CDSL - Stock for our children

Stock Opportunities Not-so-Hidden Gems
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CDSL’s December 2018 Results publication does not include the Consolidated Balance Sheet data (https://www.cdslindia.com/downloads/CDSL%20Result%20Dec%2018.pdf)

However, the September 2018 Results do (https://www.cdslindia.com/downloads/CDSL%20Results%20Sept%202018.pdf)

If you noticed, the September results publication has 10 pages and the December results has only 7 pages. It seemed weird. I’m sure it is just a mistake. Does any Chartered Accountant / Company Secretary here know if publication of Consolidated Balance Sheet data is compulsory according to the Companies’ Act now?

Thank you.

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Companies Act does not mandate any company to publish quarterly results.

It is Clause 41 of SEBI listing agreement which mandates publishing standalone results every quarter in the prescribed format. They can be either audited or checked under limited review.

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Thank you. I just had a look. It looks like complete Financial Results need to be declared “every six months” only, so that’s what I’m assuming happened here.

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I was noticing this problem in multiple results where press release claims some figures and growth.however results shows only standalone and not agreeing with press release claims. (Eg: Ujjivan and yesterday Nath bio genes) from what I track. So I wonder if we need to press releases with a pinch of salt.

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47

The more I study CDSL business model, the more I become curious as to how it could be disrupted/challenged!
In order to be sure that I am not being overly biased for the business and missing out on the risks, I have gone through the IPO document and brokerage reports on the stock and summarised some key risks faced by the business:

  1. Cyclical nature - The business is dependent on the financial cycle of euphoria and gloom. As people become euphoric about their own financial prospects and those of the economy, they are willing to take on more risk, invest in more financial assets like equities, mutual funds, bonds. But when the market hits the top and things start crashing all around, people look for an exit - they stop their SIPs, withdraw from MFs, So while the bull phase of the market helps depositories, the bear phase become a pain. CDSL derives roughly 20% revenue from the “Transaction charges” stream which is cyclical. This cyclicality, in my opinion, is around the secular trend of deepening of capital markets and more and more participation by India’s rising working population in financial assets.

  2. Threat to online data charges/KYC charges revenue stream - Roughly 15% of operating revenue coming from KYC stream of “CDSL Ventures” subsidiary. But the business segment faces competition from CAMS/e-KYC.

  3. Restricted pricing power - CDSL is required to follow and comply with the pricing determined by SEBI. Further, it also faces pricing pressure from its competitor NSDL. This fixed cost structure means that in case of adverse regulatory action by SEBI or adverse price action taken by NSDL, margins and profitability will suffer.

  4. Highly regulated business - CDSL is a public trust institution which automatically requires a lot of regulatory scrutiny. Besides price control, regulatory action can harm business prospects. For eg.,SEBI issued some guidelines in 2015 requiring DPs to convert existing accounts into Basic Service Demat Accounts (“BSDAs”) and barring them from charging annual maintenance charges. Another eg. is the SEBi relaxing the sponsorship requirements of promoting a depository (a third one!). The only point is promoter can own 15% maximum of the business and will need to spend a lot of time building a network which CDSL, NSDL have already built. Though there is no denying that with SEBI action, entry barriers to the depository business have reduced.

  5. NSDL a competitor with a better network and more institutional participants while CDSL has more retail participation and smaller brokers in its network. A positive aspect of this competition is that CDSL has been eating into NSDL’s market share of BO (beneficial owner) accounts and currently the NSDL:CDSL market share ratio stands at 53:47%. This might be because of the fact that CDSL charges lower transaction fees for larger volumes and this helps DPs lower their costs in turn and because CDSL has a zero fixed fee structure (where if you are not transacting, you are not paying fees). These points also highlight the lack of differentiation inherent in depository business model where both players are providing a similar service and price become the point of competition.
    Also, refer my previous post to get an idea of how the networks built by the 2 depositories are different.

  6. Ancillary risks like legal (tax, criminal, civil) cases pending against the company (~40 crore service tax dispute is a contingent liability), IT hack/fraud, systems failure/outage. Refer DRHP under key risks section to get these 2 points.

