CDSL: Duopoly Business

Central Depository Services Ltd (CDSL), is the first listed Indian securities depository based in Mumbai. 

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(A) Background

Central Depository Services (India) Limited incorporated at Mumbai on December 12, 1997. The Company initially registered by way of a certificate of registration on August 19, 1998 by SEBI under the Depositories Regulations. Subsequently, CDSL obtained certificate of commencement of business as a depository under Depositories Regulations on February 8, 1999.

BSE Ltd initially promoted CDSL. Thereafter in 2016, divested its stake to leading banks as "Sponsors" of CDSL.

All leading stock exchanges like the BSE Ltd, National Stock Exchange (NSE) & Metropolitan Stock Exchange of India (MSEI) have established connectivity with CDSL.

Apart from depository services, CDSL also provides services of e-Insurance account, KYC, e-voting, e-Notices, Electronic Negotiable Warehouse Receipts, commodity repository.

(B) Shareholding Pattern

BSE Ltd is the only promoter of CDSL holding 20% of the shares of company.

Mutual Funds hold 12.87% of the total shares. 1.78% is the share holding of foreign portfolio investors. Financial Institutions/Banks hold 19.79% of the total shares. Insurance companies' holding is 1.93%. Foreign bank (Standard Chartered Bank) holding is 7.18%.

CDSL shareholding pattern FY20 research report
research report of CDSL with major shareholders detail

(C) Executive Management

The Board of directors of CDSL include Public Interest Directors i.e. Independent Directors; secondly, Shareholder director i.e. director who represents the interest of shareholders, &
elected or nominated by such shareholders who are not depository participants, or their
associates & agents.

Executive director of CDSL is Mr. Nehal Vora.

The appointment of the directors is subject to approval by SEBI.

The capital market regulator i.e. SEBI encourages rules on the appointment of CEOs at stock exchanges, depositories & clearing corporations to improve transparency at institutions considered crucial to the country's financial market infrastructure.

Mr. Nehal Vora - Managing Director & Chief Executive Director

He held the position of Managing Director & CEO in September 2019. Prior to him, the position was held by Mr. PS Reddy who completed his tenure in FY19.

Mr. Nehal holds a Commerce degree from H R College, Mumbai & also a Master of Management Studies degree in Finance from the Narsee Monjee Institute of Management Studies (NMIMS), University of Mumbai.

He started his career with SEBI in 1996. Then he held position of Director, Law & Compliance at DSP Merrill Lynch Ltd. In 2009, he joined BSE Limited and headed all the Regulatory functions of BSE Ltd.

Remuneration of the previous MD & CEO for FY19 amounted to Rs. 2.33 crore, 2.19% of PAT for the year.

Remuneration of KMP other than MD/WTD/Manager amounted to Rs. 1.05 crore which is 0.98% of PAT.

(C) Business Verticals

(i) Revenue Sources for CDSL

(a) Depository Participants (DP):

Depository Participant (DP), who as an agent of the depository, offers depository services to investors. Financial institutions, banks, custodians as well as stockbrokers are eligible to act as DPs.

In order to trade in securities, investor opens demat account with DP, uses the CDSL services. Accordingly, a DP is a “Point of Service” for the investor. An investor can transfer securities from his account to any account by submitting the delivery instruction slip to the DP.

(b) Issuer Companies:

CDSL enables issuer companies to credit securities which also includes non-cash corporate benefits to a shareholder’s or applicant's demat account.

(c) Capital Market Intermediaries:

Offers KYC services to investors in Indian Capital markets.

(d) Insurance Companies:

Company offers facilities for holding of insurance policies in electronic form.

(e) 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).

Also, through its subsidiary, CDSL Commodity Repository Ltd, the company offers facilities for holding & transacting of warehouse receipts in electronic form.

  • Thus, CDSL provides IT infrastructure for processing securities & commodities electronically.
  • It builds database of ownership of securities.
  • Communicates key information to shareholders
  • Also, it is a Data centre for key Government initiatives

(ii) Revenue Breakup

Total revenue for FY20 amounted to Rs 225.06 crore. The segment wise revenue is:

research report of CDSL with revenue breakup

Transaction Charges:

DPs pay to CDSL transaction charges, account maintenance charges as well as settlement charges.

The terms of DP charges vary with agreement with each DP. CDSL discloses on its website, DP Tarriff comparison sheet (Click to view) in order to benefit the investors.

