CDSL - Stock for our children

Stock Opportunities Not-so-Hidden Gems
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Background

CDSL was initially promoted by BSE Ltd. which has thereafter divested its stake to leading banks as “Sponsors” of CDSL. There are currently two share depositaries in India . NSDL (National Securities Depository Ltd) and CDSL (Central Depository Services India Ltd)

NSDL was promoted by some giant institutions including the likes of IDBI Bank, UTI, NSE and some other institutions, while the CDSL was also promoted by some solid institutions including the likes of Bombay Stock Exchange, Bank of Baroda, Bank of India, HDFC Bank

The initial public offering (IPO) of Central Depository Services (India) Ltd (CDSL) received overwhelming response and got listed in June 2017.

CDSL is listed only in NSE (as BSE owns stake in it ) . NSDL is yet to come up with IPO hence CDSL is the only listed depository currently in the Indian market.

Financials

CDSL clocked a revenue of @225 crore for period ending March 2018 which is 20% increase from previous year end revenue of @186 crores . The PBT was 141 crores vs 116 crore and net profit is 103 crore vs 86 crores

Plus

  • Currently there are only 2 DPs and there is a huge entry barrier for new players.
  • The number of demat shareholders are expected to increase as many people / fund houses are entering the stock market.
  • Expenses are expected almost to be same and the upside revenue to grow y-o-y.
  • They are also getting into academic demat & discussion are on about unlisted indian companies being dematerialized

Minus

  • SEBI plays a major role in framing policies and CDSL is expected to adhere to them including the tariffs .The charges are fixed by SEBI and CDSL has limited options to show exceptional increase in revenue.

  • SEBI is considering allowing corporates to enter the depository business based on the recommendations of the panel under RBI Deputy Governor R Gandhi.

  • NSDL, continues to lead with a market share of around 57 percent, but CDSL has been consistently gaining market share from NSDL.

  • e-KYC norms and any new disruption based on any new government policies.

Disclosure:
Invested in CDSL and opinion may be biased. Kindly do a thorough analysis before investing.

Popular Links
https://www.cdslindia.com/aboutcdsl/introduction.html




Notes:

This is my first post of company analysis. Feedback for improvements are welcome.

The details of CDSL are very limited seen in internet and i read it on of valuepickr post about it and started SIP in it. On account of it , its titled on similar lines mentioned in the post. Thank you valuepickr and team member for highlighting the stock .

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Thank you for starting this thread. There was an existing thread earlier, which was deleted. I had written the below note on that thread at the time of IPO, and repeating it here for reference (there would be some overlaps with the above note).

As a matter of disclosure, I had bought the stock on listing and exited. Currently I have no holdings. I havent been closely tracking it and hence do not have result updates. Fellow members can post about subsequent events wherever they are tracking.

Advantages:
We would all know that the company has:

  • varied revenue streams – of which, 50% is from issuer charges, which is stable, and annually recurring in nature; 30% from transaction charges whose share in the overall revenue is expected to increase going ahead.
  • good growth potential – with increasing financialisation of savings and current under-penetration (china has 17-18cr demat accounts where india has less 2.8cr)
  • dupoly structure, with CDSL having 45% market share by revenue, 45% market share by no. of demat accounts and 60% incremental share of new demat accounts opened. There is no listed peer (I understand it is the 1st depository in Asia to be listed and only the 2nd in the world (1st is from Peru). So there will be some element of scarcity premium also).

Way ahead for the business:
It is interesting that CDSL has lower requirement than NSDL for capital and solvency parameters for Depository Participants (DP) and hence is able to attract more DPs to open accounts and associate with CDSL. Also, their focus is on tier 3 and 4 towns, where this could be an advantage (lower capital requirements). With such wider coverage by enlisting more DPs in lesser tier cities, the share of transaction revenues is expected to increase going forward.

Further in 2014, government announced unified demat account for all financial instruments, which is not yet launched. However CDSL is prepared for this (not sure whether NSDL also is).

Some points on financials (these are for FY17; will try and update for FY18 later):
CDSL Fy 17 pat is 87cr. Their other income is 40cr which is generated from cash and investments of 500cr (50 rupees per share is the investments value – this comprises bonds and MF investments). This other income has been steady for last 3 years (minor fluctuation) giving yield of 8%.

