Should you Invest in CDSL Stock After Correction?

Central Depository Services (India) Limited (CDSL) (promoted by The Bombay Stock Exchange*) is the leading securities depository in India. CDSL’s Beneficial Owner (BO) account market share stood at ~51% as on 30th June 2019 and Incremental market share stood at ~74% in Q1 FY20.

  • CDSL IPO was oversubscribed by 170 times which marks it as the most subscribed IPO issue of 2017.
  • On June 30, 2017, the Company got listed on NSE at a premium of 68% over the issue price of Rs.149.
  • The stock got listed at Rs. 250 on 30th June, 2017 and on 14th July, 2017, the stock touched a high of Rs. 486.
  • Current Market Price – Rs. 191.90 (26th Aug 2019)

Past Analysis on CDSL

Since its IPO, the stock is continuously falling despite its strong financials and market share gain. The Company has reported revenue growth of 15.6% (Q-o-Q) and 1.21% on Y-o-Y basis and PAT grew by 32% at Rs 34.19 Cr. in Q1 FY 2020.

CDSL Stock Price

*The Company’s promoter BSE also got listed at a 34.62% premium on NSE at Rs 1,085 compared with an issue price of Rs 806 on 3rd Feb 2017. Since then, the stock is continuously falling and currently trades at Rs. 528.20.

BSE Stock Price

Possible Reasons for CDSL Stock Correction

  • Stretched Valuation At the time of IPO
  • Continued subdued market conditions and lower IPOs led to revenue pressure on the transaction and IPO side of the business – The depository business is a proxy for the capital market in general and equities in particular. Failing capital markets generally mean lower trading volumes in the secondary market and low primary market activity.
  • Corporate Governance Issues – On 8th August, 2019, SEBI initiates inquiry against CDSL on 3 corporate governance issues:
    • Not finding a successor to Managing Director PS Reddy, who resigned as MD from CDSL on March 31
    • Chairman of the Company was about to retire and the board did not initiate the process of appointing a new chairman.
    • Failure of the Company in appointing independent public directors to the company’s board.

Should you Invest In CDSL?

We believe that the stock has corrected in the recent past in line with other midcaps and broader indices, but at a current valuation of 16x, CDSL is trading at an attractive valuation given the below-mentioned reasons.

  1. Diversified Revenue Stream – CDSL has a diversified revenue stream, ~33% of the revenue is annuity and ~40% is market-linked. Various fees/ charges levied by CDSL to DPs.

Various fees/ charges levied by CDSL to DPs

Service offered

Charges/fees (Rs.)

Minimum Monthly Bill

8,000

Account Maintenance charges for Corporates

500

Transaction Charges: per credit transaction into the Principle Account that originates from the Clearing House Account

5.5

Settlement Charges per month

500

Rematerialization

Fee For every 100 securities Rs. 10 Part thereof; subject to maximum 5,00,000 Or Flat fee Rs. 10 per certificate, whichever is higher

Corporate Action Charges

10 per record

  1. Compulsory Demat Of Unlisted Firms – In Q1 FY 2020, 655 un-listed companies applied for Demat services by paying ~Rs 15K/company. CDSL is adding ~200-250 un-listed companies per month.
  2. Growth in BO Account – CDSL continues to focus on increasing DPs with net beneficial owner accounts increasing to 18.0mn (+17.4% YoY), with an incremental market share of 74%. CDSL’s strategy of consolidating its position among non- institutional investors has enabled the Company to not depend on a few large institutional investors.
  3. Strong Financials – Annual issuer charges are expected to ensure stable growth in the company’s revenue. Debt-free status and cash-rich company.
  4. Asset Light Business – Minimum Capex requirement.