CDSL: MARCHING ON A FIRM GROWTH PATH
The company endeavours to cater to the needs of investors with a comprehensive range of services at competitive prices and to maintain optimal service stan-dards. It is therefore all set to match the rapid pace of the Indian equity markets
CDSL is the first listed depository of India and the second listed depository in the world. It is a market infrastructure institution (MII) and a crucial part of the capital market structure, providing services to all market participants – exchanges, clearing corporations, depository participants, issuers and investors. A depository is a facilitator for holding of securities in the dematerialised form and an enabler for securities’ transactions. As of August 31, 2021, CDSL held 44,100,691 investor accounts excluding closed accounts, 586 depository participants, and 509,270 million securities in dematerialised custody which value up to Rs33,540,874 million.
The company is also the first listed depository in the Asia Pacific region. Also, CDSL is the first depository to launch operations in IFSC, GIFT City. The company is spread across 96 per cent pin codes and operates with four subsidiaries: CVL, CDSL Insurance Repository Limited (CIRL), CDSL Commodity Repository Limited (CCRL), CDSL IFSC Limited (CDSL IL). CVL conceptualised, designed and implemented the KRA system with the mutual fund industry in 2006. It is the first and the largest KYC registration agency (KRA) in the country with over 3.10 crore fully digitised KYC records as of June 30, 2021.
CIRL has received registration certificate from Insurance Regulatory and Development Authority of India (IRDAI) to act as an insurance repository. CCRL was set up in 2017 and it provides electronic repository services for commodity assets. At present, it exclusively serves three commodity exchanges, namely, MCX, BSE and ICEX for their trades in agriculture commodities. CDSL IL has received approval from Interna-tional Financial Services Centres Authority (IFSCA) to act as a foreign depository to run the depository system and any other ancillary activities as approved by IFSCA.
Sector Overview
The depository is an institution registered with the Securities and Exchange Board of India (SEBI) for holding custody of securities in electronic form and facilitates transfer based on instructions from account holders. The growing Indian capital markets made it difficult to handle the growing volume of documentation in paper form. This caused problems like delay in transfers, long settlement period, high levels of failed trade and bad deliveries, high-risk exposure, etc. To remove these bottlenecks, the Depositories Act was legislated in August 1996. Looking at the cumulative market share of active dematerialisa-tion accounts, CDSL has experienced a growth in market share from 40 per cent in FY 2013-14 to 61 per cent in FY 2020-21. During FY 2020-21, the S and P BSE Sensex opened at 29,505 and hit a high of 52,516 on February 16, 2021, and thereafter closed at 49,509 on March 31, 2021.
During the same period Nifty opened at 8,584 and hit a high of 15,431 on February 16, 2021, and thereafter closed at 14,690 on March 31, 2021. As per Prime Database, 69 public issues have raised Rs74,707 crore in FY 2020-21 as compared to 39 public issues mobilising Rs37,677 crore in FY 2019-20. The past few years have witnessed a surge in activities by retail investors in the capital market on the back of opening online trading and dematerialisation accounts which have resulted in an increase in delivery-based transactions on the stock exchanges. Within financial assets, the allocation towards equities has been gradually increasing as retail investors have traditionally been under-invested in equities.
Financial Overview
The company’s financial performance indicates that on a consoli-dated quarterly basis the net sales and other operating income increased to Rs117.28 crore in Q1FY22 as compared to Rs65.28 crore in Q1FY21, clocking gains of 79.66 per cent. The operating profit recorded at Rs86.24 crore in Q1FY22 as compared to operating profit Rs58.80 crore in Q1FY21, zooming upward by 46.67 per cent. Q1FY22 recorded a net profit of Rs63.99 crore as compared to net profit of Rs46.72 crore in the same quarter in the previous year, registering gain of 36.96 per cent. On the annual front, its net sales and operating income grew by 52.69 per cent from Rs225.11 crore in FY20 to Rs343.72 crore in FY21.
