CDSL – a must inclusion in any demat account
The company is coming out with an offer for sale of 3.5 crore equity shares in the price band of Rs 145 – Rs 149 per share. The issue will be open to subscription from June 19 to June 21.
In the duopoly market of depository (NSDL and CDSL), the listing of CDSL (Central Depository Services (India) Limited) provides investors with an opportunity to participate in the steady, stable, high entry- barrier business. While CDSL (promoted by The Bombay Stock Exchange) prima facie is the smaller of the two depositories and a late entrant in the business, it has been able to recoup lost ground and has been beating its competition in incremental business. Besides depository, the company has diversified into other revenue stream. The steady financials and attractive valuation makes it a must addition in every demat account.The Issue
The company is coming out with an offer for sale of 3.5 crore equity shares in the price band of Rs 145 – Rs 149 per share. The issue will be open to subscription from 19th June to 21st June. At the upper end of the price band, the issue size is Rs 524 crore (QIB 50%, Non-institutional 15% and Retail 35%). At this price, the post issue market capitalisation works out to Rs 1557 crore.
Out of the Rs 524 crore offer – 77% will go to BSE, 14% to SBI, 3% to Bank of Baroda and 3% to Calcutta Stock Exchange.The Business
CDSL offers dematerialization for a wide range on securities like equity shares, preference shares, mutual fund units, debt instruments and government securities. The company has over 12.4 million Beneficial Owner (BO) accounts and 589 registered Depository Participants (DP) spread over 17,000 service centres across India.
For the corporates, CDSL offers facilities to credit securities to a shareholder or applicants demat account. The other services include KYC (know your customer) services in respect of investors in capital markets to capital market intermediaries. Another facility offered by the Company allows holding of insurance policies in electronic form to the holders of these insurance policies of various insurance companies.
CDSL provides online services such as e-voting, e-locker, National Academy Depository, electronic access to security information (easi), electronic access to security information and execution of secured transaction (easiest) drafting and preparation of wills for succession (myeasiwill) and mobile application (myeasi, m-voting) and transactions using secured texting (TRUST).
The Company has been shortlisted as a GST Suvidha Provider (GSP) to GST Network Limited (“GSTN”), a Government of India initiative for recording all filings pertaining to the Goods and Services Tax. The Company is also in the process of setting up a Warehouse Repository.
CDSL deserves a serious look on account of multiple tailwinds.
Stable Revenue: CDSL has multiple sources of stable and recurring operating revenue. Fixed annual charges collected from registered companies and transaction-based fees collected from its DPs provide stable operating revenue. The company is looking at incremental new DP relationships from Tier I and tier II cities.
The company generates additional revenue from corporates through e-notices, e-voting etc. In addition, the services rendered by subsidiaries like CDSL Ventures and CDSL Insurance offer additional income.
Foray into new businesses: CDSL endeavours to provide comprehensive range of services. It has three subsidiaries - CDSL Venture, CDSL Insurance Repository and CDSL Commodity Repository. Starting from KYC services, insurance policies in demat form to getting registered as a GSP, Warehouse repository and National Academic Repository, the initiatives in newer areas speak volume and should start getting reflected as meaningful earnings in the future.
Gaining market share despite its late start: Notwithstanding its late start (1999 compared to NSDL’s 1996), the company has been showing a healthy growth. While its overall share of revenue at 43% is lower compared to its competitor, its market share in incremental demat accounts is 60%.
Favourable macro drivers: Rising per capita income, increasing literacy, India’s demographic dividend with a large working age population and lower dependency ratio and the steady shift in savings from physical to financial are some of the strong macro drivers for a steady future growth of depositories.
Steady Financials: The Company enjoys extremely healthy margins thanks to stable revenue, lower operating costs and benefits of economies of scale. The key elements of costs are wages & employee benefits and software development & maintenance. The faster growth in BO accounts, therefore, has aided margins. The company follows a direct DP connection through centralized database system that ensures relatively low initial setup costs and minimal incremental costs.
Attractive Valuation: While theoretically there is possibility of competition, however, in reality the chances of a third entrant in this business is remote. Any business reliant on technology do carry technological risks and CDSL is not immune to the same. However, in the long history of the company, there hasn’t been any occasion of serious technological disruption. The business model and the healthy financials makes the valuation at 18X FY17 earnings extremely attractive.