django-cms is a django project itself. So there must be a file called settings.py But I couldn't find it, where it is? how is database connection taking place?
The settings.py file is created when you create your django project (the one that will host the django-cms application). Since django-cms is a django app (similar to django-tables2, django-filters etc) it does not provide a settings.py but will just use the one your project already has.
For more info check out the how to install: https://github.com/divio/django-cms/blob/ddd39215286971ca14f2608510d3e0ba5f4e0772/docs/how_to/install.rst#create-a-new-project - the same guide lists a bunch of required settings for django-cms installation.