CDSL OFS: A Good Buying Opportunity
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Central Depository Services (India) or CDSL offer for sell (OFS) is a good opportunity for such investors who have missed out its initial public offering two years ago.

CDSL, the securities depository subsidiary of Asia’s oldest stock exchange the BSE, on Wednesday, said it will sell 41,80,000 equity shares, constituting 4% of its stake in CDSL through OFS.

The OFS will open for Institutional Holders at 9.15 AM till 3,30 PM on Nov 28th, 2019 while for Retail investors it will open on Nov 29th, 2019 from 9.15 AM till 3.30 PM. The floor price for this OFS is Rs.205

As of Wednesday’s close, 41,80,000 shares is worth Rs 93.38 crore.

As of September 30, BSE holds 24%, Mutual Fund holds 9.54% while FPIs holds 1.78% in the company. Banks and financial institutions own 22.42% and Alternate Investment Funds (AIF) hold 0.67%. Standard Chartered Bank – Corporate Banking holds 7.18% and insurance companies own 2.34%.

CDSL has outgrown its parent in terms of valuation as well as on key financial parameters. CDSL has returned over 59% since its listing on June 2017 at Rs.149. So far this year, it has gained 6.11%.

CDSL enjoys strong fundamentals based on its unique business offerings.

CDSL has an asset-light and a well-diversified business model where in 35% of revenue is fixed (annuity based) which cushions it from market volatility.

The company also generates strong cash flows and is expected to benefit from the government mandate for all unlisted public companies to dematerialize their securities (as this will lead to more number of accounts with CDSL).

The net worth of the company stood at Rs 542.53 crore as on March 2019 compared with Rs.502.25 crore as on March 2018. The cash generated from operations stood at Rs 98.23 crore during FY19.

Why should Retail Investors Apply in this OFS?
CDSL reported a steady set of FY19 numbers with net sales at Rs.195 crs as compared to a revenue of Rs.188 crs last year, with EBIDTA placed at Rs.109 crs from Rs.110 crs last year with the PAT placed at Rs.114 crs from Rs.103 crs. CDSL has declared a dividend of 40% for FY19

NSDL (promoted by the NSE) and CDSL (promoted by the BSE) are the only two depositories operating in the country.

Given their strong parental lineage, these depositories will enjoy a clear advantage over any new entrant, in our view.

CDSL’s strategy of consolidating its position among retail investors has helped it expand its share in incremental beneficial owner (BO) accounts (63% in FY19) and depository participants (594 v/s 276 for NSDL).

We believe this strategy enables CDSL to spread its risk and not depend on a few large institutions

Depository business is a proxy play on the capital market growth story
The penetration of per-capita Demat accounts in India stands at 0.03, which is 19x lower than bank accounts. Only 40% of savings are in financial assets, while the balance 60% are still in physical assets. In fact, only 5% of financial savings are in equities in India, which is much lower than 15-40% in regions such as China, Brazil, Western Europe and the US.

We hence believe there is significant scope for growth in Indian capital market based on the gradual shift of money from physical assets (real estate & gold) to financial assets, increasing retail participation, greater financial literacy, growing penetration of capital markets products, regulatory initiatives, ease of technological access, expected surge in IPOs, capital requirements for SMEs and mid-corporates, and strong investor confidence.

The depository industry in India comprises of two players: NSDL (promoted by NSE) and CDSL (promoted by BSE). NSDL was the first depository established in India (in 1996), followed by CDSL (in 1999).

Even globally, the depository services are owned by exchanges and they avoid sharing data with any third party for security reasons. Countries such as Canada, Germany, Europe, Singapore, the UK and the US operate under a single depository mechanism, while India has dual-depositories

CDSL has maintained a strong balance sheet over the years with virtually no debt as on March 2019. The company has also enjoyed healthy operating cash flows.

Operating cash flows have grown from Rs.79.29 crs in FY18 to Rs 85.43 crs in FY19 where CDSL continues to be debt-free and where its growth in revenue and profitability has been consistent over the last few years.

Total liquid investments as on March 2019 stand at Rs.597 crs as compared to Rs.520 crs last year.

Hence given the prudent management pedigree, steady funded largely through internal accruals, lean balance sheet and a niche highly profitable business model Investors must surely look at this OFS offer which may not come soon again.


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