CDSL Primary Offer: Promising prospects - Subscribe

Central Depository Services India (CDSL) is making an initial public offer (IPO) that opens on Monday. CDSL facilitates holding of securities in electronic (demat) form and offers services to market participants, corporates and capital market intermediaries in issue and transfer of securities. The company’s promoter, BSE, a listed stock exchange, will be offloading 2.7 crore shares through the offer for about ₹405.5 crore. The total size of the offer is ₹524 crore (at the upper end of the price band) with a few other institutional investors too selling stake. Post the issue, BSE’s holding in CDSL will reduce from the current 50.05 per cent to 24 per cent. SEBI’s regulations require that no stock exchange shall hold more than 24 per cent stake in a depository.

The increasing interest in financial savings among households and the growing number of companies that make a debut in the market every year, make prospects bright for depositories. Further, with increasing interest to hold financial instruments including bonds, mutual funds and insurance policies also in demat for saving on costs and convenience, the demand for depository services is only set to increase.

There are two depository organisations in India — NSDL (promoted by NSE) and CDSL (promoted by BSE). CDSL had 1.23 crore demat accounts as of March 2017. The company’s market share stands at 44 per cent (1.23 crore demat accounts as of March 2017), up from 39.7 per cent, five years back.

CDSL’s prospects looks promising. Its drive to grow market share by penetrating into tier II/III markets, focus on building relationships with depository participants to add investor accounts and diversification into new lines of business including demat of insurance policies and academic awards (under the National Academic Depository initiative of the central government) should drive revenue higher. The company is also a SEBI registered KYC Servicing Agency. It makes revenue offering of KYC services to capital market investors.

In 2016-17, revenue from operations stood at ₹146 crore and net profit was ₹86.5 crore. While revenue was up 19 per cent over the previous year, net profit was down 5 per cent. Profits declined as in the previous there was a gain from reversal of a provision made for contribution to investor protection fund. In January 2016, SEBI amended the Depositories and Participants (Amendment) Regulations, 2012, and brought down the contribution to investor protection fund by depositories to 5 per cent from 25 per cent earlier. This required depositories to reverse the provision made in the earlier years in 2015-16.

Though CDSL’s future depends on the prospects of the capital market, the plus is that a good portion of its operating income is stable — revenue from the annual charges collected from companies for their listed stocks and the fees charged for corporate action, made up 49 per cent of revenue in 2016-17.

At the upper end of the price band of ₹145-149, the company is asking for a valuation of 15 times its expected earnings for 2017-18. This doesn’t look expensive, given the promising business.

In its initial public offer in January, BSE asked for a valuation of 17 times.

As businesses of both CDSL and BSE, have similar growth drivers, the valuations are comparable.

After the offer, CDSL’s stock will be listed on the NSE.

CDSL’s business has grown strongly in recent years. While for NSDL, additions in demat accounts have happened at the rate of 5.3 per cent on an average annually in the last five years, for CDSL, it has grown at an annualised rate of 9.2 per cent. The company also has a higher number of depository participants (DPs) — 588 versus NSDL’s 264.

DPs are agents through whom the depository offers its service to investors. In the case of stocks, it is stock brokers and banks.

CDSL’s consolidated revenue has grown at a compounded annual rate of 18 per cent in the last three years. In this period, profits have grown at the rate of 20 per cent.

The company’s revenue comes from servicing DPs and corporates.

CDSL charges corporates an annual custodial fees for record keeping of issued securities. It also charges for corporate action (bonus issue, subdivision of holdings and conversion of securities in a merger, amalgamation) on per folio basis and for conducting e-voting.

From DPs, the income is mainly the transaction and settlement charges as and when the investor trades.

Besides, the company makes revenue from demat of insurance policies and offering common KYC services through CDSL Ventures, its subsidiary company. As of April 2017, the company had more than 325,000 e-insurance accounts which held a total of 66,000 insurance policies. Services such as e-voting and e-locker are also offered for a fee. CDSL Ventures is registered with SEBI and the UIDAI. It is the first KRA (KYC Registration Agency) registered with SEBI under KRA regulations. It provides common Know Your Client (KYC) services for investors in the capital market.

In 2016-17, of the ₹146 crore revenue from operations, ₹52 crore was from corporates as custodial charges, ₹17 crore from services on corporate action and about ₹4 crore from e-voting. This adds up to a total of 49 per cent. Of the balance, ₹24 crore was from CDSL Ventures and the rest from DPs for the transaction and settlement service.

CDSL is focusing on growing its revenue by expanding the DP network in tier II/III cities. The management has also indicated that it intends to build on relationships with its existing DPs and get new investor accounts and grow market share.

The company’s new businesses also hold promise. It has applied for the licence of a warehouse repository and has set up a new subsidiary- CDSL Commodity Repository. Operations under this repository is soon set to start says the management. The company intends to bring MCX and BSE as minority joint venture partners in the new subsidiary by selling a part of its stake.

It is also undertaking the activity of National Academic Depository project. If the idea catches up well and there is demand from more universities to convert their awards/certificates/mark sheets into demat from paper form, CDSL may see benefit.

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