Company Background

Central Depository Services Limited (CDSL) , is the second Indian central securities depository based in Mumbai. CDSL was established by BSE in 1997 and its operations were flagged off in 1999. According to the draft prospectus, BSE which is its promoter holds 52,297,850 shares or 50.05% equity stake in the depository subsidiary. This parentage has certainly helped CDSL in growing business and limited competition also made things easier for it (NSE’s NSDL is the only competitor for CDSL). The company has a 45 per cent market share in terms of number of accounts .It has nearly 1.25 crore accounts, as on May 31, 2017.

They offers various services, such as account opening, dematerialization, processing delivery and receipt instructions, account statement, re-materialization, pledging, nomination, transmission of securities, change in address, bank account details and SMS services for depository participants.

In addition to that CDSL Ventures is registered with the SEBI and the Unique Identification Authority of India (“UIDAI”) as both an AUA and KUA. CDSL Ventures undertakes common Know Your Client (“KYC”) services for investors in the capital markets including to the mutual fund industry. As of November 30, 2016, it held over 14 million capital market investor records under the KRA representing approximately 67% market share. It also provide facilities allowing holding of insurance policies in electronic form and enable policy holders to undertake changes, modifications and revisions to insurance policies.

Stable revenue base due to repeat business in multiple offerings in the Indian securities and financial services market

The Company along with Subsidiaries, offer services to several sub-sectors of the Indian securities and financial services market including capital markets, mutual funds and insurance companies. The company’s diversified offerings to several client bases including DPs, corporates, stock exchanges, clearing corporations, registrars and the investors have provided it with multiple streams of stable, recurring operating revenue.

It has a high stability of operating income from the fixed annual charges collected from companies registered with it and transaction-based fees collected from DPs. The company also offers dematerialization 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. It also provides services including e-notices and e-voting services to companies enabling their shareholders to receive notices in electronic form and to allow shareholders to cast their votes electronically.

High economies of scale leading to steady growth in profitability

The company is the leading securities depository in India by incremental growth of BO accounts according to the CRISIL Report. Its fixed operating costs result in high economies of scale. Its main costs are employee wages and post employee benefits and software development and maintenance costs. As a result of the economies of scale, it has a strong track record of profitability. The net profit after tax, as restated has grown at a CAGR of 7.58% from Rs.553.44 million in Fiscal 2012 to Rs.741.38 million in Fiscal 2016. Its stable business and steady revenue growth has allowed it to consistently pay dividends. The dividend paid (including dividend distribution tax) in Fiscals 2016, 2015 and 2014 was Rs.314.44 million, Rs.276.70 million and Rs.244.52 million.

India’s leading securities depository with the highest share of incremental growth of BO accounts

The company is the leading securities depository in India by incremental growth of BO accounts and by the total number of registered DPs according to the CRISIL Report. It has a wide network of DPs, who act as points of service for its investors, operating from over 17,000 sites across the country, offering convenience for an investor to select a DP based on its cost structure and locational convenience to engage its services. As of November 30, 2016 it had 584 DPs servicing across 29 states and 7 union territories including two overseas centres. 

State-of-the-art technology and robust infrastructure and IT systems

The company has state-of-the-art IT systems. The company has deployed core depository system based on a centralized architecture providing real-time updated information to users. Its system can be accessed over the internet as well as the intranet though a secure channel using multifactor user authentication. Its Information Security Management System (“ISMS”) protects information throughout the life span, from its initial creation to its final disposal. Its ISMS complies with ISO 27001 standard. The company is one of the few depositories globally to be awarded ISO 22301:2012 certification for its Business Continuity Management System (“BCMS”).

Commodity repository to be set up in the next few months would be a growth driver for the company

The company has got in-principle approval from the Warehousing Development and Regulatory Authority (WDRA) for its commodity repository and it is likely to be launched in 2-3 months which would be a growth driver for the company. The management also expressed hope that a single demat account for all financial asset classes would be allowed soon.

Key Risks

* The company is one of the two securities depositories in India. It faces significant competition for investor accounts from its competitor and expects such competition to continue.

* CDSL’s inability to effectively manage its growing DP network or any disruptions in its supply or distribution infrastructure may have an adverse effect on its business, results of operations and financial condition.

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

* If there is a shift in consumer preferences away from investing and trading in securities to other products and services, it could significantly reduce demand for the company’s services and adversely affect its business, financial condition and results of operations.

* Fraud due to unauthorized transfer of securities or service deficiency could result in losses. Further, if account data disseminated by the company contains undetected errors, this could have a material adverse effect on its business, financial condition or results of operations.

* Valuation & Recommendation

Central Depository Services (India) Ltd. (CDSL) stands to gain from operating leverage. At a P/BV of 2.92xs of FY17 Book Value. We believe that CDSL demands a discount to its domestic peers. We assign a Subscribe rating to the IPO.

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