CDSL: Safe and secure

Central Depository Services India (CDSL) made its capital market debut last June at the issue price of ₹149 per share. The stock price moved up three-fold immediately post listing, but has corrected over the past few months. At ₹294, on the basis of the estimated earnings for 2018-19, the stock trades at a valuation multiple of 25 times.

Long-term investors can go for the stock even at the current valuation, given the strong growth prospects. CDSL facilitates holding of securities in an electronic (demat) form and offers services to market participants and corporates while issuing and transferring securities. The rising demand for depository services (with eKYC, plans for e-insurance, demating of university certificates and securities of unlisted companies), increasing inflows into mutual funds and new companies listing in the capital market every year, are all positives for the stock. The other plus points are the low-capex nature of the business, high profit margins and large cash generation every year.

A third of CDSL’s income comes from custodial charges paid by corporates for their listed stock, and is a steady revenue stream.

Gaining ground

CDSL’s (promoted by BSE) competitor is NSDL, which is owned by NSE. Though NSDL holds more demat accounts than CDSL, the latter is fast gaining market share, thanks to its aggressive sales approach in growing the depository participant (DP) base.

CDSL’s market share at the end of March 2018 was 46.5 per cent, up from 44 per cent during the same time last year. The company opened a total of 25.72 lakh demat accounts during the year.

The total number of depository participants with the company is 594, up from 588 last year.

In the recent quarter (last quarter of the year 2017-18), revenue was unchanged over the December period and operating profit margins were down (57 per cent versus 60.8 per cent) because of higher employee expenses.

However, the full-year numbers were good.

In 2017-18, CDSL achieved a 30 per cent growth in revenue to ₹191 crore, helped by robust inflows into MFs, several new listings and higher transaction income. Income from custodial charges collected from corporates, which accounts for a third of the total income, was up 8 per cent to ₹55 crore.

Income from transaction charges (collected from DPs for transaction and settlement of trades) was up 42 per cent and income from new listings and corporate action was up 79 per cent. CDSL Ventures, the company’s fully-owned subsidiary, which is the first KYC Registration Agency (KRA) registered with SEBI under KRA regulations and provides KYC services for investors in the capital market (who invest in MFs, stocks or bonds) and also does demat of insurance policies, saw income jump 51 per cent to ₹37 crore.

New revenue streams

CDSL is progressing well in its new businesses. In the National Academic Depository project, where CDSL would be converting certificates/ awards/ mark sheets issued by universities into demat form, the company has tied up with 231 academic institutions already and 47 of these have also given letters of intent.

In its commodity repository business, which was launched in September, there are about 72 repository participants that have registered so far and a few accounts have been opened.

CDSL is organising awareness programmes for warehouses, banks, commodity traders and may see good response, going ahead. In the e-insurance space, CDSL has tied up with 22 life insurance companies and 18 non-life insurance companies for issue of e-policies. CDSL is also pinning hopes on the eSign (online signature) project. The company is working closely with the certifying authorities for e-sign.

What also looks promising at the moment is demating of unlisted companies’ shares. The regulators are considering whether unlisted companies can also be asked to park their securities with the depositories so that their shareholding can be tracked. But given that there may not be as many transfers here as in the case of listed companies, the revenue contribution from this pie, as and when it comes, may be small.

The eKYC businesses — another promising venture at this point for CDSL — is under risk from CKYC – Central KYC Registry, a repository of KYC records that reduces the hassle of producing KYC documents every time the customer makes a new investment.

But the company maintains that personal verification and manual error checking are the strengths of CDSL Ventures, and this value addition may see clients coming to it.

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