CMS Info Systems IPO: How good is it?

In our story, CMS Info Systems IPO: Information analysis, we have shared the key details of the IPO, along with important information about the company. Here we will answer some questions about CMS Info Systems and evaluate it on parameters like management, financials, valuations, etc.

IPO questions

The company/business

1) Are the company's earnings before tax more than Rs 50 crore in the last 12 months?
Yes. The company's earnings before tax stood at Rs 238 crore for FY21.

2) Will the company be able to scale up its business?
Yes. The industry is consolidating, and customers are favouring larger cash management companies. Therefore, being one of the largest in the industry, the company will be able to scale up its business.

3) Does the company have recognisable brands truly valued by its customers?
Yes. Even though brand recognition does not hold much significance in the B2B segment, the company has been able to gain a reputation among its customers.

4) Does the company have high repeat customer usage?
Yes. The company enters into contracts with its customers, typically from one to five years.

5) Does the company have a credible moat?
Yes. The company, unlike its competitors, offers a gamut of services. Moreover, given how difficult it will be to replicate its operations, the company does enjoy a credible moat.

6) Is the company sufficiently robust to major regulatory or geopolitical risks?
Yes. The company is sufficiently robust to significant regulatory or geopolitical risks.

7) Is the business of the company immune from easy replication by new players?
Yes. With a pan-India footprint and a leading market share, the company's operations are immune from easy replication by new players.

8) Can the company's product withstand being easily substituted or outdated?
Yes. The company provides cash management services to banks (mainly). Even though cashless payment transactions are rising, cash will be the dominant payment method for the foreseeable future.

9) Are the customers of the company devoid of significant bargaining power?
No. The customers of the company are MSPs, who are in turn contracted by a bank. Therefore, the customers are not devoid of bargaining power. Also, the company has to participate in a tender process to secure business from public sector banks.

10) Are the suppliers of the company devoid of significant bargaining power?
No. The primary suppliers for the company are its workforce, and it typically negotiates wages and benefits through negotiations with trade unions under long-term collective bargaining agreements.

11) Is the level of competition the company faces relatively low?
No. The company competes with various companies in different segments of the industry.

Management

12) Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
Yes. Post-IPO, the promoter and promoter group will hold about a 65.6 per cent stake in the company.

13) Do the top three managers have more than 15 years of combined leadership at the company?
Yes. The CEO, CFO and the Company Secretary have been with the company since July 2009.

14) Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
Yes, we have no reason to believe otherwise.

15) Is the company free of litigation in court or with the regulator that casts doubts on the management's intention?
Yes, the company is free from any material litigation. However, there are quite a few cases against the company and its subsidiaries.

16) Is the company's accounting policy stable?
Yes. As per the auditors' report, the accounting policy is stable.

17) Is the company free of promoter pledging of its shares?
Yes. The company's shares are free of any pledging.

Financials

18) Did the company generate a current and three-year average return on equity of more than 15 per cent and return on capital employed of more than 18 per cent?
Yes. The company's three-year (FY19-21) average return on equity was 15.3 per cent and a return on capital employed of 31.5 per cent. For FY21, the company generated a return on equity of 17.1 per cent and a return on capital employed of 26.8 per cent.

19) Was the company's operating cash flow positive during the last three years?
Yes, the company reported positive operating cash flow during the last three years.

20) Did the company increase its revenue by 10 per cent CAGR in the last three years?
No. The company's revenue increased from Rs 1,147.6 crore in FY19 to Rs 1,312.0 crore in FY21 at a CAGR of 6.9 per cent.

21) Is the company's net debt-to-equity ratio less than one, or is its interest-coverage ratio more than two?
Yes. The company is debt-free as of August 2021.

22) Is the company free from reliance on huge working capital for day-to-day affairs?
Yes. The company's operations do not require huge working capital. Its working capital days stood at eight for FY21.

23) Can the company run without relying on external funding in the next three years?
Yes. The business generates strong free cash flows. It can run its business without external funding.

24) Have the company's short-term borrowings remained stable or declined (not increased by greater than 15 per cent)?
Yes. The company has been debt-free since FY19.

25) Is the company free from meaningful contingent liabilities?
Yes. The company is free from meaningful contingent liabilities.

Stock/valuations

26) Does the stock offer an operating-earnings yield of more than 8 per cent on its enterprise value?
No, the stock will offer an operating-earnings yield of 7.4 per cent on its enterprise value.

27) Is the stock's price-to-earnings less than its peers' median level?
Yes. Post-IPO, the company's stock will trade at a P/E of around 19.0, less than SIS's P/E of 19.7.

28) Is the stock's price-to-book value less than its peers' average level?
Yes. Post-IPO, the company's stock will trade at a P/B of around 3.0, less than SIS's P/B of 3.6.

Also read CMS Info Systems IPO: Information analysis to learn about the company's key IPO details and important information.

Disclaimer: The author may be an applicant in this Initial Public Offering.