Annual Issuer Charges and IPO/Corporate Action charges paid by companies:

Issuer companies pay IPO and Corporate action charges. CDSL functions as the central accounting and record keeping office in respect of the securities admitted by issuer companies. The CDSL tarriff for issuer companies is disclosed on its website. Annual issuer charges depend on the nominal value of admitted securities. IPO as well as corporate action charges vary as per services provided by CDSL i.e. processing, verification, rectification & other transactions.

The high stability revenue streams of CDSL include fixed annual charges collected from the registered Issuer companies as well as transaction-based fees collected from Depository Participants.

CDSL charges Rs 15K/company as fixed one time charge and Rs 6K/company based on paid
up equity capital. Revenue is realised on pro rata basis.

Online data charges:

Online Data Charges is income from KYC paid by capital market intermediaries. CDSL launched CDSL Ventures KRA, India’s first & largest KYC Registration agency (“KRA”). SEBI permited CDSL to undertake e-KYC Aadhaar Authentication service of UIDAI.

Other services:

CDSL also receives ECAS charges (4% of revenue), documents storage charges (3% of revenue), e-voting charges (3% of revenue), commodity repository charges, insurance repository charges.

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

(D) Statistics of Revenue Model

(i) Depository Participants (DP)

DP represents face of services by CDSL. The expansion of DP network is one of the major business strategies of CDSL. With a large DP network, investors spread across 28 States & 7 Union Territories can avail of CDSL’s depository services. Further, investors have access to 20,352 DP service centers spread across India.

CDSL's DP count is larger than NSDL but NSDL extends services with more number of DP service centres connected through their back office. On the other hand, total DP count for NSDL as on 31 March 2020 is 278 with 31,272 DP service centres.

CDSL has more no of DP’s than NSDL due to more retail focus, whereas NSDL is institutional focused.

research report of CDSL with details of depository participants for FY20

(ii) Beneficial Owner Accounts (BO)

CDSL's count of beneficial owner accounts increased at rapid pace with 66 lakh accounts as on 31 March 2010 to 2.12 crore accounts as on 31 March 2020.

CDSl surpassed the BO accounts count of NSDL as on 31 March 2020. NSDL's BO accounts count is 1.95 crore as on 31 March 2020.

research report of CDSL with details of beneficial owner accounts for FY20

The increase of beneficial owner accounts is attributable to increase in trend of investing in shares/commodities, Investor education & awareness with programmes in collaboration with SEBI and SEBI's encouraging efforts/amendments. CDSL also participated actively in improvements to multiply BO accounts.

(iii) Securities Held

As on 31 March 2020, the securities of 14,762 companies have been admitted for Demat with CDSL. During the last 12 months the volume of securities & the custody has increased about 26%. Moreover, around 11,000 unlisted companies have been admitted out of total 80,000 plus unlisted companies.

research report of CDSL with details of securities admitted for FY20

(iv) E-voting & E-Notices

As on 31 March 2020, 5,635 companies have signed agreements with CDSL to conduct e-Voting. 349 companies have signed for availing E-notices service.

(E) Performance Highlights

(i) Revenue from operations & PAT

research report of CDSL with details on expansion of net sales
research report of CDSL with details on increase in segment revenue

Apart from above, Documents storage charges (2% of revenue) increase by 12% in FY20; On line Data charges i.e. KYC related services (16% of revenue) increased by 10% in FY20. Other revenue (18% of revenue) increased by 32% in FY20.

research report with details on expansion of PAT

Higher PAT for FY16 is on account of reversal of amount of previous years' transfer of Investor protection fund, Rs. 33 crore.

(F) Market Share

In addition surpassing BO accounts count in comparison to NSDL, CDSL achieved market share of 52% for the year ended 31 March 2020.

CDSL is more DP friendly than NSDL on various aspects like lower transaction fee for higher volume, zero fixed fees for no activity.

(G) Growth Drivers for Income

1. Highly dependent on Capital Market Sentiments

Performance of a depository is basically dependent on sentiments in the capital market. The transaction charges revenue is directly impacted by volume of transactions during the year. Thus, negative market sentiments can have adverse impact on transaction charges segment.

Secondly, IPO and corporate action charges depend on the primary market performance.