Other income per share works out to 4 Rs. Core business eps is appx 4.2 for Fy17. This may increase to 5 this year. At 250 stock price, excluding, cash of 50, the PE works out to 40x. 2600cr is the market capitalization currently.

The FY17 ROE is 16% (87cr pat on networth of 550cr). However, out of networth of 550cr, 500cr is cash equivalents (investments). So capital employed in operating business is 50cr. On this they are generating net profit of 45cr (excluding other income). The ROE appears quite high. (Note – similar metric continues for FY18 also – very high ROE for the operating part of the business, after excluding cash balances and income from cash, from networth and total profit respectively – more than 85% if I remember right)

That’s why their dividend payout is around 50% and is likely to remain so. Their fixed asset investments are expected to be 5-6cr per year (in FY18, the company spent 70cr to purchase their own office premises, which is one time expense).

In duopoly structure with growing market, if they are able to maintain their sales growth rate of 15-20%, profits can grow at a higher rate. Further, free cash flows are expected to increase, and dividend payout is like to remain robust at 50% or more.

CDSL FY17 revenue from operations is 146cr. Other income is 41cr. Total income is 187cr. Of this 37% is annual issuer charges ie 69cr. Total DPs are 589 which means 11.7 lakh per DP. No of demat accounts are 123 lakh, implying 56 Rs per account. No of service centers is 17500 implying Rs. 39.5K per service center.

A 20% increase is just Rs10 per demat account. It will go unnoticed by customers. Provided SEBI allows them to increase.

Demand is inelastic and fee is relatively small. Such cos typically have good pricing power. Here, ofcourse, it will be little regulated.

Risks:

  • Naturally, if people get dissuaded from equity investment, then growth will slow down.
  • NSDL increasing its aggression to take away market share
  • Whether the low capital/solvency requirements of DPs can have an adverse impact on CDSL in case they fail or go bankrupt is not known.
  • It’s a heavily regulated entity. Hence there will be a cap on how much it can charge for its services, hence will always remain a moderate growth company. It is possible that government can change some regulation which can adversely affect CDSL.

Some old but relevant links:

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Attaching latest concal transcript, with some key points highlighted.

CDSL Q4 concal transcript.pdf (344.8 KB)

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Demat compulsory for unlisted shares by September

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Any idea why they are holding Rs. 500 cr + of cash and equivalents? Any plans of putting this to good use… if not why not pay a good dividend?

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Thanks Mylu for highlighting this co.

It seems to me that the breakup of the current duopoly is the real risk here.

Judging by the news report below it seems that SEBI is leaning towards doing so & thats why they constituted this committee in the first place to look into the pros and cons.

https://www.thehindubusinessline.com/economy/sebi-may-allow-corporate-entities-to-provide-depository-services/article23041847.ece

The reports not been submitted so far I think, as its not on SEBI site.

However if this is allowed, I dont see why other corporates cant rush in here and undercut prices to get customers away from the existing 2 DPs. The opportunity is very attractive with lots of future growth potential, the capex doesnt seem to be enormous for setting up one and the high margins certainly give plenty of room to reduce prices and still make decent returns.

If SEBI takes a decision not to allow additional DPs then I think this would be a very good & safe space to invest. Otherwise I dont see how current returns can sustain long term.

Im definitely going to be keeping a close watch on what happens.

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  1. Even if corporates are allowed to setup a depository, DPs would have difficulty in switching from one depository to another for so many individual accounts (aka high switching cost of CDSL’s customers as a moat).

  2. For DPs like HDFC / ICICI / Yes / Zerodha (which control most of the market), money is not the problem, but trust and proven model is definitely a huge factor for choosing a depository. Can DPs risk their customers e-shares by trying a new depository ? New DP can opt for new depository but I believe existing DPs will remain with the same depository (at-least till new depository proves himself)

  3. In most countries, there is only one depository. India has 2 - CDSL & NSDL. Based on Q4 concall, mgmt mentioned that even with 2 depositories, space is v crowded. Moreover its difficult for new entrant to get in. Reasons being - high infrastructure cost + required approvals + high switching cost of existing DPs.

Disc - Invested

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I am thoughtful…so.

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I am yet to analyze it in depth but in last conf call script (Thanks to @sammy11) it was mentioned as some 210 crore to be maintained as regulatory requirement.

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Do any of you think that buying the 2 in 1 stock BSE is better than CDSL?

