Fundamental Analysis of CDSL

Before 1996 if you had to invest in a particular stock there was paperwork that had to be done where a physical certificate would be issued in your name from the stock exchange. Every time you buy a share you get the physical certificate just imagine the huge amount of paperwork involved in this process and how cumbersome it would have been.

Then there was an introduction of a Demat account that stores the information in electronic form, this reduced the entire paperwork and made the trading process very efficient.

Every time you buy a share the information is stored in your Demat account and it was made compulsory to open a Demat account before you start investing in the Indian stock market and that created an opportunity to provide digital services to millions of shareholders in India in the form of a Demat account.

It gave birth to two companies NSDL and CDSL.

In this article, we are going to do the fundamental analysis of CDSL. We’ll start with understanding the company and its business of CDSL, its leadership, its competitive strength, competitors, key risk, future growth prospects, and financials to decide if the case is fundamentally strong or not then we will cover the valuation.

To understand if it is worth investing in the company at current levels or not.

Before I proceed I want to clarify that my stock analysis is only for educational purposes a lot of people request buy price and target price but I don’t provide that. This article is only for long-term investors who want to invest in fundamentally strong companies for long-term wealth creation.

Introduction of CDSL

Let’s get started, CDSL was established in 1999.
CDSL stands for central depository service limited.
Initially promoted by BSE that is bombay stock exchange.
CDSL received its license of depository from sebi in February 1999.

Now before we proceed further let’s first try to understand what exactly is a depository.

What exactly is a depository?

The depository is the entity that holds your securities like your stocks, bonds, mutual fund, etc in demat form that is dematerialized form.
In other words, the depository holds your security in electronic form.
As an investor, if you want to invest in stocks or bonds you need to open a Demat account.
This Demat account is held with a depository and all your shares, bond, etc are stored with them.
There are two things here one is depository and another is depository participants.
As mentioned the depository holds your securities in demat form but as an investor when you need to open a Demat account, you need to reach out to depository participants.
Depository participants are the agents of depositories, these depository participants are registered with depositories normally your brokerage firm also acts as a depository participant.
For Example, Zerodha is a brokerage firm but it also acts as a depository participant.
Zerodha is the depository participant of CDSL.

I hope now you understand the difference between depository and depository participants. Apart from this CDSL also facilitates settlement of rates executed on the stock exchange then facilitation of annual general meeting updating shareholder-related details, online access to securities execution of the secure transaction, and so on.

Subsidiaries of CDSL

CDSL has three major subsidiaries are as follows:

CVL
CIRL
CCRL

CVL

First is CVL which is the largest KYC registration agency,
With over 2.5 crores of fully digitized KYC records.

CIRL

Second is CIRL which is a CDSL insurance repository limited,
With more than 6 lakh e-insurance account as of December 21.

CCRL

Third is CCRL which is CDSL commodity repository limited.

CDSL made a record to open three crore plus active Demat accounts in fact till 2021. The company crossed two crores Demat account and in the last year, there has been a huge surge of Demat accounts. For CDSL as of today, there are two depositories in India.

The first is CDSL and the second is NSDL. You can imagine that every time an investor needs to open a Demat account. The person has to take service of either of these two forms. we will discuss more CDSL versus NSDL.

Leadership

If you look at the leadership of CDSL Mr. Nehal vara is the MD & CEO of CDSL.
Mr. Nehal has more than two decades of experience in the security and regulation market.
He started his career in 1996 with Sebi later he headed the brokering and investment banking compliance of DSP Merrill lynch limited.
He joined CDSL as CEO and MD in 2019 and before that, he was the chief regulatory officer at the Bombay Stock Exchange.
He’s got a huge amount of experience and has been instrumental in the growth of CDSL since he joined in 2019.
As of today, CDSL has a total market cap of around 10,000 crore rupees.

