Sample  write-ups  
 Central Depository Services (India)   
Vol. No. : 25    Issue No. : 50                             Friday, October 25, 2019

Leading securities depository

After a pause in FY20, the company can resume its consistent growth on revival of economy and markets

Related Tables
4Central Depository Services (India): Consolidated Financials
4Central Depository Services (India): Consolidated Results

Idea Central Depository Services (India)
BSE Code Not listed
BSE Group -
NSE Code CDSL
ISIN Demat INE736A01011
Bloomberg CDSL@IN
Reuters CENA.NS
Par Value Rs 10
52-week High/Low Rs 255 / Rs 181
Current Price Rs 208 on NSE (as on 25 October 2019)

CDSL was initially promoted by BSE Ltd, which had thereafter divested its stake to leading banks as per regulatory requirements. CDSL received the certificate of commencement of business from SEBI in February, 1999. All leading stock exchanges like the BSE Ltd, National Stock Exchange (NSE) and Metropolitan Stock Exchange of India (MSEI) have established connectivity with CDSL. The company strives to provide convenient, dependable and secure depository services at affordable cost to all market participants.

The Company's subsidiary, CDSL Ventures Limited (CVL) is registered with SEBI as a KYC Registration Agency (KRA) for investors in the Capital markets including the mutual fund industry.

CDSL through its subsidiary, CDSL Insurance Repository Limited, has arrangements with several life insurance companies and eighteen general insurance companies for holding insurance policies in electronic form and seamlessly enables the policy holders to undertake changes, modifications and revisions to insurance policies.

CDSL's subsidiary, CDSL Commodity Repository Limited (CCRL), was setup to establish and run a Commodity Repository on the lines of a Securities Depository. In this regard, Warehousing Development and Regulatory Authority (WDRA) have shortlisted CCRL as one of the two Repositories for undertaking the Commodity Repository activity.

Depository Industry in India

Depository is an institution registered with SEBI for holding custody of securities in electronic form and facilitates transfer based on the instructions from the account holders. With growth in Indian Capital market, it became difficult to handle the growing volume of paper. This caused problems like delay in transfers, long settlement period, high levels of failed trade and bad deliveries, high- risk exposure etc. To remove these bottlenecks, The Depositories Act was legislated in August 1996. Subsequently three years later in 1999, Central Depository Services (India) Limited (CDSL) was established following the implementation of compulsory trading in dematerialized securities for all investors.

In terms of market share of demat accounts, CDSL has experienced a growth in market share from 40% in FY 2013-14 to 48% in FY 2018-19.

The presence of depositories supports the Capital market growth in a variety of ways including substantial reduction in bad deliveries, enhanced liquidity of securities, reduction in transaction cost, eliminates problems relating to change of address of investors, transmission etc, makes faster disbursement of non-cash corporate benefits like rights, bonus, etc. possible, faster settlement cycle, no stamp duty on transfer of shares.

Offer services to the following clients

CDSL's clientele can be broadly classified into six main categories namely:

• Depository Participants (DPs): An investor opens an account through the agent of depository known as Depository Participant. After opening the account, the investor can convert the physical shares issued by issuers companies into electronic mode through the DP. An investor can transfer securities from his account to any account by submitting the delivery instruction slip to the DP.

• Issuer companies: A wide range of securities including equity shares, preference shares, mutual fund units, debt instruments, government securities, etc. are available for dematerialization in CDSL. CDSL enables issuer companies to credit securities including non-cash corporate benefits to a shareholder's or applicants demat account.

• Capital market intermediaries: CVL is SEBI registered KRA which offers KYC services to investors in Indian Capital markets.

• Insurance Companies: Through its subsidiary, CDSL Insurance Repository Limited, the Company offers facilities for holding of insurance policies in electronic form.

• Through its subsidiary, CDSL Commodity Repository Limited, the Company offers facilities for holding and transacting of warehouse receipts in electronic form.

• Others: CDSL offers other online services such as e-voting, e-Locker, National Academic Depository (NAD), easi (Electronic Access to Security Information), easiest (Electronic Access to Securities Information and Execution of Secured Transaction) and mobile application (Myeasi, m-Voting).

Moreover, 541 universities have signed up with CDSL for the National Academic Depository.

