Central Depository Services - Predictable, Profitable Business

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.