Competitive Strength of CDSL

The competitive strengths of CDSL are as follows:

India’s largest depository

Its first Strength is that it is India’s largest depository.
CDSL is India’s largest security depository in terms of the number of accounts with the highest share of incremental growth of Demat account along with having the largest number of DPS registered in the depository business.
There are 600 depository participants registered with CDSL including Zerodha.

Cost Leadership

The second strength is cost leadership due to a centralized database system state of the art technology, and robust IT infrastructure implementation.
CDSL has a relatively low-cost model for DPS with the minimum incremental cost, this gives them the cost-benefit over the competitors.

Stable Revenue Base

The third strength is a stable revenue base CDSL has a very stable revenue base due to repeat business in multiple offerings in
The Indian security and financial service market.

High Economy

The fourth strength is the high economy of scale due to the market leader,
CDSL has achieved an economy of scale with a presence all over the country that has resulted in a lower cost structure for the company.

Experienced Management

The fifth strength is experienced management.
CDSL has a very experienced manager with an average experience of 25 plus years for its management team.

Competitors of CDSL

If you look at the competitors of CDSL there are only two deposited participants in India CDSL and NSDL.
CDSL is promoted by the Bombay Stock Exchange that is BSE,
and NSDL is promoted by National Stock Exchange that is NSE.

However, CDSL has a high number of Demat accounts as compared to NSDL.
If you look at the chart till 2017 the competitor which is NSDL had a higher market share.
But recently CDSL has surpassed NSDL with a 58 % market share by 2020.
Overall on competitive strength, I would rate it 9 on 10.

Key Risk of CDSL

The key Risks of CDSL is as follows:

Dependency

If you look at the key risk first risk is a dependency on the market performance.
CDSL revenues are based on trading volume which is dependent upon market performance.
The total number of new Demat account openings is also dependent upon the stock market performance.
In the future, if the stock market does not perform well then it can result in the closure of the Demat account or slow down a new demand account opening.
moreover, it would impact the trading volume which would directly impact the company’s performance.

Cyber Attacks and Cyber Frauds

The second risk is cyber attacks and cyber fraud.
CDSL is a depository of three crore plus Demat holders.
This is a big responsibility and that also requires CDSL to keep upgrading its technology infrastructure,
To avoid the risk of cyber-attacks and cyber frauds.

Future Growth of CDSL

Over the last few years, there has been a huge surge in the total number of new Demat account opening in India. More and more people are now actively investing in this stock market and mutual fund. This is due to multiple reasons are as follows:

1. High Growth Potential

The first reason is due to high growth potential in the Indian economy,
India is one of the fastest-growing economies in the world,
It is bound to become the third-largest economy in the world after the USA and China.
India is already one of the biggest consumption markets in the world.
Salaries are rising spendings are rising and the government is spending billions of rupee in building the infrastructure of the country.
This would create a huge growth opportunity for the Indian economy.
When the Indian economy would grow more and more investors would want to be a part of the Indian economy.
This would attract a lot of investors to open the Demat account and invest in the Indian economy via stock market and mutual funds.

2. Launch of New IPO

The second broad driver is the launch of a new IPO there’s a lot of grace towards IPO in India.
Everyone wants to be a part of the growth journey of potential companies from the beginning,
This results in a huge amount of Demat account openings and there’s a long list of potential IPOs in the line including LIC, Paytm, NSE, and many more.
This would result in a huge surge in the Demat account opening and eventually result in more profits for CDSL.

3. Growing Awareness towards Investment

The third reason is growing awareness towards investment.
Earlier people used to shy away from the stock market.
They used to invest in FD, insurance, gold, and other traditional ways of investment.
Today’s youth like to invest in stocks and mutual funds.
This is also due to growing awareness among investors about the benefit of investment in the Indian economy.
The shift in investment preference would drive growth for CDSL.

4. Ease of Investment

The fourth reason is the ease of investment.
Earlier it was a pain to invest in stocks everything was in the form of paper and you had to call your agent and it required a lot of time.
Now investment in stocks and mutual funds is a matter of few clicks thanks to the growing fintech ecosystem in the country.
There are a lot of players in the investment space that provides the investment platform at negligible cost.
It has attracted a lot of new generation investors in India.
All these factors would drive the growth of CDSL in India.