Disclosure : Invested recently

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48

Wondering whether it wil be better to invest in bse compared to cdsl, as there are more triggers and after correction it seem to have hit the bottom, any further correction it will match the cash on book.

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Greetings!

Cumulative CFO (Mar 10 - Mar 18): Rs. 371 crs

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Cumulative PAT (Mar 10 - Mar 18): Rs. 594 crs

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Generally, cumulative CFO must be approximately equal to cumulative PAT over a period of say 10 years. But, in this case, PAT is more and cash flows are considerably less (Difference of Rs. 223 crs.)

Even if we account for Depreciation over the same period, it totals Rs. 44 crs.

Receivables are also not that high.

May someone please explain the reason for the difference here.

(Data from Screener.in)

Thank you.

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It’s because of interest income which may be coming under investing activity.cdsl has huge amounts invested in debt instruments

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hi

really liked your write up shared on CDSL earlier and also the risks enumerated in the above post. with respect to the risks though -

  1. e-kyc could be a terminal risk to the company’s kyc business if the government is serious on taking all KYC ops. in MD’s own words - “ I will not be able to comment on the prospects of the continuation of this business, but then I keep my fingers crossed and then under the fear only, we are doing well. That is the way it is.”

  2. A part company’s market share gain in demat accounts over NSDL is on account of growth in zerodha’s operations (currently the largest broker with 0.8 mn accounts), which has em-panelled CDSL as a sole depository for its investors, upsetting the incumbent status quo of almost all large brokerages tying up with both depositories. Consolidation among brokerages and working with only one depository could be a risk to the company’s growth going forward. It is important to note here that transaction revenues form an important revenue stream for brokers also since while CDSL and NSDL charge only 5-5.5 INR per debit transaction, the brokerages ramp this up all the way to 13.5 INR per transaction (Zerodha) and 30 INR (Kotak Securities) and pass it on to the final customers.

i think CDSL has a proverbial toll road moat - all the market participants and the listed companies have to pay an access charge to CDSL to transact on the bourses, for using a scalable platform that essentially operates on its own. Exchange patronage and strong linkages with the existing stock market intermediaries create a large entry barrier for new players to come in, already when there is one depository too many.

Im not sure of the network effects of the business though.

link to my entire thesis is below -

hope this helps.

disc: not invested.

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53

CDSL Results:

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54

CDSL vs NSDL comparison
details analysis

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55

I saw this post on Twitter a few months back. I replied there too. I’m sorry to be the Devil’s Advocate here, but there is a very central problem that this post ignores completely.

I completely agree with the fact that CDSL (Or any exchange for that reason) has the capability of producing a gush of FCF and a float to boot. But it begs the question of what they are doing with all this money.

A firm can do 4 different things with the money on its books:

  1. Pay Dividends: CDSL is already doing this to some extent. But among all the methods, this is the least preferred, for taxation reasons.
  2. Do Acquisitions (Inorganic Growth): Another fine use of Cash is to pay for Growth. However, CDSL cannot do this at all.

SECURITIES AND EXCHANGE BOARD OF INDIA (DEPOSITORIES AND**
**PARTICIPANTS) REGULATIONS, 2018:

“…the depository shall not carry on any activity whether involving deployment of funds or otherwise without prior approval of the Board: Provided that prior approval of the Board shall not be required in case of treasury investments if such investments are as per the investment policy approved by the governing board of depository.”

  1. Invest Efficiently: In many ways, the most logical method of all. However, CDSL really does not have any need for reinvestment (That is, investments in the core business). Don’t trust me? CDSL’s IPO was worth roughly Rs. 523.99 Crores. Two years in, the firm’s Cash and Cash Equivalents (Investments) stands at Rs. 650 Crores. So, not only did CDSL get any chance to reinvest the IPO proceeds, but that money is largely sitting in bonds and Mutual Funds. If the major aim of collecting so much cash on the Balance Sheet was only to invest in securities, then it’s better to let the shareholders decide what securities they would like to invest in i.e. Pay dividends, regardless of it being the poorest method of utilizing cash. In fact, I would go so far to say that CDSL did not need the IPO at all. It is likely the early investors and/or promoters wanted to exit the stock, so the retail investors were given the privilege of holding bonds and Mutual Funds at a steep cost.

