Brokers cheer CDSL IPO but flag risks before subscribing
CDSL is likely that the listing may also be at a premium to the offer price. However, it is difficult to say if the stock will be a consistent outperformer subsequently, Centrum said.
Sunil Shankar Matkar & Rakesh Patil
The Rs 524-crore IPO of Central Depository Services (CDSL) has opened for subscription today, with a price band of Rs 145-149 per share.
On Friday, one day before the issue opening date, the country's second largest depository, promoted by BSE Limited, already raised Rs 154.07 crore by issuing 1.03 crore equity shares to 15 anchor investors - SBI Magnum Tax Gain Scheme, ICICI Prudential, HSBC Indian Equity Mother Fund, Abu Dhabi Investment Authority–Behave, FIL Investments (Mauritius), Goldman Sachs India etc.
Bids can be made for a minimum of 100 equity shares and in multiples of 100 shares thereafter. The issue will close on June 21.
Brokerage houses advise recommending the issue, citing strong parentage, asset-light nature of business, debt free balance sheet, steady growth, decent return on equity, free cash flow generation, high barriers of entry and ample reserves parked in investments.
The key positive about the company is that it has controlled operating expenses in last 3 years which has led to significant margin expansion of 1150 bps since FY15 to 54 percent in FY17.
It has assigned subscribe recommendation to the issue based on revenue stability, robust financial performance and healthy return ratios.
CDSL will continue to diversify its product and service offerings depending on investors' needs. It has received the letter of intent to register as a warehouse repository. CDSL has also registered as a KYC service agency (KSA), authorised service agency (ASA), as a KYC user agency (KUA) and authorised user agency (AUA) with UIDAI. It also plans to expand its NAD project including more educational institutions.
CDSL being cost effective as compared to NSDL has resulted company to outpace overall industry growth. It believes, valuations are reasonable given the robust business outlook along with decent financial performance over FY12-17. Hence, we recommend subscribe rating on the issue.
Going ahead, it expects that financial savings growth could be supported from 'Rural India' given the constant support by central government to increase their disposable income through different initiatives. This flow could come into financial market in any form such as equity, debt, mutual funds resulting into better growth opportunities for the depository participants such as CDSL, it feels.
Apart from this, the company has been providing different services such as KYC related solutions, insurance dematerialization and commodity repository solutions, which it expects to fuel further growth in the financial performance from medium to long term perspective.
Given the stable growth in the financial performance, strong cash generation, healthy return on equity and a high cash on books (around 35 percent of market capitalisation at upper price band), it feels the issue is attractively priced compared to similar profile of high cash generating service companies.
Aditya Birla Money
Asset light nature of business enables the company to distribute 35-50 percent of profits as dividend. In FY17, it had paid Rs 3 per share as dividend. The IPO is attractively priced with TTM (trailing twelve months) PE of 18x at higher price band of Rs 149.
CDSL which holds 60 percent of incremental market share of beneficial owner account is likely to benefit from rising per capita income, growing Indian financial market and gamut of value added services. CDSL generates 39 percent of revenue (as against 7 percent for NSDL) from annual fees, provides strong revenue visibility. Other services like commodity repository (to be launched shortly), KYC services, e-notice, e-insurance account, NAD project, e-will, etc should aid topline and bottomline going forward.
Further, CDSL’s cash and investments accounts for around 35 percent of market cap, provides adequate margin of safety. It recommends subscribing the issue with long term perspective.
It believes that CDSL is truly a perfect pick to play out the structural growth story of securities markets in India as increasing financial literacy & rising urbanisation is expected to act as tailwinds for this underpenetrated market.
It also likes that a significant chunk of its operational revenues comes from annual fees, as against transaction fees that are the primary drivers of the top-line of the competition. This highlights the relatively lower volatility that the operational revenues of CDSL should experience in comparison to the competition.
It believes that the company would continue to grab a bigger market share of the incremental demat accounts because of its lower net worth & reserve requirements and wide geographic coverage.
Considering the duopolistic nature of the depository business, high barriers of entry, operational leverage, healthy margins, robust free cash flows & ample reserves parked in investments, the research house recommended subscribing the issue.
CDSL stands to gain from operating leverage. It believes that CDSL demands a discount to its domestic peers. It assigned a subscribe rating to the IPO.
Centrum Wealth Research
Given the current decent financials such as high margins, healthy return ratios, free cash flow generation and strong balance sheet, the issue may attract good subscription in the current market scenario where there is lot of buying interest in primary as well as secondary offerings.
Further, it is likely that the listing may also be at a premium to the offer price. However, it is difficult to say if the stock will be a consistent outperformer subsequently.
Post the tapering of initial high growth, the business model of the company is more of an annuity type with steady earnings. Indian market has traditionally not rewarded such businesses handsomely in the past and it is quite likely that the same might be the case with this company as well and its stock price may remain range-bound for longish period of time.
At the same time, given the high cash flow generation, it could be a good dividend play.
According to brokerage houses, following are risks:-
CDSL is one of the two securities depositories in India and thus faces significant competition for investor accounts from the competitor in a variety of ways.
A large proportion of company’s business is transaction-based and dependent on trading volumes.
Appointment of CERSAI as central KYC registration agency may have a significant adverse impact on the business prospects and result of operations of its subsidiary, CDSL Ventures.
Any interruptions or malfunctions in the operation of its IT systems could damage its reputation and cause loss for the business.
Fraud due to unauthorised transfer of securities or service deficiency could result in losses. Further, if account data disseminated by the company contains undetected errors, this could have a material adverse effect on its business, financial condition or results of operations.
Any shift in investment pattern away from securities to other products & services
High dependence on technology and IT services sourced from third partiesRegulatory risks