Multiple revenue streams

The company offers services to several sub-sectors of the Indian securities and financial services market including Capital Markets, Mutual Funds and Insurance companies. The company has high stability of operating income from the fixed annual charges collected from the registered Issuer companies and transaction-based fees collected from Depository Participants. The company offers dematerialisation for a wide spectrum of securities including equity shares, preference shares and bonds of public (listed and unlisted) and private companies, units of mutual funds, government securities, commercial papers and certificates of deposits. The company also charges account maintenance charges to corporate account holders and monthly maintenance charges to clearing members for maintenance of settlement accounts

Other consistent revenue-generating services offered by the company include e-voting and e-notice services to the registered companies enabling their shareholders to receive notices in electronic form and to allow shareholders to cast their votes electronically, remotely or at the meeting venue.

Leading securities depository in India

CDSL is the leading securities depository in India by incremental growth of Beneficial Owner (BO) accounts of over 77.76 lakh from FY 2015- 16 to FY 2018-19. Further, the total number of registered Depository Participants (DPs) is 597 at the end of FY 2018-19. As on March 31, 2019 CDSL had over 17.3 million investor accounts (excluding closed accounts). The company has a wide network of DPs, who act as points of service. CDSL had 597 registered DPs with over 19,400 service centres across India. The DPs are spread across 29 states and 7 union territories.

CDSL’s net beneficial owner (BO) accounts touched 18.7mn in Q2FY20 (17.9mn in 1QFY20), implying 74% incremental market share.

High entry barriers

The depository industry in India comprises of two players: NSDL (promoted by NSE) and CDSL (promoted by BSE). NSDL was the first depository established in India (in 1996), followed by CDSL (in 1999). Given that industry is largely regulated by the SEBI, the chances of a successful third depository in India are very thin. Moreover, with the strong parental lineage, these existing two depositories have a clear advantage over any new entrant

Targeting and focusing on Unlisted and Private Limited Companies

There are a large number of unlisted public and private limited companies who have not dematerialized their securities as yet. Ministry of Corporate Affairs has issued Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018 which inter alia mandates an unlisted public company to issue securities only in dematerialised form. The said rules also mandates transfer of securities in dematerialised form. CDSL intend to pursue with these companies and get their securities admitted in its depository. This has dual benefits of increase in Issuer Charges as well as opening of more number of Corporate Promoter Demat accounts.

A total of 2,500 unlisted companies have enlisted with CDSL, and the company earned Rs 57 lakh as incremental issuer charges in 2QFY20.

Introducing new offerings and scaling up recently started businesses

The company continues to diversify its product and service offerings. The company believes a continuous review of its services according to its evolving understanding of investor preferences and market behaviour will help it better cater to our investors’ needs, enhance their user experience and maximise account volumes and revenues.

September 2019 quarter results

For the three months ended September 2019, revenues fell 2% to Rs 52.66 crore. OPM fell 1500 basis points to 46.6% which saw OP fell 25% to Rs 24.52 crore. Other income rose to Rs 16.69 crore from 9.79 crore, up by 71% and interest cost was nil. As deprecation grew 35% to Rs 2.99 crore, PBT went down 5% to Rs 38.22 crore. Provision for taxation went down 10% to Rs 9.16 crore after which PAT fell 4% to Rs 29.06 crore. After considering minority interest PAT fell 1% to Rs 29.31 crore.

For H1FY20 revenues rose 12% to Rs 111.07 crore. OPM fell 1640 basis points to 42.5% which saw OP fell 19% to Rs 47.16 crore. Other income rose to Rs 31.72 crore from 15.01 crore, up by 111% and interest cost was nil. As deprecation grew 20% to Rs 5.67 crore, PBT went up 6% to Rs 73.2 crore. Provision for taxation went down 2% to Rs 16.23 crore after which PAT rose 9% to Rs 56.97 crore. After considering minority interest PAT rose 9% to Rs 56.75 crore.

The company’s revenues in the first half are adversely affected by sluggish conditions in the capital markets. OPM has been hit by rise in employee costs due to salary revisions. However mark-to-market gains on the company’s debt investments and tax refunds have boosted other income.

Outlook

Business of depositories grows in direct proportion to growth in Capital markets. The past three-to four years have witnessed a steady structural shift of savings from physical assets such as real-estate and gold into financial assets. The trend is likely to continue. Within financial assets, the allocation towards equities has been increasing steadily due to the relatively low base; given the retail investor has traditionally been under-invested in equities.