CDSL has created multiple strategies to grow its business. It includes building the depository participant network. Introduction of new product offerings. Investment in IT infrastructure and improving the operational efficiency and driving the investment awareness campaign especially in tier 2, 3, and 4 regions.

Hence overall and future growth I would rate it 10 on 10.

Company Financials of CDSL

Company Financials of CDSL are as follows:

Revenue

If you look at the revenues CDSL.
Revenues have consistently grown from rupees 105 crores on March 15 to 344 crores by March 21 at a very good cagr of 21.9 percent.
CDSL profits have jumped from 44 crores on March 15 to 200 crores by March 21 at a very good cagr of 28.7.
Look at the sharp rise in profit in last one year this sharp rise is due to a sharp increase in the total number of Demat account and increase in trading volume.
overall both revenue and profits have grown at a very good rate and hence on growth ratio, I would rate it 10 on 10.

Operating Margins

CDSL operating margins have been exceptionally high it is consistently above 40 percent.
The recent margins are 62 which is simply brilliant.

ROE and ROCE Ratio

If you look at the ROE and ROCE both ROE and ROC are looking good.
ROE is in the range of 15 to 20 percent and ROC is in the range of 20 to 30 percent.
The recent ROE is 22.8 and ROCE is 29.6 which is very good.
Overall on profitability, I would rate it 10 on 10.

Debt to Equity

If you look at the debt to equity structure CDSL is a completely debt-free company.
Hence on debt to equity, I would rate it 10 on 10.

Reserves

Its reserves have increased from 265 crores in march 15 to currently at 773 crores,
and the company is cash-rich with a total cash balance of rupees 208 crores by March 21.

If you look at the shareholding pattern of CDSL as of December 20.
Promoters hold 20 percent shareholdings in the company.
Banks and financial institutions hold 14 percent shareholding.
Mutual funds hold 8 percent and foreign institutions hold 6 percent shareholding.
If you look at the top five shareholders BSE is the largest shareholder and also the promoter with 20 percent holding.
HDFC Bank has 7.18 percent holding, Standard Chartered Bank has 7.18 holding and Canara bank has 4.4 percent holding,
and Lic has 4.4 percent holding.

Valuations

CDSL had its IPO in June 2017 at a price band of rupees 149.
It got a very good response and it touched a high of rupees 400 in July 17.
but then the share fell down to the levels of 190 by august 19.
Since then the share price has zoomed and made a high of 1550+.
CDSL’s current market price is rupees 1200+.
At current levels, it is trading at a multiple of 70 x which looks like on the higher side.
I have already said this there is a huge growth opportunity for CDSL in the next five to 10 years.
Rather than waiting for the right time to invest, the better strategy would be to keep investing systematically or keep buying on dips.

Conclusion

In this article, we did the fundamental analysis of CDSL.

CDSL is in the business of depository where it holds securities like Stocks, Bonds, ETF, Mutual Funds, etc in the Demat form.

It is the leader in the depository segment with a 58% market share.

It has a strong competitive advantage due to its cost leadership, strong technology infrastructure, large distribution network and, vast experience in the business.

The growth prospect in the stock market looks very promising where India is still in the decent stage and has huge potential to grow in the next 10 to 20 years.

Due to the new Demat account opening and increase in trading volume on account of very good written potential in the Indian market.

Increasing awareness and ease of investment.

The financials of the company look solid with very high profitability and zero debt.

The valuations of the company are on the higher side due to high growth potential but look like a good share to invest in for long-term wealth creation.

What is your take on this company? Have you invested in CDSL? Do let me know in the comments section. For more details on stock investment, you can explore my website.

One should follow the Risk Management, Money Management, and Fear and Greed concept of the market to avoid big losses.

I hope you like Fundamental Analysis of CDSL, and if you like the article, then do like and comment. Happy Investing.

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Fundamental Analysis of CDSL