CDSL IPO : Why you should subscribe?

Central Depository Services (India) Limited (CDSL) is coming with an IPO with an offer for sale of Rs 550 crore, comprising of 3,51,67,208 equity shares with face value of Rs 10 each. Out of these, 7,00,000 shares are reserved for subscription by eligible employees. The lot size consists of minimum of 100 shares. The issue will remain open from June 19 to June 21, 2017 with price band of Rs 145-149 per share. CDSL will be listed only on the National Stock Exchange (NSE).

The issue is an offer for sale and not a fresh issue. Thus, the company will not receive any proceeds from the offer and all the proceeds will go to the existing shareholders who are selling their stakes. CDSL, being a well-established company, is not in immediate need of funds and is expecting to enhance its visibility and brand image in the market and provide liquidity to its existing shareholders.

CDSL is a leading securities depository in India offering services to the clients including depositary participants, corporates, capital market intermediaries, insurance companies etc. Its depository business commenced in 1999 and BSE had promoted it initially. Some of the leading Indian banks also have stakes in the company.

CDSL’s revenue sources include transaction charges, account maintenance charges, settlement charges paid by DPs, annual fees, corporate action charges and e-voting charges paid by the companies. As of Nov. 30, 2016, it held over 1.4 crore capital market investors' accounts and has three lakh e-insurance accounts with 58,000 insurance policies held in electronic form. The 584 registered DPs had 17000 service centres in India and 1.4 crore KYC records with market share of 67% was recorded as on Nov 30, 2016. Latest technology and robust infrastructure with IT systems has enabled the company to show such strong growth and continuous development.

BSE, SBI, Bank of Baroda and Calcutta Stock exchange would be selling their stakes in CDSL through this IPO.

In India, there are only two depositories namely NSDL and CDSL. This Rs 240 crore industry has grown at a CAGR of 12% over the last three financial years. CDSL is promoted by BSE and NSDL is promoted by NSE. Both these depositories hold 90% of the total shares of listed companies in electronic form. Entry of any new peer is very difficult as both these depositories have strong backing of their parent companies, i.e. the two major stock exchanges.

 Depositories in India have good future prospects due to rising capital market participation, new value-added service offerings, financial literacy initiatives undertaken by SEBI and growing awareness of investments in capital markets.

We see that the company’s revenue has grown at a CAGR of 6.54% for FY14-16. The net profit has grown at a CAGR of 22.57% for FY14-16. Dividend paid by the company for FY14, FY15 and FY16 was Rs 2 per share, Rs 2.2 per share and Rs 2.5 per share, respectively. Its stable growth in revenue and profits is evident from the above financials. Its market share with respect to incremental demat accounts has grown to 58% in FY16 from 46% in FY12. This shows the growing participation and confidence of investors in share market and the depositories.

Valuation

On a consolidated FY16 EPS of Rs 7.09, with the upper price band of Rs 149, its P/E ratio stands at 21.01x. Its price-to-book (P/BV) value ratio for FY16 stood at 3.1x. Its consolidated return on net worth (RoNW) for FY16 was 17.99%. It has no direct listed peer, so as per overall industry analysis, the valuations seem to be going fair.

Depository business has limited scope for exceptional expansion. A steady growth rate of 8-10% every year can be expected in this business. CDSL is providing dividends on a regular basis since last few years. So, we can expect the company to continue paying dividend going forward. Retail investors’ participation would also increase post this IPO listing. We see that investors can earn medium range returns and would benefit in the long run. We advise investors to subscribe to the issue.