  2. Do Buybacks: When I wrote my blog post, I had mentioned that this was the most efficient method to utilize cash for CDSL (Again, going with my statement that CDSL did not need the IPO - so, a buybacks are essentially like correcting the mistake of the IPO, one piece at a time). But again, this is not possible for CDSL beyond a point. In a letter written by BSE to SEC, we see the following:

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If CDSL buys back its own stock and writes it off, BSE’s holding in CDSL will increase, and it cannot go beyond 24%. It is true that BSE itself can tender shares for the buyback, but the risk of making sure that the holding does not go beyond 24% accidentally is high. Imagine if BSE’s tendered shares don’t get accepted - it means that someone else’s shares were, which will further increase BSE’s stake. BSE cannot get a preferential treatment too, since everyone is the same in the eyes of SEBI during a buyback. What a bummer!

Now, after the announcement of Buyback Tax, that’s another red mark on Buybacks.

So in conclusion, CDSL is a duopoly business with both an upside cap and downside protection on Margins (Read my blog post to know more). But due to the organic nature of demand and the decreased need for Capex, it is able to produce a flush of FCF and by virtue of their business model, some float also to boot. But the exchange, due to several regulations and restrictions, is unable to utilize the cash efficiently to deliver shareholder value. As discussed above, the best way to utilize the cash seems to be Dividends, although ironically Dividends are the least efficient way to utilize cash for many companies.

In my eyes at least, CDSL should become a massive dividend payer (Even ~90% Dividend Payout would be completely justified), which is the best way in which they can create shareholder value. If your expectation from CDSL is anything else other than a slow, consistent grower with a butt-load of Dividends, then you should probably revisit your investment thesis.

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I really wonder if demat accounts are growing at such a rate, why is CDSL topline stagnant ?

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Same question here.

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58

[CDSL Results June 2019.pdf (1.2 MB)

Q1’2020 results out. Consolidated details Y-O-Y

  1. Revenue up by ~13Cr
  2. Other income up by ~10Cr
  3. Expenses up by ~16Cr
  4. Net Profit up by ~6Cr
  5. EPS goes up from 2.09 to 2.63
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59

Any idea what has caused this drastic jump in Employee Expenses & Other Expenses? The jump is of almost 100% in each.

I worry that this cash cow has a way of leaking money since there is no need for it.

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Excellent question.

Adding on to it, Other Expenses are Rs. 936.64 Crs in the Standalone results and Rs. 1836.84 in the Consolidated results. So a bulk of the increase came from spending on the Subsidiaries.

CDSL holds 3 Subsidiaries: CDSL Ventures Limited, CDSL Insurance Repository Limited and CDSL Commodity Repository Limited. The first and the last are completely held, while the middle one is held to the extent of 54.25% directly and indirectly.

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CCRL Shareholding: CDSL 52%, BSE 24% & MCX 24%

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I am unable to get the earnings call details for this Q. Surely many analyst will be raising it as well …

For the expense increase, I see the following in Q3,2019 (earlier) earnings call. Not sure whether they are going to tell same provisioning as the reason. Though its mentioned as for 3rd & 4th quarter.

Amit Chandra: Sir, like, in this quarter, we have seen a sharp jump in the other expenses, which is like from 8.5 Crores it has jumped to 12.6 Crores so in this quarter. So can you please, like, provide the breakup of this?
Bharat Sheth: See, generally during third and fourth quarter, we are providing for doubtful debts and bad debts.
So majority comes from the provision for impairment of financial as against provision for
doubtful receivables. Majority is from issuers only as such.
Amit Chandra: Okay. So of these 12.6 Crores the jump is around 4 Crores. So the 4 Crores incremental is around?
Bharat Sheth: Around 3 Crores is from provisional for doubtful debts and bad debts.
Amit Chandra: So we are also going to provide for the next quarter or we have taken into account all the defaults in this quarter?
Bharat Sheth: That is next quarter also some that we will see how much we are, getting amount. Based on it, we will provide. This is based on 9 months as such.

Increased employee cost is a concern.

This means its better to be an employee of CDSL rather than shareholder.

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