Fortune Scrip     

Published: September 30, 2023
Updated: September 30, 2023

CDSL

In fast lane of depository services: Riding demat side of market boom

Instead of looking at ‘regular’ corporate entities, this time we have decided to track a new and unique segment where there are only two players and only one of them is listed on a recognized stock exchange. It is Central Depository Services Ltd, popularly known by its abbreviated form — CDSL. Though initially promoted by BSE, the shares of CDSL have been divested to leading banks and BSE now holds just a 20 per cent stake. As per SEBI rules, BSE will have to reduce its stake further to 15 per cent.

CDSL, which was promoted with the objective of providing convenient and secure depository services at an affordable cost to all market participants, facilitates holding/transacting in securities in electronic form and settlement of trades executed on stock exchanges. These securities include equities, debentures, bonds, exchange traded funds (ETFs), units of mutual funds, units of alternative investment funds, certificates of deposit (CDs), commercial papers (CPs), government securities and treasury bills.

In order to introduce new offerings so as to scale up business, CDSL has promoted four subsidiaries which will not only bring diversified revenues but have a promising future. These subsidiaries are:

(a) CDSL Ventures Ltd (CVL). A wholly-owned subsidiary of CDSL, it is the first entity in the country to register as a KYC Registration Agency (KRA). Today, CVL provides fully digitised KYC services to all intermediates in the capital market and currently has 39.3 million fully digitised transfer agents. It maintains and updates KYC details, bank details, sends e-mails, etc. The company’s three-year topline CAGR is above 25 per cent

(b) CDSL Insurance Repository Ltd (CIRL). The parent holds a 51.25 per cent majority stake in this subsidiary while the balance is held by 10 different insurance companies. CIRL provides policyholders a facility to keep their insurance policies in electronic form and to undertake changes, modifications and revisions to bring about efficiency and cost reduction in the issuance and maintenance of insurance policies. These services are provided for all kinds of life and general insurance policies for both individuals and corporates.

(c) CDSL Commodity Repository Ltd (CCRL). CDSL holds a majority stake of 52 per cent in the subsidiary while Multi-Commodity Exchange (MCX) and BSE Investments Ltd each have a 24 per cent stake. CCRL serves three derivative commodity exchanges — MCX, BSE Ltd and ICEX – for their derivative trades in agri-commodities. It facilitates transacting and holding of commodity assets in electronic form instead of physical storage receipts via issuance of electronic negotiable warehouse receipts.

(d) CDSL IFSC Ltd (CIL). A wholly-owned subsidiary of CDSL, it operates under the regulatory oversight of International Financial Services Centres Authority (IFSCA). It facilitates transacting in and holding foreign securities, bullion, depository receipts and other such instruments. As the GIFT City route of investing in India picks up, CIL is expected to register robust growth in its business.

FINANCIALS BOOM

CDSL is going from strength to strength in its financial performance. During the last 12 years, its sales turnover has expanded almost six times from Rs 96 crore in fiscal 2012 to Rs 555 crore in fiscal 2023, with operating profit advancing over 5 times from Rs 61 crore to Rs 319 crore and the profit at net level also moving up by over five times from Rs 55 crore to Rs 276 crore. However, we have not picked this scrip for the slot of Fortune Scrip merely on the strength of its past performance. We strongly feel that future prospects for the stock are even more promising. Consider:

• There has been a substantial growth in the number of companies/issuers admitted in demat from 541 in fiscal year 1999-2000 to 123.50 million in the current year (upto August 5, 2023). These trends – an increase in trading volumes and retail participation — are a great boon for CDSL. The equity cult is spreading, and during the last two decades there has been an exponential growth in the activities of Indian stock exchanges. But this looks huge because of the very small base. While demat accounts have skyrocketed from 541 in 1999-2000 to 123.50 million this year – a huge increase on paper — it is still only around 8.5 per cent of the country’s population. In comparison, over 35 per cent of Americans own stocks, and even in China 17 per cent of the population are equity investors. In other words, the Indian capital market is under- penetrated and provides tremendous longterm opportunities. Besides, the Indian capital market also lags behind global peers in various parameters like market cap/GDP ratio, cash turnover velocity and free float. This indicates that there is plenty of room for growth going ahead. With the increase in financial literacy, mobile penetration and Jan Dhan bank accounts, demand for financial products is expected to rise, especially in tier 2 and 3 cities.

