Central
Depository Services’ (CDSL) business is characterised by a high degree
of predictability and profitability. It earned >35% of revenue from
annual issuer charges in FY17, which are likely to remain
stable-to-growing irrespective of market conditions owing to certainty
of earning custody charges and an ever increasing number of companies
willing to enter the primary market. Further, IPO/Corporate Action
Charges revenue witnessed 45% revenue CAGR through FY14-FY17. This
revenue stream – linked to overall health of the
capital market and number of issuers – will drive corporate action
volumes such as bonus share credit and stock-split. CDSL’s total revenue
clocked a healthy 18.8% CAGR over FY14-FY17.
Growing Demat Market Share owing to Lower Cost for DPs
CDSL
has steadily gained market share in its core business
vis-à-vis its lone competitor, NSDL. It has enjoyed higher incremental
market share over NSDL for 4 successive years on low operating cost, net
worth criteria and technology investment. Its net worth and deposit
criteria are Rs20mn and Rs0.5mn, respectively vs. NSDL’s Rs30mn and
Rs1mn, respectively. In terms of technology, CDSL has a centralised
server, and brokers can purchase a lap top and link it to the server,
enabling plug-and-play. On the other hand, brokers registered with NSDL
have to invest in a server to interact with NSDL’s IT systems, which is
an expensive proposition. CDSL
had 12.3mn BO accounts as of FY17-end (vs. 15.6mn for NSDL), clocking
~12% CAGR through FY14-FY17.
New Avenues for Growth – Corporates, KYC, Insurance, Academic
Depository
CDSL
has invested in new business initiatives to drive growth. Through
subsidiary CDSL Ventures (CVL), it provides KYC services to capital
market intermediaries (>15mn KYC records, ~67% share as of Apr’17).
CVL is also one of the two depositories for National Academic Depository
(NAD). Another subsidiary, CDSL Insurance offers repository services
for e-insurance policies issued by insurance companies (>325,000
e-insurance accounts, >66,000 electronic policies as at Apr’17). CDSL
also provides services like e-voting to corporates, online drafting
solutions for succession wills through Myeasiwill (>1,000
registrations as at end-Apr’17), e-Notices, Corporate Bond Repository,
KYC search assistance for Aadhaar
holders, GST Suvidha Provider and Warehouse Repository (through its
subsidiary, CDSL Commodity Repository, incorporated in Mar’17).
Outlook &
Valuation
At
the CMP, the stock trades at a PE of 29.5x/26.4x FY19E/FY20E EPS,
respectively. In light of a highly predictable revenue model, good
health
of capital markets, strong position and market leadership based on
incremental BO accounts, high profitability, steady cash flow and newer
business initiatives, we believe the stock is a very good long-term
investment. We initiate coverage on CDSL with a BUY recommendation
and Target Price of Rs450, which implies a PE of 35x average of FY19E
and FY20E EPS.
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