CDSL has experienced a substantial growth in the number of companies admitted in demat from 541 in FY 1999-00 to 13,104 in FY 2018-19, a growth of 21% CAGR. The active participation of retail investors was demonstrated with the increase in the turnover of shares traded on the BSE rising from 5.21 lakh crore in FY 2013- 14, to 7.76 lakh crore in FY 2018-19, while trading on the NSE increased from 28.08 lakh crore in FY 2013-14, to 79.48 lakh crore in FY 2018-19. The markets have been sluggish over the last year or two, affecting trading volumes and transactions, but this trend should reverse once economy gets back on its feet.

Valuation

Over the last five years (FY14 to FY19) CDSL had grown its revenues at a CAGR of 14% and net profit at a CAGR of 18%. Even in FY 19, it managed to grow through growth in other income in spite of adverse market conditions. However in FY20 sluggish market conditions has been accompanied by sharp (56%) rise in employee costs due to salary revisions, which may lead to fall in profits. However due to stable cost base from FY21 and expected recovery in investor and trading interest, the company can get back to its past consistent growth rates.

In FY 2020 and FY 2021 we expect Central Depository Services (India) to register consolidated EPS of Rs 10.4 and Rs 11.9.

The scrip trades around Rs 208. P/E on FY 2021 projected consolidated EPS works out to around 17.5.

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Central Depository Services (India): Consolidated Financials
 
  1603 (12) 1703 (12) 1803 (12) 1903 (12) 2003 (12P) 2103 (12P)
Sales 122.85 146.00 187.69 194.65 214.14 239.84
OPM (%) 52.0% 54.4% 58.8% 56.0% 43.4% 47.0%
OP 63.92 79.42 110.37 108.93 93.03 112.67
Other inc. 38.48 40.85 37.99 49.19 65.10 68.35
PBIDT 102.40 120.27 148.36 158.12 158.12 181.02
Interest 0.00 0.00 0.00 0.00 0.00 0.00
PBDT 102.40 120.27 148.36 158.12 158.12 181.02
Dep. 4.19 3.70 6.95 9.92 11.65 12.81
PBT before EO 98.21 116.56 141.42 148.21 146.48 168.21
EO -33.10 0.00 0.00 0.00 0.00 0.00
PBT after EO 131.31 116.56 141.42 148.21 146.48 168.21
Total Tax 40.19 29.98 37.78 33.38 36.75 43.73
PAT 91.13 86.59 103.64 114.83 109.73 124.47
Minority Interest 0.13 0.80 0.46 1.31 0.68 0.25
Net Profit 91.00 85.78 103.18 113.51 109.05 124.22
EPS (Rs) * 6.5 8.2 9.9 10.9 10.4 11.9
* Annualized On current Equity Of Rs 104.5 Crore of face value of Rs 10 each
(P): Projections
Figures in Rs crore
Source: Capitaline Database

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Central Depository Services (India): Consolidated Results
 
  1909(03) 1809(03) Var.(%) 1909(06) 1809(06) Var.(%) 1903 (12) 1803 (12) Var.(%)
Total Operating Income 52.66 53.67 -2 111.07 99.21 12 194.65 187.69 4
OPM(%) 46.6% 61.1%   42.5% 58.9%   56.0% 58.8%  
OP 24.52 32.81 -25 47.16 58.46 -19 108.93 110.37 -1
Other Income 16.69 9.79 71 31.72 15.01 111 49.19 37.99 29
PBIDT 41.21 42.60 -3 78.88 73.47 7 158.12 148.36 7
Interest 0.00 0.00   0.00 0.00   0.00 0.00  
PBDT 41.21 42.60 -3 78.88 73.47 7 158.12 148.36 7
Depreciation 2.99 2.22 35 5.67 4.72 20 9.92 6.95 43
PBT 38.22 40.38 -5 73.20 68.76 6 148.21 141.42 5
Tax provision 9.16 10.22 -10 16.23 16.58 -2 33.38 37.78 -12
PAT 29.06 30.15 -4 56.97 52.18 9 114.83 103.64 11
Minority Interest -0.25 0.15   0.23 0.31   1.31 0.46  
PAT after MI 29.31 30.00 -2 56.75 51.87 9 113.51 103.18 10
EPS* # #   # #   10.9 9.9  
* Annualized On Current Equity Of Rs 104.5 Crore of face value of Rs 10 each
EO: Extraordinary Items, PL: Profit to Loss
EPS Is Calculated After Excluding EO And Relevant Tax
# EPS not annualised due to seasonality of business
Figures In Rs Crore
Source: Capitaline Database

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