Central Depository Service (India) Ltd (CDSL) is a Market Infrastructure Institution (MII) in India. The company is one of the two depositories along with NSDL (National Securities Depository Limited) in the domestic market, but CDSL is the only listed one.

The company primarily provides services such as holding and facilitating transactions in financial assets such as stocks, bonds, mutual funds, treasury bills, commercial papers, etc, in the dematerialised (electronic) form. Depositories are a key component in the value chain as their services are accessed by investors, issuers (largely listed companies), stock exchanges, clearing corporations and Depository Participants (DPs). CDSL is the leader in the business, with 76 per cent share in the total Beneficial Owner accounts.

As an investor, when you buy a stock, depending on your broker/DP, CDSL will hold that stock in digital form on your behalf in your demat account that you have with them. You will be the Beneficial Owner (BO) of that asset. Similarly, when you offload the same, it will be debited from your demat. While you cannot directly open an account with a depository, their services are accessed through DPs, which usually will be your broker. The settlement of trades will be done by Clearing Members (CMs).

At the current price, the stock is valued at about 52 times its FY24 earnings. Since the Covid lows, the stock price has multiplied by nearly 10 times, factoring in most of the positives. On a one-year forward basis, it trades at PE of 44 times as compared to five-year average of 39 times.

While the premium is not significant compared to historical average, it does not factor for cyclicality risks, which can result in slowdown in earnings growth. The company’s considerable dependence on stock market performance for its revenues (about half are market-linked) intertwines its fortunes wih market cycles. At present, earnings are buoyant, driven by the market upcycle. However, current valuations do not offer adequate margins of safety for any turn in market cycles. Therefore, investors can consider cashing out now, following the stock’s strong performance.

Revenue streams

CDSL generates a major chunk of its revenue from issuer charges and transaction charges. Issuer charge is the fee collected annually from companies, whose issuances such as shares, are electronically held in demat accounts facilitated by CDSL. This is a recurring income that the company receives.

Income from annual issuer charge increased 39 per cent to ₹255 crore for FY24. This is the biggest constituent in revenue, contributing 28 per cent to the total income of ₹907 crore in FY24. This is a function of the number of BO accounts i.e., when a greater number of investors hold a particular asset, CDSL can earn more money from the issuer of that asset. At the end of FY24, the company had 11.6 crore BO accounts when compared to 2.1 crore at the end of FY20. Also, the number of issuers has increased to 23,060 in FY24, from 14,762 in FY20.

Transaction charges are collected from the DPs, and this is directly proportional to the market activity during that period. Investors pay depository charges while they transact in the cash market. So, more the volume in the cash segment, more money the company makes. As the turnover in the cash market increased 51 per cent and hit a record ₹201 lakh crore in FY24, the income from this component expanded 39 per cent to ₹221 crore in the last fiscal. Its share of the total income was at 24 per cent.

Not just in the last fiscal, the equity market has been witnessing a steady increase in turnover (refer chart) (stood at ₹90 lakh crore in FY20). Overall, a little over half of the CDSL’s total income is derived from annual issuer charge and transaction charge combined.

In the remaining half of the revenue, online data charges (i.e., CDSL charges a fee for processing e-KYC) and Initial Public Offering (IPO)/Corporate Action (CA) charges are the key contributors. Apart from these, the company charges for facilitating e-voting and for providing e-CAS (consolidated account statement) for investors. In the last fiscal, online data charges (grew at 84 per cent yoy to ₹160 crore in FY24) contributed 18 per cent, followed by 10 per cent by IPO/CA actions (increased by 89 per cent yoy to ₹94 crore in FY24). Other income (expanded 153 per cent to ₹177 crore in FY24), which includes revenues from e-Voting and e-CAS, contributed to nearly 20 per cent.

Financials and outlook

CDSL released its results for FY24 on May 4. The revenue from operations expanded by 46 per cent to ₹812 crore, marginally beating the consensus estimate of ₹792 crore. The company’s profit after tax increased 52 per cent to ₹420 crore, surpassing the expected ₹405 crore. Thus, the net profit margin for FY24 stood at 46 per cent, improving slightly from 44 per cent in FY23. The earnings per share jumped to ₹40 apiece in FY24 (versus consensus estimate of ₹38) from ₹26 in FY23.

While the company is firing on all cylinders, the risk stems from cyclicality. Should there be a decline in price at a wider level in the market, investors might slow down their activity in the equity segment. It can also have repercussions on mutual funds, potentially impacting CDSL’s revenue and profitability.

Moreover, the revenue per demat has dropped to ₹70 in FY2024 compared to ₹106 in FY20. Meaning, the newly opened demat accounts have been contributing less towards CDSL’s revenue as the new investors’ focus remains predominantly on futures and options (F&O) segment and not in the cash market.

Also, the company operates in a high regulatory environment, which is also a risk to be considered.

That said, there is now an opportunity in insurance as IRDAI has mandated dematerialisation of insurance policies. CDSL operates in this space through its subsidiary CIRL (CDSL Insurance Repository Limited). But it is a relatively smaller player in this space and it remains to be seen how well the company can capitalise on this segment.

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