CMS Info Systems Ltd

I am currently studying CMS Infosystems. Good to see this thread on Valuepickr. The answers that the management gives to the question concerning threats to their Business Model i.e., the Impact of a higher adoption rate of digital currency/UPI are listed below:

1. First of all, the Cash Logistic Business is a B2B business and their revenue model is not directly correlated to the volume of ATM Transactions, rather their revenues are directly correlated to the no. of touchpoints.
2. It is in the business plan of Banks to add more and more branches to enhance their physical distribution (to improve CASA & Loan growth). Historically, for every branch, 2 ATMS are being added. So, an increase in ATMs will increase CMS’s Cash logistic business.
3. To put down the growth in no. of ATMs, in 2021, there were around 225,000 ATMs & it is projected to grow at 6.5% to 365,000 ATMs by 2027. One more data point that they mentioned in one of their Investor meet was that currently 60% of ATMs are being outsourced by banks, rest 40% are managed by Banks, themselves. This split was 50%-%50% between self-maintained & Outsourced a year back. They said that banks are trying to focus primarily on their core business and outsourcing other things. This 40% ratio will even drop further and thus will increase the market size.
4. The future market size of the Cash logistics business (FY 2027) is projected to be 8000 Cr. Considering their 45% odd market share, this creates a turnover of Rs. 3600 Cr from the cash logistics business alone from Rs. 1300 Cr in FY 2023. This will be a growth of 29% CAGR.
5. Furthur, they said that RBI had issued a circular/data, wherein it stated that Cash and digital currency will co-exist in the future. As a testimony to it, they said in one state of the USA, a law has been passed for the vendors not to refuse payment in cash, signifying the co-existence of both modes of currencies

These were some answers that management gave to the question of the future of the cash logistics business. Another thing that I have seen from my personal experience is that even though I am going the majority time for cashless transactions, i.e., using UPI for small payments for Auto, Cabs, Grocery, Street Foods, etc., these recipients (vendors) do not use UPI for making their payments or in their their expenditure. Rather, what they do is, withdraw cash from their account and use it in their discretionary spending. So, what trend is becoming evident is that earlier, people like you and me used to transact in cash with such vendors for our discretionary spending by withdrawing surplus from our banks (Which means we used to do activity in ATM), v/s now, people like you and me pay through UPI for Discretionary Spending and these vendors are getting money in their bank so they go to ATM to withdraw money from ATM.
The management also said that even after the UPI Transactions touched new highs in our country, but the ATM transactions have remained steady at similar levels. This means that the Set of People using ATM Services is changing but not the level of activity. Although I don’t have the numbers to back this analogy, I do get some conviction after thinking in this way. Any Logical arguments will be positively accepted.

Their AIoT Business & Managed Services business are growing at a good pace their share of revenue to total revenue is also increasing. I believe the biggest moat that this company has is its DISTRIBUTION NETWORK. The pace at which they are growing their newly launched AIoT Business (from 0 to 400-500 Crs in 3 years) is backed by their distribution strength. Leveraging their distribution, they can build a large business from here on.

The other side of me also acknowledges the fact that the management is also looking to diversify from the cash logistics business and reduce revenue share from this segment. They too acknowledge the risk of digital currency in their Annual Report & DRHP.
In a news article shared on VP & other public platforms, I read that they are piloting Gold Logistics & related services also. I couldn’t find any official news for this. If anyone has anything on this part, please share.

Disclosure: I started Studying recently. Not invested currently.