Markets
CDSL’s lower reliance on capital market volumes deserves a premium
Summary
- About 53% of the depository's revenue is insulated from vagaries of the capital market
Shares of Central Depository Services (India) Ltd (CDSL) have doubled so far in 2024 to touch an all-time high of ₹1,899 apiece on Friday, with trading volume spiking to 2x the monthly average. Since the Securities and Exchange board of India approved the initial public offering (IPO) of its peer National Securities Depository Ltd on 8 October, CDSL’s stock has gained nearly 40%.
The NSDL issue is likely in a month. CDSL is a securities depository company promoted by BSE Ltd, while rival NSDL is promoted by National Stock Exchange.
Sure, asset management companies (AMCs), wealth managers (WM), and depositories—all benefit from the increased interest and activity in the capital market ecosystem. But depositories stand out for two reasons. AMCs and WMs’ revenue and profit depend on the value of the assets, while depositories derive earnings from the volume of transactions irrespective of the value. Also, the latter operate in a duopoly. But does CDSL deserve a price-to-earnings multiple of 70x based on Bloomberg consensus earnings per share estimates for FY25, which is higher than that of most capital market intermediaries such as AMCs and WMs?
Within the duopoly, CDSL is the dominant player with 137 million demat accounts, translating into nearly 75% market share as of September-end. CDSL’s revenue model needs to be bifurcated into two revenue streams—one is dependent on capital market activity and the other is not.
CDSL gains from buoyant activity in secondary and primary markets from equity and debt markets. In secondary markets, effective October, CDSL’s fee per debit transaction to the sell-side broker is ₹3.5 with, a discount of ₹0.25 for female demat account holders, mutual fund units and bonds. The number of demat accounts for CDSL grew 43% year-on-year in the September quarter (Q2FY25), but its income from transaction charges showed an even higher growth of 66%. This shows that it has likely reaped the benefit of the rise in delivery-based cash market trading volume from older demat accounts as well. With the recent curbs on futures and options, the cash market could see even more activity in future.
Read more: Indian stock markets review 2024: A tale of two halves
In the primary market, CDSL charges ₹2 per folio for verification of subscriptions and ₹10 per folio for allotment to the issuing company in the year of issuance. Its income from IPO and other corporate actions, including buybacks, doubled year-on-year to ₹52 crore in Q2FY25.
Thus, CDSL’s financials could get adversely affected if the activity in secondary and primary markets goes through a lull. While that’s true to some extent, it is better placed than AMCs or WMs as it earns stable income from annual issuer charges and from online data charges, independent of the market activity. These income streams respectively accounted for 30% and 23% of CDSL’s H1FY25 operating revenue of ₹512 crore.
Annual issuer fees are levied on corporates, government, etc. for their securities at a rate of ₹11 per folio with certain minimum fees. These charges are fixed by the regulator and are uniform for both depositories.
Online data charges are earned from CDSL Ventures Ltd (CVL), the wholly owned subsidiary. It is a KYC registration agency for the capital market intermediaries including mutual funds. However, the competition in KRA business is more unlike the duopoly in depository business.
With 53% revenue (based on H1FY25 financials) insulated from vagaries of the capital market, CDSL deserves a valuation premium vis-à-vis what other capital market intermediaries enjoy.
