Rakesh Patil & Sunil Shankar Matkar
The initial public offering (IPO) of leading securities depository Central Depository Services (CDSL) will open for subscription on June 19, with a price band of Rs 145-149 per share.
The company is expected to raise Rs 509.92 crore at the lower end of price band and Rs 523.99 crore at higher end of price band.
It has already raised Rs 154.07 crore by issuing 1.03 crore equity shares to 15 anchor investors – Abu Dhabi Investment Authority–Behave, FIL Investments (Mauritius), Goldman Sachs India, SBI Magnum Tax Gain Scheme, ICICI Prudential, HSBC Indian Equity Mother Fund, Tata MF, DSP Blackrock Equity Savings Fund etc. These shares were allotted at a price of Rs 149 apiece.
Bids can be made for a minimum of 100 equity shares and in multiples of 100 shares thereafter. The issue will close on June 21.
The BSE-promoted company had filed a draft red herring prospectus (DRHP) with the Securities and Exchange Board of India in December 2016.
The company will only be listed on National Stock Exchange. BSE is the promoter of the depository firm.
Axis Capital, Edelweiss Financial Services, Nomura Financial Advisory and Securities (India) and SBI Capital Markets are global co-ordinators and book running lead managers to the offer while Haitong Securities India, IDBI Capital Markets & Securities and YES Securities (India) are book running lead managers. Link Intime India is the registrar to the issue.
Here are 10 things you should know before subscribing the issue:-
Offer for sale
It is an offer for sale issue of 3.51 crore shares (representing 33.65 percent of fully diluted post-offer paid-up equity) by selling shareholders – BSE Limited up to 2.72 crore shares, State Bank of India up to 47.75 lakh shares, Bank of Baroda up to 21.74 lakh shares and Calcutta Stock Exchange up to 10 lakh shares.
Of total public issue, 7 lakh shares are reserved for subscription by employees. Hence, the net offer to the public is of 3.44 crore equity shares.
Objects of the issue
The objects of the offer are to achieve the benefits of listing the equity shares on NSE and for the sale of equity shares by the selling shareholders.
CDSL will not receive any proceeds of the offer and all the proceeds of the offer will go to the selling shareholders.
About the company
Incorporated in December 1997, CDSL is a leading securities depository in India by incremental growth of beneficial owner accounts over the last three fiscals and by the total number of registered depository participants, as at the end of fiscal 2016, according to the CRISIL report.
In terms of market share, CDSL is the second largest depository in India. It offers services to depository participants and other capital market intermediaries; corporates; capital market intermediaries; insurance companies and others.
It offers dematerialisation for a wide range of securities including equity shares, preference shares, mutual fund units, debt instruments, government securities. As a securities depository, it facilitates holding of securities in electronic form and enable securities transactions (including off-market transfer and pledge) to be processed by book entry.
The depository participants act as its agent and offer depository services to the beneficial owner of the securities.
As of April 30, 2017, it had over 12.4 million investor accounts.
In fiscal 2017; it held a 59 percent market share of incremental beneficial owner accounts with a net growth in beneficial owner accounts of 13.68 percent from fiscal 2016 to fiscal 2017; over 253 billion securities of 9,934 issuers under custody representing a total value of Rs 18.3 trillion; 589 registered depository participants who had over 17,000 service centres across India; and over 15 million KYC records with a market share of approximately 67 percent.
The promoter of company is BSE Limited, the country’s oldest stock exchange. Promoter holds 5.22 crore equity shares aggregating to 50.05 percent of company’s pre-offer issued subscribed and paid-up equity share capital.
CDSL Ventures Limited, CDSL Insurance Repository Limited and CDSL Commodity Repository Limited are company’s subsidiaries while Indian Clearing Corporation and Marketplace Technologies are other group companies.
As of June 3, the company has 15 shareholders; of which 10 shareholders holding stood at 99.04 percent.
Board of Directors
CDSL has been paid final dividend of Rs 3 per share in the year ended March 2017, Rs 2.5 in March 2016, Rs 2.2 in March 2015, and Rs 2 each in March 2014 and March 2013.
Profit in the year ended March 2017 stood at Rs 86.58 crore, degrowth of 5 percent compared with Rs 91.12 crore in previous year.
