A decade in the past, the thought of hundreds of thousands of Indians actively buying and selling equities appeared distant. Right this moment, CDSL, India’s largest depository, is prospering on this very development, benefiting from rising demat accounts, issuer charges, and transaction fees. Its capital-light enterprise mannequin, robust margins, and near-monopoly place in a high-barrier trade make it a compelling long-term development story.
Over the previous 5 years, CDSL’s inventory has delivered a 10x return, fuelled by a surge in new demat accounts, rising retail participation, and India’s extended bull market.
Learn this | Analysts sound alarm: CDSL’s troubles removed from over as market navigates challenges forward
However with such speedy development comes an inevitable query—can it maintain this momentum? As monetary markets evolve, CDSL stands at an inflection level. Can it proceed to dominate, or will cyclical headwinds and regulatory shifts affect its trajectory?
The core enterprise
CDSL operates within the depository sector, a enterprise with important entry limitations and close to duopolistic management. CDSL’s main function as a depository is to safeguard dematerialized securities and facilitate seamless transactions between depository contributors, useful homeowners (BOs), clearing companies, and inventory exchanges.
Holding a 79% market share with 115.6 million demat accounts (as of FY24), it caters predominantly to the retail phase and maintains sturdy relationships with 580 depository contributors, whereas NSDL takes the lead within the institutional sector phase.
The corporate generates income from three core segments—depository providers, KYC providers (by way of its subsidiary CDSL Ventures), and insurance coverage repositories. With demat account penetration in India at simply 12% in comparison with 62% within the US, the potential for development stays huge as extra people enter the monetary markets.
Income streams
CDSL’s capital-light enterprise mannequin thrives on regular, predictable earnings streams intently tied to India’s increasing monetary markets.
One among its most important income sources is annual issuer fees. These charges are charged to issuers for sustaining securities—equities, personal firm shares, and debt securities—in dematerialized type. Set by the regulator and utilized per folio, annual issuer fees account for twenty-four% of CDSL’s consolidated income as of Q4FY24.
This income stream capabilities very similar to an annuity, offering stability whereas being intently tied to market exercise. As transaction volumes rise and new folios are created, this earnings is anticipated to strengthen additional. Moreover, rising retail participation in debt and unlisted markets will additional bolster development. Over the previous six years, income from issuer charges has grown at a CAGR of 31%, reaching ₹2.5 billion, with additional growth projected as market engagement deepens.
One other important income stream comes from transaction charges, that are levied on traders for every debit transaction within the money supply phase. CDSL fees ₹3.5 per debit transaction, contributing 28.5% to its consolidated income. The expansion of this phase is straight linked to general money volumes and the proportion of delivery-based trades. Moreover, CDSL generates income from pledges created by clients on their securities.
Over the past six years, the market has expanded on all essential fronts, considerably benefiting CDSL. The variety of demat accounts has surged 4.9x, from 36 million in FY19 to 179 million, whereas money and supply volumes have grown 3.7x to ₹1.3 trillion and 5x to ₹45 billion, respectively. Because of this, transaction charges have grown at a formidable CAGR of 42% to ₹2.2 billion over the identical interval.
This phase is anticipated to proceed its upward trajectory, pushed by the robust tempo of demat account openings and rising fairness participation. Nevertheless, stricter margin norms and diminished spinoff buying and selling volumes might introduce some moderation in development.
Past issuer and transaction charges, CDSL additionally earns income from IPO processing and company motion fees. These embrace charges for dealing with IPO purposes, allotment of securities, and facilitating company actions reminiscent of dividends, bonus shares, and inventory splits, collectively contributing round 10% of complete income.
Learn this | The acid take a look at for BSE SME IPOs is right here amid inventory market cracks
With extra firms tapping the capital markets, this phase is poised for continued development. The rising frequency of company actions reminiscent of rights points, buybacks, and bonus share issuances additional enhances CDSL’s income potential on this space.
Past depository providers
CDSL operates India’s largest KYC registration company, by way of CVL KRA. The company offers KYC providers to round 2,000 firms, together with capital market intermediaries, and manages over 85.7 million KYC information.
CDSL facilitates the creation, upkeep, and administration of digital KYC information whereas providing doc administration and digital repositories for each central and state authorities instructional establishments in addition to personal organizations.
