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REGISTER NOW OR LOGINCentral Depository Services (NSE:CDSL) is a facilitator for the holding of securities in the dematerialized form and an enabler for securities transactions. It is a leading Market Infrastructure Institution and a government registered share depository in India. BSE Ltd. holds a 24% stake in CDSL.
CDSL plays a crucial role in the Capital market structure providing essential services to all market participants - exchanges, clearing corporations, depository participants, issuers, and investors. It has a large network of 599 DPs including state financial corporations, public financial institutions, scheduled commercial banks, etc. across 28 states and 8 union territories.
It has over 2.41 crore investor accounts, 597 depository participants, and more than 445,000 million number of securities in Demat custody. In India, the two key depository participants are NSDL and CDSL. CDSL accounts for nearly 50% of the market share of Indian Demat accounts.
CDSL Pros
i) Largest & Fastest growing - CDSL is the largest securities depository in terms of the number of accounts in India. It has the highest number of DPs registered and also maintains a major share of incremental growth of Demat accounts in India. The company has registered a sales growth of 13.68% CAGR in the past three years. Its DP service centers also grew to 20,352 in FY 2019-20 from 19,460 a year ago. The total active Beneficial Owner accounts registered a growth rate of 19% CAGR in the last five years. Investors trust the CDSL brand for its convenient and dependable services at competitive prices for a wide range of securities. The company also stands a good chance to benefit from the changes in margin requirement increase in pledging after a recent announcement by SEBI. CDSL is witnessing an increase in the number of new retail Demat account openings. It has also been successful in bagging exclusive partnerships with some online brokerages.
ii) New Projects improving the investing landscape in India - CDSL became the first depository to cross 20 million active Demat accounts in 2020. Its centralized KYC documents record-keeping of capital market investors had more than 2.16 crore registered accounts by the end of FY 2020. KRA and CKYC have changed the whole landscape of investing in India and play a critical role in personal identification in the new digital age. CDSL continues to invest in new projects which are expected to generate additional revenue in the future. It operates through subsidiaries like CDSL Ventures Ltd., CDSL Insurance Repository Ltd., and CDSL Commodity Repository Ltd.
iii) Benefit from the Digitization trend in India - As tools for digitization become increasingly popular, the Demat System for electronic storing of shares and securities have become mandatory. CDSL has a consistent source of secure revenues given its multiple offerings in the Indian securities and financial services market. It has an asset-light and a diversified business model with 35% of fixed revenue. Annual issuer charges and revenue from corporate actions like IPO contribute to a stable revenue stream. With time, the number of listed companies will grow on Indian Stock markets. CDSL should gain as the government mandates even the unlisted public companies to dematerialize their securities. In addition, CDSL’s revenue is generated from transaction charges, account maintenance charges, and settlement charges paid by depository participants. The huge untapped potential of Indian investors acts as a strong tailwind for the company. CDSL has a wide competitive moat as investors depend on the company for its valuable services. CDSL is entrusted with all the personal details of investors and unless a very unfavorable situation, an investor would not like to make a switch from one depository company to another. A strong parental backup of BSE Ltd. also grants it a big advantage over new entrants.
Valuation
CDSL has been buzzing on bourses since the start of this year and has doubled in the last six months. The stock’s P/E stands at ~40 while RoE for CDSL stands at 15%. The dividend yield for the stock is 0.93% and the market cap for CDSL stands at Rs 4,858 crore. CDSL was listed on NSE in 2017. It has gained by more than 220% since its issue price of Rs. 149/ share. It hit its all-time high of Rs.514 recently. The company also forms part of the most popular indices like NSE NIFTY500, NIFTY SmallCap 250, NIFTY Mid-SmallCap400, etc. in India. Stable sources of income sources, low operational costs, and high economies of scale have supported margin growth in the past. CDSL also generates strong cash flows given its debt-free status and minimum capital expenditure requirement.
Source: MoneyControl
Key Risks
A portion of CDSL’s revenue is dependent upon delivery and trading volumes. Therefore, any decline in these volumes could adversely affect the company’s operations. However, a major proportion of CDSL’s revenue is annuity revenue, which is not linked with market activities and is non-cyclical in nature. The company is reducing this risk by further diversification. Another risk is that a large population in India is still not confident about online Demat trading. Lack of awareness about the benefits of Demat trading and multiple charges often dissuade retail investors to trade online. Investors living in small towns often face difficulty in opening a Demat account which might deter them from trading in the stock market.
COVID Impact
The number of new Demat accounts opened in the first half of 2020 has increased significantly and CDSL is one of the biggest beneficiaries of this growth trend. Both its revenue and margins improved in the recent quarter driven by better transaction charges due to high retail activity, increased delivery volume, and new accounts addition. Also, investors decide to become more “aatma-nirbhar” during these crazy times as is indicated by the growing number of Demat accounts with CDSL and increased delivery volumes. The trading activity increased during the lockdown period as potential investors had some free time in hand to try their passion and make some extra bucks similar to the Robinhood app effects in the U.S.
Conclusion
CDSL plays an integral role in the Indian capital market. As the Demat system was mandated, there has been a rise in the number of Indian retail investors. As investors continue to trade in the growing Indian market place, companies like CDSL will benefit from each trade. The company is well-positioned to benefit from the government mandate for all unlisted public companies to dematerialize their securities. As the number of companies availing Demat facilities will grow in the future, CDSL will benefit from an increase in fee revenue (like annual issuer charges) which is expected to form a steady source of top-line growth. Out of the two, only CDSL is listed and could be a good long term opportunity for investors looking to gain from the Indian stock markets. The stock run-up of 130% in the last six months of 2020 does not seem to leave enough room for a future hike, in my opinion.
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