Central Depository Services Ltd (CDSL) Initiating Coverage Research Report By HDFC Sec

(Hidden) gem of a business

Central Depository Services Ltd (CDSL) is one of two depositories in India and the only one to be listed. Given the high risk of data pilferage, we believe there is limited scope for any other depository to be set up.

CDSL is a gem of a business that any investor constructive on India in the long term must own.

It has a robust business model, with (1) One-third of revenues being annuity (issuer charges), (2) Embedded non-linearity playing out (1,502 bps margin expansion over FY13-17), (3) Low capex requirement (~3% of revenue), (4) Excellent cash generation (OCF ~63% of EBITDA) and (5) Huge option value from new areas like digitisation of academic records and insurance policies, e-warehouse receipts and GST Suvidha centres.

We see value based on

(1) Diversified revenue stream,

(2) Fixed cost model

(3) Healthy balance sheet (Net cash of Rs 4.9bn, ~90% of BS & ~16% of Mcap),

(4) High return ratios (RoE 16%, RoIC 103%)

(5) Option value of new growth engines

(6) No capex required for growth and

(7) Excellent cash generation.

We believe the business should command higher multiple because of its less cyclical nature vs exchanges and brokerages.

We assign a P/E multiple of 33x to core earnings and add net cash to arrive at a TP of Rs 425 (47% upside from CMP). At 24/21x FY19/20E earnings, value is imminent and merits a BUY.

Investment rationale

 The revenue stream is diversified, with 46% of revenues being market-linked (transaction charges/IPO & corporate action/KYC are 21/11/13% of revs).

Annual issuer charges (~35% of rev) are determined by SEBI and collected from a diversified base of issuers (~9.8K),providing stability.

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

Despite being a late entrant in the market, CDSL has been gaining market share from NSDL. CDSL BO accounts market share stands at 44% in FY17 (almost doubled in 10 years) and market share in incremental account adds is ~60%. DP friendly culture, flexible tariff structure, low cost offerings and retail focus are the prime reasons for market share gain.

 Stable growth in annual issuer charges, increased market traction, higher no of IPO and huge in-flow in MFs (KYC), can combine to deliver revenue CAGR of 22% over FY17-20E. CDSL has a fixed cost structure (employee/IT cost is 37/13% of total cost in FY17).

Revenue has risen at 13% CAGR over FY13-17, while cost increased by only 5% over the same period. We expect EBITDA to increase at a CAGR of 29% over FY17-20E and margin to expand to 65% in FY20E vs 54% in FY17.