  • In FY11, During the financial year 2010-11, the capital market witnessed significant volatility and remained rangebound for most part of the year. The BSE Sensex, which registered a gain of 80.5% during the financial year 2009-10, could thus make only a gain of 10.76% for the whole financial year 2010-11. Subdued activities of FIIs, inflation, hike in interest rates, rising crude prices, a series of scams and the impact of the tsunami on Japan were some of the major reasons for the Sensex to remain rangebound during Financial Year 2010-11. Therefore, CDSL's revenue & PAT growth impacted because of such factors.
  • In FY14, the performance of the primary market witnessed one of the lowest amounts mobilized as compared to recent years.
  • FY15 was also year of positive market sentiments with inflows from FIIs of approx Rs. 1,10,000 crore and Rs. 38,600 crore from mutual funds.
  • FY18 also witnessed increase in trading volumes as well as retail participation. The active participation of retail investors was demonstrated with the increase in the turnover of shares traded on the BSE. Also, 80 public issues raised Rs. 98,947 crores in FY 2017-18 as compared to 53 public issues mobilising Rs. 36,615 crores in FY 2016-17.

2. Diversified revenue streams for stability in income

The company earns fixed nature of income as annual issuer charges from companies registered. Such charges are SEBI approved. As per management, increase in these charges is not at fixed duration. Depending on circumstances of the market, SEBI approves increase in such charges. The Company also charges account maintenance charges to corporate account holders and monthly maintenance charges to clearing members for maintenance of settlement accounts.

Secondly, e-voting and e-notices revenue is also fixed nature. Although, revenue contribution of the same is not very high.

Also, On line data services & documents storage are also stable income streams. As on March 31, 2020, CDSL through its subsidiary CVL held over 2.1 crore capital market investor records under CVL, the first & largest KYC Registration Agency (KRA) in India. CDSL has opened approximately 5 lakhs active e-Insurance accounts, holding more than 2,36,000 insurance policies in electronic form as on 31 March 2020.

3. SEBI Reforms

Growth of depositories also depends on reforms introduced by SEBI from time to time. The market participation increases with such initiatives. For instance:

  • In November 2009, SEBI allowed purchase & redemption of Mutual Fund Schemes through stock exchange infrastructure. Thus, NSE & BSE launched platforms for Mutual Funds transactions. Consequently during 2009-10, CDSL admitted 355 mutual fund schemes of 27 Mutual Funds.
  • A new product in FY10, Interest Rate Futures (IRF)
  • In FY12, in order to facilitate promoters to dilute/offload their holding in listed companies in a transparent manner with wider participation, SEBI allowed the offer for sale of shares by promoters of such companies through a separate window provided by the stock exchanges.
  • Industry improvement: The introduction of KYC Registration Agency (KRA) in January 2012, made it convenient for investors to do a onetime KYC across all intermediaries in the capital markets.
  • In FY13, SEBI made mandatory for top 500 companies to register for e-voting facility.
  • In FY17, requirement of reduction in 18 listed central public sector enterprises to 75%alone could contribute to Rs. 20,678 crore of capital raise.

(H) Cost Structure

research report of with details of cost structure

CDSL's main expenses include employee benefit expenses and spend on improvement in computer technology.

'Settlement of service tax matter expense' for FY20 is on account of settlement of service tax matters of earlier years under the Sabka Vishwas (Legacy Dispute Resolution) scheme, 2019. It is non recurring nature of expense.

In order to maintain effective operations, technology up-gradation & safety of records, CDSL spends on computer technology. CDSL has to keep the IT infrastructure in line with various technology standards related to information security and business continuity management.

Employee cost as a % of Net Revenue is 21%. On the other hand, technology spend as a % of net revenue is 7%.

Other expenses also includes amount transferred to Investor Protection Fund (IPF) as mandated by SEBI Regulations. The same amounts to around 2% of the net revenue.

(I) Free Cash Flow

free cash flow growth of CDSL
Free cash flow and sales growth of CDSL

Even in the years of volatile market conditions, CDSL has kept free cash flow positive and a good Free Cash Flow (FCF)/Sales Ratio. It is a positive factor for the company.

Moreover, CDSL's dividend payout has also remained consistent.

(J) Threats for CDSL

(i) Dependency on market sentiments

As stated earlier, transaction charges income as well as IPO charges income stay dependent upon overall market sentiments. Thus, various combination of various factors impact the company's performance including inflows of foreign direct investment in Indian markets, growth of mutual funds industry, comfort level of valuation of securities, crude oil prices, political volatility, Interest Rates structure.

