CDSL IPO opens for subscription. Should you apply?

The initial public offer (IPO) of BSE-promoted Central Depository Services Limited (CDSL) opened today for subscription. The company is planning to raise up to Rs 524 crore through this maiden offer. 

CDSL acts as a repository of over 325,000 e-insurance accounts, reports suggest, which hold more than 66,000 insurance policies in electronic form. It also offers other online services such as e-voting, e-Locker, National Academy Depository, electronic access to security information & execution of secured transactions, drafting & preparation of wills for succession, mobile applications and transactions using secured texting.

So, should you subscribe to the offer? Here’s what leading brokerages and research houses suggest:

MOTILAL OSWAL

CDSL is the second largest depository in terms of market share and has been growing at decent compounded annual growth rate (CAGR) of 23%/14% in 3/5 years (and revenues grew by 13%/18%). Further, the key positive about the company is that it has controlled operating expenses in last 3 years which has led to significant margin expansion of 1150 bps since FY15 to 54% in FY17. 

At the upper band of INR149, the offer is available at 18.2x FY17 EPS which we believe is attractive considering - 1) strong parentage and entry barrier 2) stable earnings growth 3) strong margins and 4) decent ROE of 16%. Hence we recommend to SUBSCRIBE for long-term investment. 

ANGEL BROKING

CDSL has a unique business model with high entry barriers coupled with decent growth prospects. The average ROE for the last six years has been ~17%, which we believe will sustain going ahead as well. 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 '145-149, the stock is offered at 17.7x-18.2x its FY2017 EPS, which we believe is reasonably priced, and hence, recommend SUBSRIBE to the issue.

LKP SECURITIES

We believe that CDSL is truly a perfect pick to play out the structural growth story of securities markets in India. We also like that a significant chunk of its operational revenues comes from annual fees, as against transaction fees that are the primary drivers of the top-line of the competition. This highlights the relatively lower volatility that the operational revenues of CDSL should experience in comparison to the competition.

We believe that the company would continue to grab a bigger market share of the incremental demat accounts because of its lower net worth & reserve requirements and wide geographic coverage. Considering the duopolistic nature of the depository business, high barriers of entry, operational leverage, healthy margins, robust free cash flows & ample reserves parked in investments, we recommend a SUBSCRIBE on the CDSL IPO.

IIFL

While its sole competitor, NSDL, currently holds ~56% of BO market share, CDSL has improved its share from 40% in FY14 to 44% in FY17, to achieve a client base of ~12.4mn. Stability in operating income is the key growth stimulant for CDSL on the back of fixed annual charges from registered companies and transaction-based fees from DPs.

Robust margins have come from stable income sources, helped by low operational costs from efficient operations, high economies of scale and innovative service implementations. Also, its direct DP connection through a centralised database system ensures relatively low initial set up costs and minimal incremental costs. 

During FY15-17, CDSL posted decent revenue CAGR of 17.8% while operating margin improved significantly from 44% in FY15 to 54.5% in FY17. As the company is the first depository to get listed on the bourses, there are no comparable valuations as such. However, we are upbeat on the IPO and recommend ‘subscribe’ given its strong fundamentals and clean balance sheet.

EQUINOMICS RESEARCH & ADVISORY

The value of all listed stocks has gone up from Rs 52 lakh crore in 2007 - 08 to over Rs 1.26 lakh crore. The base of both companies listed on the exchanges and also the number of investors in India is growing steadily. This is a positive development for the long-term growth of CDSL. Hence we suggest subscribing to the issue. At the upper end of the band, the stock is valued at 18.1x its FY17 EPS of Rs 8.21.