Central Depository Services (India)

Well positioned to leverage from development of financial markets

BSE trims holding to fall in line with regulation allowing only 24% stake

CM RATING

48/100

Central Depository Services (CDSL) is the leading securities depository in India by incremental growth of beneficial owner (BO) accounts over the last three financial years and by the total number of registered depository participants (DPs) end of fiscal ended March 2016 (FY2016). The depository commenced in 1999 to provide convenient, dependable and secure depository services at affordable cost to all market participants. Promoter BSE subsequently divested a part of its stake to leading Indian banks. Currently, BSE holds 52,297,850 equity shares aggregating to 50.05% of the subscribed and paid-up equity share capital.

There is connectivity with clearing corporations of all the leading Indian stock exchanges. Memorandum of understanding has been entered with global depositories including Depository Trust & Clearing Corporation - New York, Japan Securities Depository Center and Euroclear. There were over 12.4 million investor accounts end April 2017. The market share of incremental BO accounts was 59% end FY2017, with a net growth of 13.68% over FY2016. There are over 253 billion securities of 9,934 issuers, representing a total value of Rs 18.3 trillion, in custody. There are 589 registered DPs with over 17,000 service centers across India. The company has over 15 million KYC records with a market share of approximately 67%. However, in terms of market share, the company is the second largest depository in India.

There are three subsidiaries: CDSL Ventures, CDSL Insurance Repository, and CDSL Commodity Repository.

Comparison of CDSL and NSDL

The depository system in India was a Rs 2.4 billion industry end FY2016. Comprising CDSL and NSDL, It has recorded a CAGR of 12% over the last three financial years. Established in 1996, NSDL was the first and largest depository in India. CDSL followed three years later after the implementation of compulsory trading in dematerialized securities for all investors in January 1999.

Market share by revenues is 43% and that of NSDL 57%. The growth in market share by demat accounts is growing (CAGR of 9% over last three fiscals) is faster compared with NSDL's 5% growth in market share. The market share grew from 39% in FY2011 to 44% in FY2017. Consequently, the market share of incremental demat accounts grew from 46% in FY2012 to 60% in FY2017.

The company offer services to the following clients:

Demat services are offered for a wide range of securities including equity shares, preference shares, mutual fund units, debt instruments and government securities. Securities are held in electronic form and securities transactions are processed by book entry. The DPs act as agents and offer depository services to the BOs of the securities.

Issuers credit securities to a shareholder's or applicant'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. KYC services are offered to investors and capital market intermediaries including to mutual funds. Insurance policies of several insurers are held in electronic form.

Online services include 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).

The Offer and the Objects

Following the amendment to the depository regulations on 11 September 2016, the sponsor of a depository cannot hold more than 24% of the paid-up equity share capital of such depository. Accordingly, the promoter is required to bring down the current shareholding to not more than 24% of paid-up equity share capital.

The issue comprises offer for sale (OFS) of up to 35,167,208 equity shares by the promoters and sponsors. The entire proceeds from the OFS will be paid to the selling shareholders. The OFS includes sale of equity share of up to 27,217,850 equity shares by the promoter of the company up to 47,75,000 equity shares by the State Bank of India, up to 21,74,358 equity shares by Bank of Baroda and up to 10 lakh equity shares by the Calcutta Stock Exchange.

The OFS will mop up proceeds of Rs 509.92 crore at the lower price band of Rs 145 per share (face value Rs 10 per share) and Rs 523.99 crore at the upper band of Rs 149 per share. Post-IPO, the promoter's stake will reduce to 24% from 50.05%.

The minimum bid lot is 100 equity shares and in multiples of 100 equity shares thereafter. The issue is to be made through a book building process and will open on 19 June 2017 and will close on 21 June 2017. The issue includes a reservation of seven lakh equity shares for subscription by eligible employees.

Listing will only be on the National Stock Exchange and not on the BSE as the latter is the promoter of the depository.

Strengths

Leading securities depository by incremental growth of BO accounts and by the total number of registered DPs. However, second largest depository in India by market share.

Along with subsidiaries offers services to several sub-sectors of the Indian securities and financial services market, providing multiple streams of stable and recurring operating revenues. A high stable operating income from the fixed annual charges collected from companies and transaction-based fees collected from DPs.

Operating costs are largely fixed and result in high economies of scale. The main costs are employee benefits and software development and maintenance. The high economies of scale have been further enhanced by BO accounts recording CAGR of 12.98% over the last three fiscal years.

Revenues from operations include transaction charges, account maintenance charges and settlement charges paid by DPs and annual fees, corporate action charges and e-voting charges paid by companies whose securities are admitted. Consolidated restated revenues registered a CAGR of 13.33% from Rs 145.47 crore in FY2015 to Rs 186.85 crore in FY2017. Profit before tax before exceptional items notched a CAGR of 21.38% from Rs 79.12 crore in FY2015 to Rs 116.56 crore in FY2017.

Spread of financial markets to tier II and tier III cities, increased awareness and interest in investing in equity and debt securities and increasing trading volume due to dynamic environment remain key contributors of steady growth in business.

Weaknesses

Although there are entry barriers in the depository business such as regulatory restrictions, capitalization norms and long gestation periods, increased competition from existing or potential competitors might cause a decline in market share of investor accounts.

Inability to effectively manage growing the DP network or any disruptions in supply or distribution infrastructure might have an adverse effect on business.

Most of the business is highly regulated. Changes in the regulatory framework can affect the business and financials.

Any interruptions or malfunctions in the operation of IT systems might damage reputation and cause loss for the business.

Fraud due to unauthorized transfer of securities or service deficiency might result in losses. Further, undetected errors in account data disseminated might have a adverse effect on the business.

Appointment of Central Registry of Securitisation Asset Reconstruction and Security Interest of India as central KYC registration agency might adversely affect the business and results of operations of subsidiary, CDSL Ventures.

A large proportion of the business is transaction-based and dependent on trading volumes. A large proportion of trading volumes is dependent on a number of economic, global, social external factors. Therefore, any declines in trading volumes and market liquidity might hurt the business and profitability.

Valuation

Consolidated sales were up 19% to Rs 146 crore and the operating profit margins increased from 52% to 54.4%, resulting in a 24% spurt in operating profit to Rs 79.42 crore in FY2017. Other income improved 6% to Rs 40.85 crore, while depreciation declined 12% to Rs 3.71 crore. Consolidated profit before tax went up 19% to Rs 116.56 crore. FY2017 did not have exceptional gains of Rs 33.10 crore in FY2016. After providing total tax of Rs 29.98 crore, consolidated profit after tax stood at Rs 86.59 crore.

The EPS for FY2017 works out to Rs 8.3. The scrip is offered at P/E multiple of around 17.5 times FY2017 EPS at the lower price band of Rs 145 per share and 18 times FY2017 EPS at the higher price band of Rs 149 per share. There are no listed peers in this business.

Book value (BV) was Rs 51.04 end March 2017. P/BV works out to 2.8 times at the lower price band and 2.9 times at the upper price band.

Central Depository Services (India): Issue highlights

Central Depository Services (India): Consolidated Financials

 Central Depository Services (India): Consolidated Summary Statement of Revenue from operations