Here is why I ask. At the times of a correction, you see BSE doing market buyback of the stock, and also starting to show positive performance as the volumes are going up in the markets, and also the partial ownership of CDSL is already built into BSE.

Therefore, we have a better performing entity (BSE), doing a 2 in 1 function (exchange and depositary), but of course, it is not a pure-play-depositary.

More importantly, as has been said before, BSE is a business that is impossible for anyone to replicate whereas the depositary business might be recreated with the advent of more computing, easy of doing AI and also ML, where more sophisticated tracking, and other features can be built into it.

Thoughts?

KKP

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buy whichever looks cheap to you …

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Look at ROCE of CDSL without the recent purchase of buildings…an indication of incremental ROCE possible. BSE has been pretty poor at that

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BSE has a very strong competitor NSE which took away its market share ever since it came into existence. NSE is today the market leader. BSE is trying new things with currency trading I think but still NSE, even though younger in age, is the big brother…

CDSL has slight benefit here as it has almost equal market share as compared to NSDL…and when I last tracked it, it was more aggressive in growth compared to NSDL.

I held BSE, CDSL and MCX but sold all three recently…MCX was my biggest bet…I sold BSE and MCX because of NSE…the big brother is very bossy and agressive…it will eat younger one’s food…I absolutely did not like about my company that a sudden change in government policy took away the moat of my MCX…the universal exchange feature…which meant NSE would come into Commodity exchange…I was not tracking and realized this only when MCX fell by 30%…That day I decided not to held or buy a company which can lose its moat by mere one government decision…I sold MCX and along with that I sold BSE

CDSL, I sold because I was not able to track that company. I could not find much information on it and felt that its growth maybe less than what I anticipated earlier. I maybe wrong is all my decisions above…just wanted to share the thinking behind the decision…views welcome!

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Q1 Fy19 result out today. Its not great. Earning per share has reduced.Revenue yoy flat.subdued market condition and ipo activities taking a impactQuickresults.pdf (2.5 MB)

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FY19 Q1 Concall details:

Operating income of the company increased rose 0.2% to Rs 50.45 crore.
Net profit declined 14% to Rs 22.03 crore
Other income has declined 47% to Rs 5.17 crore. The other income of the company was impacted due to mark-to-market losses of Rs 1.94 crore in investment book.
Annual issuance charges have increased 17% yoy to Rs 15.7 crore, transaction charges 12% to Rs 9.7 crore, IPO corporate action charges 28% to Rs 5.9 crore and online data charges 11% to Rs 6.9 crore.
The number of IPOs was higher in Q1FY2019, but the size of subscription and retail participation was weak, which impacted the revenues.
CDSL Ventures have performed well in Q1FY2019. The number of mutual fund folios has increased, but the business was attracted by the competitor.
The numbers of BSDA demat account stood at 55 lakh.
The company has continued to gain market share with incremental demat account share rising to 71% in Q1FY2019 and 47% at aggregate level end June 2018.
The company has opened about 5.11 lakh demat account in Q1FY2019, while the aggregate demat account with the company stood 1.54 crore end June 2018. The tariff hike also provides opportunity, which is determined by the SEBI.
On future revenue growth potential, the company indicated that there around 65 thousand unlisted public limited companies, which would go for dematerialization. the
On insurance depository business side, the company is awaiting the regulation on single demat account. Some development on this front is expected in the next three months.
The company provides a wage hike in 2-3 years, while the previous wage hike was provided in October 2016.

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CDSL india Q1 2019 earnings call transcript.

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CDSL vs NDSL

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Hi,
The unlisted companies which are > 65K may have to go for demat.
Has anyone done analysis of what is the opportunity size? and how it can impact positively revenue growth of NSDL and CDSL both?
I am analyzing this company recently and looking at all positive triggers, which are probably ignored at the moment.
Disc : No investment.

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@mylu It will be really nice if you can unleash this as you are tracking this company for some period of time…
Hi All Company Mentioned the freehold property of 62Crore what is the reason of this ? as by the definition of freehold it is expensive as compared to lease and belongs to owner not to entity what is the reason owner brought property of 62 Cr Not leased … Am i misinterpreting or something we should see from skeptical eye

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CDSL bought a property for a sum of Rs 62 cr. the company CDSL is now the owner of this property. Freehold just means that CDSL owns this property for life and dont have to return in any point of time say after 50 years or 90 years like in case of many leasehold property

~To the best i remember, the property is the office floors in their current office in Lower Parel.

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