CDSL Ventures fees ₹20 for every KYC created throughout the system. When a KYC is transferred to a brand new middleman, the recipient middleman incurs a ₹35 charge.
With capital market exercise anticipated to rise, MOFSL initiatives a CAGR of 36% for this sector between FY24 and FY27, presenting important development potential.
One other promising avenue is the insurance coverage repository enterprise, the place CDSL has gained traction following an Irdai mandate requiring all new insurance coverage insurance policies to be issued in digital type from April 2024. CDSL, alongside CAMS, NSDL, and Karvy, is likely one of the 4 licensed entities on this house.
The trade measurement, which incorporates roughly 330 million normal insurance coverage and 29 million life insurance coverage insurance policies issued in FY24, is projected to be between ₹2.1-2.9 billion yearly, based mostly on a charge of ₹6-8 per coverage. As of Q3FY25, CDSL already holds greater than 1.6 million insurance policies.
CDSL has partnered with 48 firms throughout the well being and life insurance coverage sectors, reaching a market share within the excessive single digits. This offers CDSL with an incremental income potential of ₹150-200 million, or 2-3% of FY24 revenues.
As well as, CDSL has secured a contract with an insurance coverage agency to handle distant places of work and facilitate outsourcing providers. As extra firms undertake outsourcing fashions, this can generate a brand new income stream, complementing its insurance coverage repository operations.
The most effective half? This enterprise requires minimal capital expenditure, making it extremely worthwhile. Given the low insurance coverage penetration in India, this phase is poised for development, presenting robust enterprise prospects.
Furthermore, CDSL stands to generate further income from service requests, reminiscent of coverage modifications, deal with modifications, and loans towards insurance policies.
Monetary energy
CDSL has delivered stellar monetary efficiency over the previous 5 years. Income has grown at a CAGR of 26% to ₹9 billion, whereas revenue has expanded at 32% to ₹4.2 billion. With an Ebitda margin of 61%, a dividend payout of 55%, and a Return on Fairness (RoE) of 31%, the corporate is exceptionally cash-rich.
Nevertheless, its efficiency is intently tied to market cycles. The latest market downturn in Q3FY25 led to a 16% decline in income and a 19.7% drop in revenue sequentially—its first weak quarter in a number of years. Decrease buying and selling volumes impacted transaction charge income, a key driver of development.
Valuation: Nonetheless a lovely guess?
The CDSL inventory, which opened at ₹1,270 apiece on Wednesday, at present trades at a P/E of 47.6x, barely above its five-year median of 44.9x however aligned with CAMS (P/E 46x) and at a 16.9% low cost to KFin Applied sciences (P/E 57.3x).
The broader market correction has introduced valuations down by 38%, making CDSL’s risk-reward equation much more interesting. Given its monopoly-like standing, recurring income, and long-term development tailwinds, it stays a lovely funding for these betting on India’s monetary deepening.
Quick-term dangers
CDSL is well-placed to capitalize on India’s rising capital market participation. Its dominance within the depository house, capital-light enterprise mannequin, and robust money technology make it a resilient long-term compounder. The corporate’s annuity-like income from issuer charges and transaction fees offers stability, whereas its newer ventures in KYC providers and insurance coverage repositories add incremental development potential.
Additionally learn | Indian inventory markets overview 2024: A story of two halves
Nevertheless, short-term headwinds stay. A weak fairness market might affect transaction volumes, lowering income within the close to time period. Regulatory modifications and shifting investor behaviour might additionally affect its earnings trajectory.
Regardless of these dangers, CDSL stays an organization to look at for long-term traders who consider in India’s monetary inclusion story. If India’s retail investing growth continues, CDSL will doubtless stay on the centre of it.
Word: This text has relied on information from www.Screener.in and Tijorifinance. We have now used an alternate, extensively used, and accepted supply of knowledge solely when the info was unavailable.
The aim of this text is just to share attention-grabbing charts, information factors, and thought-provoking opinions. It’s NOT a advice. For those who want to take into account an funding, you’re strongly suggested to seek the advice of your advisor. This text is strictly for educative functions solely.
Concerning the writer: Madhvendra has been a passionate follower of the fairness marketplace for over seven years. He’s a seasoned monetary content material author. He loves studying and sharing his trustworthy opinion about publicly listed Indian firms and macroeconomics.
Disclosure: The author doesn’t maintain the shares mentioned on this article.
