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CMS Info Systems IPO key risks: Negative cashflows, intense competition, regulatory changes and more

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CMS Info Systems IPO: The 1,100 crore-IPO CMS Info Systems will open for subscription today and close on Thursday. The company has highlighted several risk factors in its Draft Red Herring Prospectus (DRHP). Among those are negative cashflows, intense competition, outstanding legal proceedings, decrease in the availability or use of cash as the predominant mode of payment in India, limited customers contributing to a chunk of revenue, regulatory changes and a few others.

CMS Info Systems IPO key risks: Negative cashflows, intense competition, regulatory changes and more
The 1,100 crore-Initial Public Offering (IPO) CMS Info Systems will open for subscription today and close on Thursday.
Shares of the cash management and automation solutions provider are likely to list on the bourses on December 31. The company's platform offers its customers a single point of reference across India for their operations. It services 1,33,469 business points spread across 96.4 percent of the country's districts, according to its website.
CMS Info Systems shares will be available for bidding in a price band of Rs 205-216 apiece. Shares will be available for bidding in multiples of 69 which means one lot is valued at Rs 14,904 considering the upper end of price range.
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The Mumbai-based cash management company posted a net profit of Rs 168.5 crore in FY21, up 25 percent on a year-on-year basis. Its total income stood at Rs 1,321.9 crore in FY21 compared to Rs 1,388.3 crore in the previous year.
Here are key risk factors mentioned by CMS Info Systems in its Draft Red Herring Prospectus (DRHP):
1. COVID-19
The company said that demand for its services and the services of its customers has been significantly impacted as a result of COVID-19. CMS Info Systems as a frontline business is exposed to lockdowns, economic disruptions and loss of lives for its employees and third-party personnel. While India is accelerating its vaccination drive, further waves of new COVID-19 cases are still possible, the cash management company cautioned in its DRHP.
 
2. Decrease in availability or use of cash
A decrease in the availability or use of cash as the predominant mode of payment in India could have an adverse effect on the company's business, cash flows and financial condition. If the RBI introduces a digital currency in the future, it may also impact the amount of cash in circulation and result in a decline in the use of cash as a mode of payment in India. This would also adversely affect the company's future plans and strategies and its Brown Label ATMs business.
3. Any adverse development with respect to Indian banks
Any adverse developments that impact the businesses of banks could result in banks postponing or cancelling any planned expenditures with respect to ATM cash management services they outsource to MSPs, retail cash management services they provide or their ATM networks, which in turn could result in decreased demand for the company's services.
4. Limited number of customers contribute to a chunk of revenue
A substantial portion of the company's revenue comes from a limited number of customers. This means that if one or more of its key customers were to suffer a deterioration in their business, cease doing business with the company or substantially reduce its dealings with CMS Info Systems then the company's revenues could decline.
5. Negative cashflows
CMS Info Systems have had negative cash flows from investing activities in the last two years and negative cash flows from financing activities in the last three years and the company said it may have negative cash flows in the future as well.
6. Scaling up Brown Label ATM
In recent years, the company has scaled up its Brown Label ATM offerings and entered into the remote monitoring business. For the brown label ATM business, it deploys capital on behalf of banks to set up ATMs and operate and service them. As the brown label ATM business is still relatively new for the company, it might face operational and/or execution challenges associated with the contracts that it has won to date.
The expansion of brown label ATM service offerings also exposes the company to the risk of declining ATM transactions in India, due to which it might fail to achieve the anticipated returns that it envisioned at the time of entering into such contracts.
7. Intense competition
CMS Info Systems said in its DRHP that it has experienced periods of increased competition from peers in a bid to increase its market share. While this industry has consolidated over the years, it still has a number of industry participants and is subject to competition. The company has highlighted competition and pricing pressures from competitors as risk factors.
8. Invocation of pledges on Promoter's shares
The Promoter has availed a $60 million loan facility and as a security for the facility, the holding company of the Promoter has pledged all of its shareholding in Promoter and all the preference shares issued by
the Promoter with the lending banks. A default by the Promoter of any obligations in the DRHP may result in an invocation of the relevant pledges on the Promoter’s shares, which could cause an indirect change in control of the company and trigger an open offer requirement under the Takeover Regulations.
9. Outstanding legal proceedings against the company, Directors, Subsidiaries, and Promoter
There are outstanding legal proceedings against the company, its Directors, subsidiaries and Promoter. These proceedings are currently being adjudicated at different levels of adjudication before various courts, tribunals and other authorities. Any adverse decision in such proceedings may result in liabilities or penalties, which will adversely affect the company's business and operations.
10. Regulatory changes
The company's business is both directly and indirectly highly dependent on the banking sector in India, which is highly regulated by the RBI and the Indian Government. As a result, its business can be affected by the policies, decisions, and frameworks of the RBI and the Government that relate to certain of its customers, as well as any changes to the existing laws and regulations or the introduction of any new laws, regulations or policies relating to their businesses.
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