CDSL IPO valuations attractive on stable earnings, parentage, say analysts

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Mumbai: As Central Depository Services Ltd (CDSL) prepares to offer shares to the public in a three-day sale starting Monday, analysts are broadly positive on the financials and future of India’s first share depository to go public.

At the top end of the price band of Rs145-149 per share, the CDSL initial public offer (IPO) will raise Rs 524 crore. Parent BSE Ltd, State Bank of India Ltd (SBI), Bank of Baroda Ltd and The Calcutta Stock Exchange will sell around 3.51 crore shares. CDSL will not receive any proceeds from the offer.

The company on Friday raised Rs154 crore from anchor investors. After the IPO, BSE’s stake in CDSL will fall from 50.05% to 24%.

CDSL is one of India’s two depositories—the other is National Securities Depository Ltd—which holds securities in electronic form. The business is highly regulated with entry barriers, and hence, the market is likely to remain a duopoly, analysts said.

According to Motilal Oswal Securities Ltd, at Rs 149 a share, the offer is valued at 18.2 times FY17 earnings per share (EPS), which is attractive due to its strong parentage, stable earnings growth, strong margins and decent return on equity of 17% in FY17.

The key positive, the brokerage said in a report, is that it has controlled operating expenses in the last three years, triggering a significant margin expansion of 1150 basis points to 54% in FY17 from FY15.

CDSL’s revenue grew 17.8% to Rs146 crore over FY15-17 while net profit over same period grew 24.8% to Rs87 crore. It is a debt-free company, with cash and investments of Rs551 crore as on March 2017.

Centrum Broking said due to its decent financials such as high margins, healthy return ratios, free cash flow generation and strong balance sheet, the issue may attract good subscription, since there is lot of buying interest in primary as well as secondary offerings.

“Post the tapering of initial high growth, the business model of the company is more of an annuity type with steady earnings. Indian market has traditionally not rewarded such businesses handsomely in the past and it is quite likely that the same might be the case with this company as well and its stock price may remain range-bound for longish period of time,” it said in a report on 16 June.

However, Angel Broking said CDSL has a unique business model with high entry barriers coupled with decent growth prospects. “The incremental capital required for doing business in this space is very minimal and this makes it an interesting business model. At the issue price band of Rs 145-149, the stock is offered at 17.7-18.2 times its FY2017 EPS, which we believe is reasonably priced,” it said in a 15 June report.

The number of CDSL demat accounts have grown at a compounded annual growth rate of 8.6% over FY2011-17 to 12.3 million, compared to 5.1% for rival NSDL over the same period to 15.6 million. While CDSL has an overall market share of 43% in the cumulative demat accounts, on the incremental accounts opened, it had a market share of 59% in FY2017.

The depository has gained market share with higher growth in the incremental beneficial owner (BO) accounts over the last three years to 44% in FY17 from 40% in FY14.

IIFL Wealth Management said in addition to a stable income source and low operational costs driven by better operational efficiency, high economies of scale and innovative service implementations support CDSL with robust margins.

KR Choksey Shares and Securities Ltd said valuations are reasonable and expects revenue to increase from medium to long term perspective. “The company has been generating revenues of around 39% from annual fees as against 7% for NSDL. We believe this provides strong revenue visibility in terms of recurring revenue for CDSL. It has only two major operational costs i.e. employee and other expenses, which are largely fixed in nature. Thus, increase in the economies of scale would absorb fixed overheads resulting into expansion in operational performance and thereby return ratios and free cash flows,” it said in a 14 June report.

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