FUNDS INFLOW

• Along with the increasing popularity of the equity cult, there has also been a rise in mutual funds inflow in the stock market. Over the past decade, the Indian mutual funds industry has grown at a steady pace from Rs 7 trillion to Rs 32.1 trillion. Further, during the year, the industry saw a healthy growth of 9 per cent in total folios, largely due to increased awareness and high retail participation.
• With stock market indices scaling sky-high levels, there has been an unprecedented rush of companies, including MSMEs, to raise funds from the market. During the last 2 to 3 years, the Indian primary market has been buzzing continuously and funds mobilization via the primary market was the highest ever in fiscal 2021, when funds raised through initial public offerings (IPOs), follow-on public offerings (FPOs) and offers for sale (OFS) stood at a record Rs 747 billion. The 2021 record was broken in 2022 when funds worth Rs 147,000 crore were raised. In 2023 too, fund raising in the primary market has done remarkably well. This benefits CDSL too as many investors are opening new demat accounts
• As mentioned earlier, the company has promoted four subsidiaries with a promising future, which have entered new businesses which will bring different revenue streams.

UNLISTED SEGMENT

• The spectrum of unlisted companies is a very big market opportunity for depository firms like CDSL, as there is an increasing trend of money raising via private equity and venture capital funds. CDSL has started focusing on unlisted public and private limited companies. This has dual benefits for CDSL in terms of an increase in issuer charges as well as opening a large number of promoters’ demat accounts.
• Though there is tremendous scope for depository services in India, there are only two companies — CDSL and NDSL. the first promoted by BSE and the other by NSE. And there is little scope for a third company to enter the sector. Because of the strong parentage (BSE and NSE), CDSL and NSDL have a clear advantage and a duopoly. In these circumstances, it will not be possible for a newcomer to face competition from the Big 2.
• Even among the two depositories, CDSL is far ahead of NSDL and has emerged as the numero uno depository services company in the country. Little wonder that the stock price of the company has zoomed to cross the Rs 1,300 mark. As the future prospects of the company are highly promising, discerning investors will do well to include these shares in their portfolio and accumulate them at every decline.

OPPORTUNITIES GALORE

• The company, an indigenous integrated and strategic defence and aerospace electronics solutions provider which is well positioned to benefit from the ‘Make in India’ opportunity, has strong competitive strengths. The Indian defence industry is rapidly evolving into a self-sustaining one with companies and defence PSUs moving towards specialising as defence prime integrators and components suppliers. Similarly, the space industry is expanding with new space participants offering services which were previously offered by the Indian government’s space organization such as launch services, satellite operations and downstream services. The defence sector has now started outsourcing sub-component manufacturing to the private sector. Thus, there are resultant expanded opportunities for the private sector. Data Patterns has emerged as one of the major beneficiaries of this trend.
• Since its inception, Data Patterns has focused on in-house development and manufacturing capabilities led by innovation and design and development efforts. Just two years ago, the company had more than 500 engineers, many of whom serve in both the design and development departments. The company has in the past initiated development of several projects such as military grade processor modules, cockpit displays, actuator controllers, digital receivers and up/down converters for radars with an aim to utilize these components in subsequent projects. This in turn has also underscored the company’s capabilities.
• Data Patterns has achieved a consistent track record of profitable growth due a scalable business model. With a net profitability growth of 490 per cent between fiscal 2020 and fiscal 2023, the company is one of the fastest growing entities in the defence and aerospace electronics sector in India, with excellent margins and return ratios. It is focused on managing costs by leveraging the inherent efficiencies of its reusable building block-driven business model while consistently growing revenues.

SCRIP IN CLOVER

The company came out with an IPO in 2021, with an issue price of Rs 585, and got listed on December 24, 2021 at Rs 864 (BSE). This shot up to Rs 2,484 in 2023 before settling around Rs 2,252. Prabhudas Lilladher,a well-known brokerage, has set a target of Rs 2,480/2,500. JM Financial has set a target of Rs 2,720.

Discerning investors will do well to accumulate these stocks at every decline, as the stock is fundamentally very strong and its future prospects are highly promising.