Total income from operations during the year increased 15.8 percent to Rs 186.85 crore from Rs 161.34 crore in last year.
It’s revenue from operations includes transaction charges, account maintenance charges and settlement charges paid by depository participants and annual fees, corporate action charges and e-voting charges paid by companies whose securities are admitted to its systems.
According to brokerage houses, following are risks:-
CDSL is one of the two securities depositories in India and thus faces significant competition for investor accounts from the competitor in a variety of ways.
A large proportion of company’s business is transaction-based and dependent on trading volumes.
Appointment of CERSAI as central KYC registration agency may have a significant adverse impact on the business prospects and result of operations of its subsidiary, CDSL Ventures.
Any interruptions or malfunctions in the operation of its IT systems could damage its reputation and cause loss for the business.
Fraud due to unauthorised transfer of securities or service deficiency could result in losses. Further, if account data disseminated by the company contains undetected errors, this could have a material adverse effect on its business, financial condition or results of operations.
Any shift in investment pattern away from securities to other products & services
High dependence on technology and IT services sourced from third parties
Brokerage houses advise recommending the issue, citing strong parentage, asset-light nature of business, debt free balance sheet, steady growth, decent return on equity, free cash flow generation, high barriers of entry and ample reserves parked in investments.
CDSL being cost effective as compared to NSDL has resulted company to outpace overall industry growth. It believes, valuations are reasonable given the robust business outlook along with decent financial performance over FY12-17. Hence, we recommend subscribe rating on the issue.
Going ahead, it expects that financial savings growth could be supported from ‘Rural India’ given the constant support by central government to increase their disposable income through different initiatives. This flow could come into financial market in any form such as equity, debt, mutual funds resulting into better growth opportunities for the depository participants such as CDSL, it feels.
Apart from this, the company has been providing different services such as KYC related solutions, insurance dematerialization and commodity repository solutions, which it expects to fuel further growth in the financial performance from medium to long term perspective.
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 percent in FY17.
It has assigned subscribe recommendation to the issue based on revenue stability, robust financial performance and healthy return ratios.
CDSL will continue to diversify its product and service offerings depending on investors’ needs. It has received the letter of intent to register as a warehouse repository. CDSL has also registered as a KYC service agency (KSA), authorised service agency (ASA), as a KYC user agency (KUA) and authorised user agency (AUA) with UIDAI. It also plans to expand its NAD project including more educational institutions.
Given the stable growth in the financial performance, strong cash generation, healthy return on equity and a high cash on books (around 35 percent of market capitalisation at upper price band), it feels the issue is attractively priced compared to similar profile of high cash generating service companies.
Aditya Birla Money
Asset light nature of business enables the company to distribute 35-50 percent of profits as dividend. In FY17, it had paid Rs 3 per share as dividend. The IPO is attractively priced with TTM (trailing twelve months) PE of 18x at higher price band of Rs 149.
CDSL stands to gain from operating leverage. It believes that CDSL demands a discount to its domestic peers. It assigned a subscribe rating to the IPO.
Centrum Wealth Research
Given the current decent financials such as high margins, healthy return ratios, free cash flow generation and strong balance sheet, the issue may attract good subscription in the current market scenario where there is lot of buying interest in primary as well as secondary offerings.
Further, it is likely that the listing may also be at a premium to the offer price. However, it is difficult to say if the stock will be a consistent outperformer subsequently.
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.
At the same time, given the high cash flow generation, it could be a good dividend play.
CDSL which holds 60 percent of incremental market share of beneficial owner account is likely to benefit from rising per capita income, growing Indian financial market and gamut of value added services. CDSL generates 39 percent of revenue (as against 7 percent for NSDL) from annual fees, provides strong revenue visibility. Other services like commodity repository (to be launched shortly), KYC services, e-notice, e-insurance account, NAD project, e-will, etc should aid topline and bottomline going forward.
Further, CDSL’s cash and investments accounts for around 35 percent of market cap, provides adequate margin of safety. It recommends subscribing the issue with long term perspective.
It believes that CDSL is truly a perfect pick to play out the structural growth story of securities markets in India as increasing financial literacy & rising urbanisation is expected to act as tailwinds for this underpenetrated market.
It also likes 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.
It believes 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, the research house recommended subscribing the issue.
Source for images: DRHP