The stock of CMS Info Systems made a tepid debut today at ₹218.5 apiece, gaining 1.2 per cent from its IPO offer price of ₹216. However, the stock has since gathered some momentum and was trading at ₹250.50 – a premium of 16 per cent (at the time of writing this). The company provides cash management services and technology solutions for ATM management to banks, financial institutions, and organised retailers.

The modest gains were on account of the relatively weak subscription for the IPO. The overall offer was subscribed by 1.95 times, while the portion secured for Qualified Institutional Buyers and Non Institutional Investors were subscribed by 1.98 and 1.45 times, respectively. Retail investors subscribed for 2.15 times the shares set aside for them.

The IPO entirely comprised of an offer for sale by the company’s sole shareholder Sion Investment Holdings Pte (an affiliate of Baring Private Equity Asia), which offloaded 34.4 per cent of its stake.

Growth concerns

The company’s current product offerings can be segregated as – Cash management services (comprising 68.6 per cent of FY21’s consolidated revenue), managed services (27.9 per cent), and others. CMS’s consolidated revenues grew at a muted pace of 6.8 per cent compounded annual growth rate (CAGR) over FY19-21 to ₹1,321.9 crore. However, with operational efficiencies having set in, the company’s operating margins improved from 18.2 per cent in FY19 to 23.4 per cent in FY21.

At ₹250 a piece, the company is valued at 22 times its FY21 earnings. At the current juncture, the valuations leave little headroom for growth.

The company’s heavy reliance on cash movement in the organised space, the ever-increasing use of digital cash, and the RBI’s dis-incentivisation of cash usage may limit its top-line growth, despite the company enjoying market leadership positions, across its business segments.

Besides, while operating margins have expanded quite well in the last three years to touch 23.4 per cent in FY21, with outsourced security services, vehicle maintenance and fuel forming major chunk of its expenses, further improvements in margins may not be easy.

CMS is a debt-free company with about 63 per cent of EBITDA being churned as cash. Since the company has been following an inorganic growth strategy, any acquisition of a substantial margin yielding business may help further expansion and spur the earnings growth for the company. However, acquisitions also come with integration and execution risks. Hence investors can watch out for such developments later and then take a call on investing in the stock based on the merits at that point.

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