The operating profit expanded by 81.33 per cent in FY21 as compared to FY20. The net profit rose by 88.6 per cent in FY21, recording Rs201.27 crore as compared to Rs106.72 crore in FY20. CDSL delivered a strong revenue performance which can be traced to transaction and online data charges (KYC) revenue. Key attributes that highlight a positive outlook include strong momentum in transaction revenue driven by retail activity i.e. online brokers and pledge income, continued gain in BO account market share, sustained growth in annual issuer charges i.e. annuity income led by BO accounts addition and unlisted opportunity, investment in technology for enhanced security, high cash generation and high net cash.
Product-Wise Performance
Revenue Streams: CDSL offers services to several sub-sectors of the Indian securities and financial services’ market including capital markets, mutual funds and insurance companies. The other revenue-generating services offered by the company include e-voting and e-notice services to the registered companies, enabling their shareholders to receive notices in electronic form and to allow shareholders to cast their votes electronically, remotely or at the meeting venue. To get a glimpse of the operational income in FY21, the annual issuer charges for FY21 increased by 11 per cent whereas transaction charges zoomed significantly in FY21.
The company’s IPO and corporate action charges increased 46 per cent in FY21 as compared to FY20. Online data charges increased 52 per cent in FY21. ECAS charges expanded 35 per cent whereas e-voting charges increased 81 per cent for FY 2020-21. Document storage charges for FY 2020-21 increased by a mere 1 per cent. On the other hand, income from others squeezed by 8 per cent to Rs2,509 lakhs for FY21 as compared to Rs2,713.17 lakhs for FY20. This depicts a positive operational performance in FY21.
Depository Participant Network: CDSL is a leading securities’ depository in India by constant growth of beneficial owner (BO) accounts of over 1.08 crore from FY 2015-16 to 3.34 crore for FY 2020-21. The company bears a wide network of DPs who act as points of service. As of March 31, 2021, CDSL had 592 registered DPs with over 20,689 service centres across India. The DPs are spread across 28 states and eight union territories. As of March 31, 2021, CDSL had over 47,522 crore securities representing a total value of Rs2,743,936 crore.
Outlook
The Department of Revenue of the Ministry of Finance via a gazette notification has recognised CDSL and CVL as a reporting entity to perform Aadhaar authentication. Also, SEBI has come out with a circular regarding clarification on KYC process and the use of technology for KYC. The circular throws light upon the importance of online procedures for the KYC process, in-person verification through video, online submis- sions of valid documents and other documents using e-sign of the investors. The above initiative by SEBI and Ministry of Finance will enable registered capital market intermediaries to open trading and dematerialisation accounts digitally.
Many large broking houses and discount broking firms are likely to accrue benefits due to this development. Nowadays, brokers are more focused on going completely paperless and in opening all accounts online. Further, the Electronic Delivery Instruction Slip (e-DIS) which is currently a buzzword in the capital market has been operational in one form or the other in CDSL since 2016, which also brings in a large number of retail accounts.
CDSL has an edge with a strong distribution network of DPs spread across the country. The company’s DPs are able to effectively use digital technology in opening accounts online. CDSL aims to continue to build on its existing DP relationships and leverage their extensive network all over India to take the offering to new investors. The company endeavours to cater to the needs of investors with a comprehensive range of services at competitive prices and to maintain optimal service standards. In order to maintain and enhance the competitive position, it will continue to offer services at aggressive prices achieved through its low operational costs driven by operational efficiency, high economies of scale and innovative service implementation.
It also aims to continue to invest and upgrade the IT infrastruc-ture and systems leading to enhancement of service quality. The business of depositories grows in direct proportion to growth in the capital markets. India’s stock market is the seventh biggest – up three spots – in the world as total market capitalisation increased to USD 2.7 trillion. The continuous improvement in the equity and capital markets is bound to keep growing the depositories’ businesses over time. Hence, predicting strong growth potential in CDSL’s services and activities in the near as well as long term future, we recommend BUY for CDSL.