(ii) SEBI Guidelines

In FY13, SEBi introduced Basic Service Demat Account (BSDA) where investor with portfolio lesser than Rs 50,000 will not pay any AMC. Since major of accounts fell under this category, many DPs would get adversely effected. The company expected many nil balance accounts closed by many DPs due to operational cost increase.

In FY15, many DPs found it unviable to remain in this business due to increase in compliance and operational costs. Hence, 33 DPs surrendered their registrations.

Moreover, in FY13, management also stated that many DPs started closing because of the requirement of NISM certified official in each of the DP branch.

Later in FY16, SEBI came out with a circular advising DPs to convert existing accounts into Basic Service Demat Account (BSDA) as per guidelines.

(iii) Oil Prices

In FY19, management stated in its outlook that spike in oil prices is major threat because it results on negative Global Outlook.

(K) Opportunities

The following opportunities includes positive environment factors for depositories business as well as outlook given by management of CDSL.

(i) Lockdown saw more retail investors join the queue:

Indians are increasing their exposure to equities, indicating a shift from traditional investment assets such as gold and bank deposits. ICICI Securities - "On the opportunity front, huge money waited to enter the retail segment & the market gave them an opportunity to enter at substantially lower levels".

NSE internet trading volumes jumped 53% in April 2020.

Moreover, about 1.2 million new investors opened demat accounts with the Central Depository Services (CDSL) alone in March and April. About 6.18 lakh new demat accounts were opened in CDSL in March and another 6 lakh in April.

In FY19, management stated that attractive valuations post sharp correction in prices is an opportunity for the company.

(ii) Unlisted entities

There are close to about 80,000 companies in the unlisted space. Out of that approximately 11,000 have been admitted by CDSL. Thus, in coming years, this is a growth opportunity for CDSL.

(iii) New Branch

CDSL's growth of DP network as well as BO accounts is quite impressive.

Moreover, CDSL opened its first IFSC Branch in January 2020 at the GIFT City, Gandhinagar in Gujarat.

CDSL’s IFSC branch intends to contribute to the growth of the financial markets with the
introduction of products like depository receipts, masala bonds, exchange-traded funds (ETFs) along with hybrid products and similar delivery-based trading to the existing suite of the products traded on the exchanges.

(iv) Add On services

Newer revenue streams like e-KYC is a growth factor. CDSL is one of the intermediaries who have been permitted to take up AUA/KUA license & also received a new e-signed license from CCA (Controller of Certifying Authorities). So both the eKYC & the e-Sign will facilitate online account opening and add to the number of accounts in CDSL as well as the KYCs in CVL.

(L) Concall Updates May 2020 for the year ended 31 March 2020

  • Profits for FY20 decreased mainly on account of provision for a non-recurring previous year anticipated statutory liability of Rs.10.56 Crores, contribution towards CSR expenditure of Rs.6.80 Crores, which includes Rs.4.17 Crores of unspent amount of previous years and a legal provision of Rs.1.79 Crores pertaining to an outcome of previous year’s legal matters.
  • The adverse news came up that NAD project has been handed over to Digilocker. The company has made all expenses in previous years for the same but no revenue is recoverable from Government.
  • The management has not answered queries for business aspects post lockdown stating that the concall only pertains to performance of FY20.
  • In respect of incentive fee structure for RTAs, management stated that CDSL has also started offering the similar referral fee to RTAs as the competitor is offering from last year. The company is also gaining market share due to referral fee structure for RTAs (registrar and transfer agents) as well as practicing Company Secretaries.
  • Further on scope of commodity repository services, it currently covers agri based commodities which is allowed. It depend on Government to allow for non-agri commodities.
  • Also, on sustainability of its subsidiary, CDSL Ventures Ltd (CVL), management stated that intermediaries depend on KRA for KYC data and show no confidence on the data of CERSAI (Central Registry of Securitisation Asset Reconstruction and Security Interest).

(M) Valuation

  • CDSL's current Market Cap is Rs 2,863 crore. Investments and Cash & cash equivalents amount to Rs 718 crore.
  • Enterprise Value/EBITDA is 18.95
  • Currently trading at P/E of 26
  • Thus current Earnings Yield is around 4% which is low.
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