THESIS ON CENTRAL DEPOSITORY SERVICES (INDIA) LIMITED (CDSL)

Central Depository Services (India) Limited (CDSL) is very good stock to hold for long-term investors and I am presenting a thesis on it which is as follows:

·      Its fundamentals are very strong and impressive which can be understood from the following points: 

Ø  It is a debt free company.

Ø  It has delivered a good profit growth of 24.10% CAGR over last 5 years.

Ø  It has been maintaining a healthy dividend payout ratio of 42.69%.

Ø  It has a healthy Cash from Operations.

Ø  It has a healthy ROE and ROCE of more than 20%.

Ø  It has a very healthy Operating and PAT Margins of 75.51% and 58.55% respectively as per the financials of F.Y. 2020-21.

·      The penetration to equity markets in India is still very low as roughly about 3% of India’s population invests in equity markets as compared to 55% in US, which suggests that there’s lots of headroom for India’s stock marketplace penetration to grow. This gives CDSL a great opportunity to grow and benefit from increasing penetration in future.

·      Most of the new Discount Broking firms like Zerodha, Upstox, Angel One etc. are associated with CDSL due to which any growth in the opening of new Demat accounts will directly benefit CDSL as today people are preferring discount brokers more for opening of new Demat accounts. Hence, we can say that CDSL is a proxy play on the growth of companies like Zerodha etc.

·      Its shareholding pattern is also very strong as BSE Ltd. Holds 20% of its total shareholding as Promoters and also various Mutual funds, FIIs and DIIs are also increasing their stake on a quarterly basis.

·      The number of active accounts in CDSL is growing at the rate of 18% CAGR from F.Y. 2015 to June F.Y. 2021. In fact, in March 2022 CDSL became 1st depository with 6 crore active Demat accounts which is a great achievement. 

·      Since there are only two depositories operational in India i.e., NSDL and CDSL and CDSL being the only one listed on the stock exchanges, it has a First Mover Advantage.

·      There are following sources of Key Entry Barriers in the industry in which the CDSL operates which strengthens its position in the industry:

Ø  License Cost and Net Worth requirement: Since to open a depository and for getting a license the minimum net worth requirement is of Rs. 100 crores.

Ø  Switching Cost and Exit Barriers: Let’s say if Zerodha has been growing with CDSL for a long time then it cannot easily switch the amount of Critical data to any other depository.

Ø  High Operating Leverage: Due to high Fixed Costs which are mainly from two sources i.e., Employee costs and Expenditure/Investment in IT Systems.

Ø  Regulation: It is regulated by the Securities and Exchange Board of India (SEBI) and it has to follow various rules and regulations as mandated by the SEBI.

·      One of the subsidiary companies of CDSL is CDSL Insurance Repository Limited which is registered under IRDAI to act as a “Insurance Repository” through which they are trying to dematerialise the physical copies of Insurance contracts by tying up with different insurance companies. They have close to 5.5 lakh E-Insurance Accounts. Though it is not mandatory to dematerialise the insurance but in future it might become mandatory and this venture has a huge future growth potential which can play out well for the company.

·      Also, various unlisted companies might want to dematerialise their physical shares which might benefit CDSL.

·      Also, the growth in the number of new IPOs and corporate actions in the listed entities help the growth in revenue of CDSL as they charge IPO/Corporate Action charges and Annual Issuer charges which the companies have to pay to the depositories.

·      Also, the growth in the number of e-voting options availed by the companies also help in the growth of CDSL’s revenue as they charge E-voting Fees for the same.

Hence, to sum-up, CDSL has a huge growth potential ahead which can be clearly seen from the growth of capital markets in India.

 

Note: This blog is only for sharing my personal opinion for educational purpose. This is not an investment advice so please consult your financial advisor before investing.