Thread by @Mjkfinvestment

A detailed thread on CDSL (2018) 🧵

Market cap: 6300 crores
Revenues: 225 crores
P/E: 35
P/B: 7.22
ROCE: 19.61%

The revenue stream is diversified, with 52% of revenues being market-linked (transaction charges / IPO & corporate action / KYC are 21/11/13% of revenues).

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Annual issuer charges (~29% of rev) are determined by SEBI driven by the certainty of earning custody charges from existing issuers.

CDSL earns revenue by charging annual issuer fees to corporates and account maintenance charges, user facility, and transaction fees to DPs

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The remaining 19% of revenue is derived from other services like, e-voting, e-CAS, account maintenance, etc.

Industry structure:

Duopolistic industry structure with high entry barriers:

Highly regulated by SEBI; the chances of a successful 3rd depository in India are very thin

IPO & corporate action charges:

During an IPO, CDSL charges Rs 2/folio for verification of subscription and Rs 10/folio for allotment to the issuing company

For any corporate action (bonus, split) CDSL charges Rs 10/folio to the company

Revenue growth of ~43% CAGR over FY13-18

CDSL ventures (100% subsidiary) provide KYC services for investors in the capital markets, including the mutual fund;

It has ~70% market share & holds ~17.5 mn investor records.

The revenue from such services is one time in nature and the company charges Rs 20-35 per inquiry.

Asset light business model, operating leverage drive robust cash flows:

A robust EBITDA margin of ~60% (major cost being employee and technology), coupled with a negative WCC & minimum CAPEX requirements;

The company has net liquid investments of ~24% of the current market cap.

The transaction fee depends on the volumes in the secondary market and the increasing no. of BOs

CDSL has gained the highest market share in incremental Demat accounts over the past 4 years.

CDSL's operating margins improved more than 20% points over FY13-18 from 39.4% to 59.5%

Right strategy?

The company has focused more on acquiring non-institutional investors, harboring the view that the volume and not value of transactions will be a bigger driver of revenue for-depositors;

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Despite being a late entrant in the depository business, CDSL has consistently gained market share in the no. of absolute BO accounts (from 39.6% in FY13 to 46.5% in FY18);

In terms of growth in BO accounts, CDSL has been growing at a higher rate-

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-(12.2% CAGR over FY13-18) compared to NSDL (6.1% CAGR).

Non-market-linked activities guard CDSL against market volatility:

Non-market-linked activities contribute ~15% of the revenue pie, up from ~3% in FY10, its contribution increasing to 19% by FY20;

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DP friendly culture, flexible tariff structure, low-cost offerings, and retail focus are the prime reasons for market share gain;

Employee expenses and software development (IT) / maintenance costs constituting ~50% of its total cost;

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CDSL's costs recorded an 8% CAGR over FY14-18, while its revenue increased from 39.4% in FY13 to 59.5% in FY18, as revenue growth surpassed the cost inflation.

A Depository facilitates holding of securities in the electronic form and enables securities transactions to be-

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-processed by book entry by a Depository participant (DP) who as an agent of the depository, offers depository services to investors;

CDSL is the leading securities depository in India by incremental growth of Beneficial Owner (BO) accounts over the last 3 fiscal years.

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The Registrar and Transfer Agents (RTAs) and Clearing Members (CMs) are the other intermediaries involved in the process of issue and transfer of securities on CDSL electronic platform;

52% of its operating income comes from annual issuer charges and transaction charges;

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The company is venturing into segments such as digitization of academic records, depository services to unlisted companies, insurance companies, & commodity repositories;

While these businesses are in a very nascent stage at the moment and will require 2-5 years to scale.

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The company's insurance repository arm has already opened 3,25,000 e-insurance accounts in which it held over 66,000 insurance policies in an electronic form;

CDSL started a National Academic Depository service in Jul'17 and has tied-up with ~300 universities;

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The ramp-up of these services will provide additional revenue growth drivers over the long-term.

CDSL Commodity Repository Ltd:

CDSL will own 52% and BSE & MCX will own 24% each in the repository;

CDSL has gained market share (in terms of incremental Demat accounts)-

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-going from 46% in FY12 to 63% in FY18;

The no. of BO accounts with CDSL has risen at a 10-year CAGR of ~12% to 15 mn in FY18;

India's total BO accounts have grown at a 10-year CAGR of ~6%, while NSDL's count of BO a/cs has grown at ~8%;

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User friendly?

CDSL has a centralized server enabling DPs to start only by linking their workstation to the server, thus saving costs for the DP;

and a stable based transaction fee structure, no custodian fees to DPs and lower settlement fees;

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CDSL generates ~50% of adjusted PAT from other income, mainly consisting of interest income on investment and gains from the sale of investments.

Key Risks:

Lower pricing power,

High dependence of transaction-based business on trading volumes,

Regulatory oversight, such as-

contributing 5% of profit before tax to the IPF adversely impacted CDSL's profitability, SEBI regulated the pricing of annual issuer charges and oversees the pricing of other services;

All product and segment offerings are ultimately determined by SEBI and-

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-the company has limited flexibility to innovate or differentiate vis-a-vis other depositories;

A decline in interest rate may adversely impact other income- CDSL is a debt-free company and has high investment and cash generated from this investment incomes;

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Any changes in interest rate may adversely impact other income;

An appointment of CERSAI as the central KYC registration agency might adversely impact CDSL Ventures Ltd's KYC business -CDSL may lose a substantial part of its KYC business that operates through its subsidiary CVL-

Which holds over 15 million capital market investor records (67% market share) and contributed to ~17% of net revenues in FY17.

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End of Thread 🧵