to move towards more software-oriented solutions - similar to what CMS has been building for the domestic market in India.
While the global players are 5x larger in size than CMS, their margins are at best less than half of what CMS is able to deliver.
CMS is also growing much faster (~20% quarterly growth rate) than its global peers, who, being much larger and in more mature markets, average at a single-digit growth rate.
Domestic Industry Landscape
While globally, the industry is consolidated and oligopolistic, in India, there are a large number of international as well as domestic players competing in various sub-segments of the market.
Post demonetization, this market has been consolidating at a rapid pace, and existing players are either conceding market share, exiting parts of their business, or leaving the industry all together.
CMS has been able to leverage its strong debt-free balance sheet to take advantage of the consolidation in the industry. The playbook for CMS has been to buy an existing competitor at a slump sale valuation, leverage its relationships with banking customers, and up sell them the new offering as a package in addition to the existing services. Banks, too, prefer to give their business to one large player instead of several smaller ones.
This strategy has enabled CMS to grow faster than any of its competitors and increase its overall market share. Buying cheap and scaling rapidly also lead to high return ratios for the company.
Porter 5 Force Analysis
In order to cement our understanding of this industry, here is a Porter's Five Forces analysis of CMS Info System’s business model.
Few things are evident from this analysis.
CMS Info Systems has some pricing power for its services but they also tend to be largely dependent on regulation and its customer’s willingness to pay. Regulation so far has been favorable for CMS and banks are willing to pay for quality services especially if a vendor can offer end-to-end integrated platform like CMS. This is reflected in the rapidly growing margins trajectory - with EBITDA margins increasing from mid teens to almost 30% today.
Another observation is the increasing number of competitors opting to exit the market and overall market share being consolidated among the larger players. This is also partly driven by regulation - the regulator has over the years increased compliance. Example of these include the requirement to upgrade all ATMs to a cassette swap instead of traditional locker based, live tracking of all cash vans and timelines to reconcile cash. This increasing cost of compliance is driving smaller players out of the industry and acting favorably for larger players, like CMS.
Finally, the threat of substitute from a shift towards digital payments is real and ever growing. UPI has been a great differentiator and enabler for India to move towards a more digitized payment system. However, this move hasn’t impacted the cash usage in the economy. Cash in Circulation - a metric used by RBI to describe cash usage has essentially increased at an annual rate of 5.33%.
This increase in cash usage is not just across rural and semi urban areas but even within developed metros. In-fact, the state of Karnataka has the highest ATM replenishment rate at Rs 1.73cr per ATM per year across India!
It is clear from the above analysis, that CMS is witnessing tailwinds in its business driven largely by increasing pace of industry consolidation - leading to operating leverage kicking in. While the threat of digital payment looms, in the short to medium term, the use of cash seems to be stable and persistent in the economy.
Financial Analysis of the Company
CMS boasts of healthy, fast-growing financials. The 3-year sales CAGR has been 11%, while profits in the same timeframe have grown by 31%.
The margin profile has accelerated in recent years. CMS has gone from earning 17% EBITDA margins in 2019 to 28% in 2023. The main reasons for this growth have been operating leverage along with an increased share and growth of higher-margin businesses like software solutions.
A minor area of concern within the financials is the large share of intangible assets when compared to the overall fixed asset pie. Total intangible assets (goodwill, etc.) accounted for more than 50% of the total assets in 2019. However, this figure has sharply reduced and is now at 25% as of March 2023.
Overall, at 18x trailing twelve-month earnings and 10x EVEBITDA, the company seems reasonably priced given the backdrop of an accelerating growth rate and increasing margin profile.
The company also boasts a 25% dividend payout ratio and a debt-free balance sheet with over ~1400 crore in reserves.
The management has guided for a doubling of the topline by 2025 and an immediate yearly growth rate of 18%.
So far, they have been ahead of their target goals.
Risks and Growth Triggers
There are three main key risks for CMS Info Systems:
Market Structure Risk
CMS largely derives its business from the use of cash in India's economy. Given the adoption and focus from the government to digitize the economy, there is an increased risk to the business.
While the use of cash may not decrease in the next 5 to 10 years, the same cannot be stated with a high degree of certainty for the following 10 years.
The company operates in a highly regulated industry. Any adverse regulatory changes can quickly erase margins and hinder growth.
RBI, so far, has been pushing for stricter compliance and supporting the formalization and growth of the cash management industry.
However, governments and policies can be unpredictable, and they tend to change every few years.
The promoter for CMS is a large private equity fund - Barings. The PE fund has been liquidating their stake in the company, and all PE funds have an exit timeline.
There may be a risk of increased share supply, which could keep the share price down or in range for an extended period.
There are several growth triggers for CMS playing out today, I will highlight the three main ones:
Increasing pace of consolidation in the Industry
As mentioned earlier throughout this article, the industry in which CMS operates is undergoing rapid consolidation. CMS, being a leader in the industry, stands to benefit from this change, leading to a higher market share.
Scaling up of New Business Verticals
CMS has been successful in rapidly scaling up new business verticals like remote monitoring, which has reached a revenue run rate of 100 crore within 12 months.
Incubation of New Business Lines
Constant innovation combined with the luxury of a strong balance sheet allows CMS to incubate new business lines. The latest business incubation is focused on cash collections - an area that is largely unorganized but crucial to the business of a bank.
Below is an excerpt on cash collections business from the CMS Investor Day.
“In the collection space in India, the focus has been primarily on lending money rather than collecting money. Our idea was to create a business model that addresses this gap by leveraging three key elements. Firstly, there are numerous small, semi-organized or unorganized collection agencies in the country, but none of them have achieved scale or operate nationwide. Secondly, the collections value chain encompasses technology, contact centers, and customer outreach, each handled by different companies. Lastly, there is a lack of a comprehensive solution that combines all these aspects. This interested us the most, as banks seek partners who prioritize reputation management and brand integrity. Currently, we are in the incubation phase, assembling a team and hiring experienced leaders from the industry. Our focus in the upcoming year will be on piloting and investing in the business, working with large NBFCs and exploring partnerships with additional organizations. This year will serve as a pilot period to evaluate the scalability and success of our approach.”
Rajiv Kaul, CMS Investor Day, May 2023
In my view, CMS Info Systems is a company undergoing metamorphosis. The business is transitioning itself from a cash management company to a business solutions company for financial institutions.
The company is run by able and proven management, available at reasonable valuations and exhibiting accelerated growth.
There are terminal risks to the business due to increased digitization of money but these terminal risks seem to be more than a decade away. Cash in India is sticky, as evident from RBI’s data.
The business also is pushing to transform itself by incubating new revenue lines that are agnostic to the form of money.
I hope this write up helped you understand the business of CMS Info Systems in a holistic manner. If you enjoyed reading this and have any feedback or insights, please share by leaving a comment below 👇
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