Central Depository Services (India) Limited (CDSL) is India’s leading and only listed depository, with an objective of providing convenient, dependable and secure depository services at affordable cost to all market participants. CDSL received its certificate of commencement of business from SEBI in February 1999 and it facilitates holding and transacting in securities in the electronic form and facilitates settlement of trades on stock exchanges.
CDSL maintains and services over 2.4 crore Demat accounts of Investors or Beneficial Owners (BOs) spread across India. These BOs are serviced by CDSL’s 597 Depository Participants (DPs) from over 19,500 locations.
Increase in trading volumes and retail participation
CDSL has experienced a substantial growth in the number of companies / Issuers admitted in demat from 541 in FY 1999-00 to 14,018 in FY 2019-20, a growth of 18% CAGR. Retail investors have been increasingly investing in equities, which is evident from the rise in number of investor’s accounts from 1.9 cr. accounts in 2010 to 4.3 cr. accounts as June 2020 and increase in turnover of shares traded on the stock market – trading on BSE increased from 5.21 lakh crore in FY 2013-14 to 6.61 lakh crore in FY 2019-20 (CAGR of 4.05%); while trading on NSE increased from 28.08 lakh crore in FY 2013-14, to 89.99 lakh crore in FY 2019-20 (CAGR of 21.42%).
Gaining market share from NSDL
In terms of cumulative market share of active demat accounts, CDSL has experienced a growth in market share from 40% in FY 2013-14 to 51% in FY 2019-20. As on 30th June, CDSL’s aggregate market share was 54% of investors’ accounts. The number of demat accounts opened with CDSL in FY 2019-20 stood at 38 lakhs as compared to 10.5 lakhs accounts for NSDL. CDSL opened 8.3 lakh investors’ accounts in the month of June 2020, the highest in the history of CDSL.
Duopoly business with high entry barrier
CDSL (promoted by BSE) and NSDL (promoted by NSE) are the only 2 depositories present in India. Because of their strong parentage, these depositories have clear advantage and duopoly nature has resulted in healthy competition. We believe the sector is highly regulated and there is no scope for any other depository.
Diversified revenue stream with high operating leverage
Around 64% of CDSL’s revenue comes from market-linked activities like transaction charges, annual issuer charges and IPO charges. The balance 36% comes from online data charges, E-Voting, Document verification, E-CAS charges and other value added services.
CDSL is an asset light business with high operating leverage, has robust EBITDA margin of 44% with major costs being that for technology and human resources.
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, elimination of 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.
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 prevailing positive interest rates should enable this trend to continue. Within financial assets, the allocation towards equities has been increasing steadily due to the relatively low base; given that the retail investor has traditionally been under-invested in equities.
|Technology related Expenses||7.90||8.40||9.70||11.60||15.80||19.40||22.10|
|Other Operating Expenses||29.60||33.30||37.30||39.90||62.40||56.70||64.90|
|Depreciation & Amortization||4.20||3.70||7.00||9.90||11.70||13.20||14.40|
|Profit Before Tax - Before Exceptional||98.20||116.60||141.40||148.20||146.70||194.20||216.80|
|Profit Before Tax||131.30||116.60||141.40||148.20||136.20||194.20||216.80|
|Total Equity & Liabilities||698.00||780.90||688.40||780.50||862.30||948.10||1053.80|
|Property, Plant and Equipment||3.70||5.20||76.10||75.20||75.10||69.00||64.60|
|Cash, Bank and Investments||497.80||551.20||563.00||653.00||718.30||813.40||919.40|
|Profit After Tax||91.10||86.60||103.60||114.80||106.50||145.30||162.30|
|Cash From Operating Activities||28.40||42.70||79.30||85.40||82.10||154.60||173.40|
|Cash Flow from Investing Activities||0.30||18.20||-67.10||-66.80||-32.70||-10.00||-10.00|
|Cash from Financing Activites||-27.70||-31.40||-37.70||-20.10||-50.50||-52.30||-57.50|
|Net Cash Inflow / Outflow||1.00||29.50||-25.50||-1.40||-1.00||92.40||105.90|
|Opening Cash & Cash Equivalents||0.90||2.00||31.40||5.90||4.50||3.50||95.80|
|Closing Cash & Cash Equivalent||2.00||31.40||5.90||4.50||3.50||95.80||201.70|
CDSL delivered robust performance in Q1 driven by strong traction in transaction charges. We believe there is a strong tailwind with increase in trading volumes and retail participation. CDSL is a proxy to capital market growth and it continues to gain market share from NSDL. We like CDSL because of duopoly nature of business, low capex requirement and cash rich balance sheet. We initiate ‘Buy’ on CDSL for long term horizon.