-Report by Prerna Pincha

The company, helping the investors to manage their holdings in securities listed on the stock exchanges, is itself getting listed. The  long-awaited IPO of CDSL is finally ready to hit the market. Let’s analyze the offer to know if it’s worth investing your time and money into:

 

OFFER DETAILS

  • Issue size: Rs. 523.99 cr (35,167,208 equity shares- offer for sale issue; out of which 7,00,000 eq, shares are reserved for eligible employees)
  • Issue type: Book built issue.
  • Opening issue date: 19th June, 2017
  • Closing issue date: 21st June, 2017
  • Listing at: NSE
  • Face Value: Rs. 10 per share
  • Lot size: 100 shares
  • Price Band: Rs 145-149 per equity share
  • Syndicate structure:

Registrar to the offer– Link Intime

Book running lead managers– Axis Capital, Edelweiss Financial Services, Nomura Financial Advisory, SBI Capital markets, Haitong securities, IDBI capital Markets, YES Securities.

 

OBJECTIVES OF THE OFFER

  • To achieve the benefits of listing the Equity Shares on NSE.
  • To enhance its visibility and brand image
  • Provide liquidity to its existing Shareholders.

 

Top 10 share holders (%)

BSE Ltd 50.1
State Bank Of India 9.6
HDFC Bank Ltd 7.2
Standard Charted Bank Ltd 7.2
Canara Bank 6.5
Bank Of India 5.6
Bank Of Baroda 5.1
LIC 4.2
Union Bank Of India 1.9
Bank Of Maharashtra 1.9

 

 

INDUSTRY OVERVIEW

Indian Economy

The absolute GDP increased to approximately Rs. 122 trillion in FY17 from Rs. 88 trillion in FY12, representing a compounded annual growth (CAGR) of 6.7%.

GDP growth remained steady at 7.1% in FY17.

The third quarter of FY17 registered a growth rate at 7.0% despite expected slow-down from the effect of demonetization drive.

The GDP is expected to grow in FY18, with an expected increase to 7.4%. With rising population and increasing urbanization, the GDP of the country is expected to grow at a faster pace.

Market capitalization

Market capitalization to GDP ratio of stock exchanges can be taken as a measure of how promising the stock markets are.

There is a huge scope for growth of market capitalization, as India is still 20% below the global average of 98%.

 

Depository Industry in India

  • The depository system in India is a Rs. 2.4 billion industry, as of FY16, which has grown at a CAGR of 12% over the last three Fiscals and comprises of two depositories, namely NSDL and CDSL. NSDL, established in 1996, was the first depository in India and was followed by the establishment of CDSL three years later in 1999 shortly following the implementation of compulsory trading in dematerialized securities for all investors in January, 1999.
  • The presence of a multi depository system in India has resulted in a competitive scenario and helped to reduce transaction charges for investors. The industry has a strong entry barrier as each of the current depositories are promoted by each of the two major stock exchanges in India i.e. NSDL by NSE and CDSL by BSE.
  • With strong parental lineage, these depositories have a clear advantage over any new entrant (if any is planned). If a new peer plans to enter this industry, they will face stiff competition and will find it difficult to gain a market share.

Let’s have a look at the neck to neck comparison of CDSL and NSDL.

Revenue

However, in terms of revenue, the market share of NSDL is 58% and 42% is acquired by CDSL.

In terms of revenue, NSDL has grown at a CAGR of 12% and CDSL at 11%.

Number of Demat Accounts

As of March 31, 2017, there were 15.58 million and 12.30 million demat accounts, respectively, at NSDL and CDSL. The number of demat accounts for CDSL has grown at a CAGR of 9%, whereas that of NSDL has shown a growth of 5%.

 

Number of Incremental  Demat Accounts

The market share of CDSL, in terms of incremental demat accounts, is 60%, whereas, the remaining 40% is acquired by NSDL.

Number of companies available in Demat

Number of BO accounts

The CAGR with which the number of BO accounts with CDSL has increased is 9%, over the past 7 fiscal years, whereas BO accounts with NSDL has seen a growth of 5% over the years.

 

Depository Participants

The number of DPs has increased significantly over the last 15 years. CDSL witnessed a CAGR of approximately 10% between FY01-17, whereas, NSDL grew at a CAGR of mere1%.

India’s multi-depository system has a wide presence across the country, which has in turn helped investors to transact with DPs locally. Let’s have a look at the number of locations where these DPs are located:

There was a rise in the geographical coverage of both depositories’ DPs in Fiscal 2016. In just one year, the number of locations of DPs of CDSL rose by 195%, which implies more penetration of intermediaries in the country for the investors to play in the financial markets, eventually resulting in more business of CDSL, whereas, its only peer NSDL could increase the location of its DPs by just 25%.

Sources of revenue CDSL VS NSDL

BUSINESS OVERVIEW

CDSL is the leading securities depository in India by incremental growth of Beneficial Owner (“BO”) accounts over the last three Fiscals and by the total number of registered Depository Participants (“DPs”), as at the end of Fiscal 2016.

CDSL offers the following services to its clients:

  • Depository Participants: They offer dematerialization for a wide range of securities including equity shares, preference shares, mutual fund units, debt instruments, government securities.
  • Corporates: CDSL offers facilities to issuers to credit securities to a shareholder’s Demat accounts to give effect to a range of non-cash corporate actions such as bonus issue, subdivision of holdings and conversion of securities in a merger, amalgamation or in an initial public offering.
  • Capital market intermediaries: CDSL offers KYC services in respect to investors in Indian Capital markets to capital market intermediaries including mutual funds.
  • Insurance Companies: They offer facilities to allow holding of insurance policies in electronic form to the holders of these insurance policies of several insurance companies.
  • Others: CDSL also offers other online services such as e-voting, e-Locker, National Academy Depository, easi (Electronic Access to Security Information), easiest (Electronic Access to Security Information and Execution of Secured Transaction) drafting and preparation of wills for succession (myeasiwill) mobile application (myeasi, m-voting) and Transactions using Secured Texting (TRUST).

CDSL serves its clients through the following entities:

STRENGTHS

  • Stable revenue base due to repeat business in multiple offerings in the Indian securities and financial services market.
  • High economies of scale leading to steady growth in profitability.
  • Convenient and dependable depository services at competitive prices for a wide range of securities.
  • State-of-the-art technology and robust infrastructure and IT systems.
  • Led by an experienced senior management team.

 

STRATEGIES

  • To focus on developing new DPs relationships and leveraging their existing DP network.
  • To introduce new offerings and scale up recently started businesses.
  • To invest and upgrade their IT infrastructure for the enhancement of operational efficiency.
  • To Sell, Purchase and Transfer of Securities in India.
  • To continue investor education initiatives to foster a rise in the number of potential new investors and deepening of the Indian securities market.

 

LITIGATIONS AGAINST THE COMPANY

  • Criminal cases- 22 cases (Amount- Rs. 10.45 cr)
  • Material civil cases- 14 cases (Amount- Rs. 597.01 cr)
  • Indirect tax cases- 7 cases (Amount- Rs. 49.4 cr)
  • Direct tax cases- 58 cases (Amount- Rs. 3880.1 cr)
  • Actions by regulatory/ statutory authorities- 6 cases (Amount- Rs. 1.4 cr)

 

RISK FACTORS

  • The company has had negative net cash flows from investing and financing activities in the six-month period ended September 30, 2016 and the last three Fiscals.
  • The company’s electronic platform, networks and those of its third-party service providers may be vulnerable to security risks and cyber-attacks.
  • The company will continue to be controlled by their Promotors and sponsors after the completion of the Offer.

FINANCIAL OVERVIEW

The topline of the company has shown an increase from Rs. 145.47 cr in FY15 to Rs. 186.85 cr in FY17, with a CAGR of 13.33%. CDSL has wide source of revenues at its privilege which lends higher revenue visibility for CDSL compared to NSDL.

EBITDA had shown an increase from FY15 to FY16, from Rs. 87.22 cr to Rs. 135.5 cr, but declined again in FY17, to Rs. 120.26 cr. EBITDA margin also increased from 60% in FY15 to 84% in FY16, and then fell to 64.4% in FY17.

Trend of ROA and ROE through the past years

  FY15 FY16 FY17
ROA 11.24% 16.48% 14.26%
ROE 13.82% 19.01% 16.24%

 

AUTHOR’S NOTE

CDSL has a unique business model with high entry barriers; it is one among the only 2 depositories in the country, being the first one to get listed on the stock exchange. With this, it has already gained an advantage over NSDL, its only peer and that too, non-listed!

The business is highly regulated with entry barriers in place, and hence, the market is likely to remain duopoly in nature.

Apart from the listing edge, CDSL provides a unique range of services to its customers, such as e-voting, e-locker, national academy depository, electronic access to security information, electronic access to security information, etc.

It also allows its customers to hold insurance policies in electronic form and allow them to undertake changes in it, if needed.

CDSL is a debt-free company which makes it stand apart from the crowd. The cash flows have been positive and consistent so far. As far as the valuation front is concerned, it is attractively priced at a PE of 18x, which is a rarity in the present market conditions.

We believe that the IPO is quite promising as CDSL is expected to grow quite a lot in the near future due to its behavior of investment in selective and cautious items, and its unique range of services. Therefore, we recommend to go for the offer.

It could be held for listing as well as long term gains. A thumbs up for CDSL.