CDSL

Hello friends,

As communicated earlier, I’ve been writing very detailed analyses of some select companies for the readers of Sakal Money magazine, which is published monthly. The companies are selected through a value investing lens and qualify for long-term investment. However, as the magazine is a paid one, I do not publish the analyses here until the original article is at least a couple of months old. In this, there is a certain disadvantage in terms of valuations but as the stock market does give chances again and again to pick good stocks at reasonable valuations, it is important to be ready with an analysis when the opportunity presents itself.

Business analysis is of utmost importance in the value-based investing approach. Peter Lynch says that investing in a company is not buying a lottery ticket, but owning a small part of that company’s business, and that ownership is for the long term. Therefore, we should be as careful and meticulous when buying a stock as we are when buying a house.
There are many characteristics of a good business, but Warren Buffett likes companies that do not require constant capital investment, generate good free cash flows, and most importantly, have a monopoly or some strong competitive advantage in the business. He says that no company can be profitable in the long run without some kind of solid competitive advantage. CDSL fits neatly into Buffett’s investment mould.

CDSL’s Business and Market Position

Central Depository Services (India) Limited or CDSL, is a registered company that provides basic facilities required for running the stock market. All the daily buying and selling transactions and deals in the stock market are done through stock brokers. All these stock brokers are mainly registered with the stock exchange companies (exchanges), BSE and NSE, and the actual transactions are done electronically by the stock brokers in these exchanges instantly. All the other facilities required for these exchanges are provided by two companies, CDSL and NSDL. Therefore, these four companies can be said to be the backbone of the stock market. For Mutual Funds, such services are provided by two companies, namely CAMS and KFIN.

CDSL is a Market Infrastructure Institution that provides depository services, primarily the dematerialization of securities. The biggest promoter of CDSL is BSE with a 15% stake. CDSL also offers various other services like e-Voting – enabling shareholders to vote electronically on company resolutions, e-Notices – sending documents to shareholders electronically, recording of Debt Issues using Blockchain and creating a system for recording the lifecycle of secured debt instruments.

CDSL caters to a wide range of market participants, including Exchanges, Clearing Corporations, Depository Participants (DPs), Issuers, Registrar & Share Transfer Agents (RTAs) and Investors.

CDSL’s Market Position: Duopoly

The depository industry in India is a duopoly, with CDSL and National Securities Depository Limited (NSDL) being the two major players. NSDL is not yet listed and CDSL is currently the largest depository in India, based on the number of demat accounts, The number of active demat accounts, which was around 4 crore in 2020, has reached to almost 19 crore by the beginning of 2025, and CDSL has a market share of over 75 per cent. However, when it comes to the combined value of these accounts, NSDL is far ahead as NSDL has more demat accounts of financial institutions, while CDSL has more demat accounts of retail investors.

CDSL has an extensive network of over 580 registered DPs across India, acting as points of service for its customers. The shift from traditional saving instruments to market-linked investments has fueled the growth of demat accounts, benefiting CDSL. This is by far the biggest growth driver for CDSL. CDSL has focus on Technology and Innovation and has consistently invested in technology, offering services like e-voting, e-notices, and online account opening, enhancing convenience and accessibility.

Client Categories:

• Depository Participants (DPs): DPs are CDSL’s primary intermediaries for providing services to investors. They act as agents of the depository, offering account opening, transaction processing, and other services related to dematerialized securities. Examples include stock brokers, banks, and financial institutions. 
• Issuers: Companies that issue securities and list them on stock exchanges are clients of CDSL. These companies utilize CDSL’s services for dematerializing their shares, facilitating electronic share transfers, conducting e-voting, and disseminating e-notices. Examples include companies like 5 Paisa Corporate Services etc.
• Registrar & Share Transfer Agents (RTAs): RTAs maintain records of shareholders for companies. They work closely with CDSL to ensure smooth share transfers and corporate actions.
• Clearing Members (CMs): CMs are entities that clear and settle trades on stock exchanges. They utilize CDSL’s services for efficient settlement of trades in dematerialized securities.
• Clearing Corporations (CCs): CCs guarantee settlement of trades on stock exchanges. They work with CDSL to ensure the smooth functioning of the clearing and settlement system.
• Investors: While not direct clients in a contractual sense, investors form the foundation of CDSL’s business. The millions of demat accounts held with CDSL generate transaction fees and contribute to the company’s growth.

CDSL’s revenue model: The revenue consists of fixed annual charges for services related to dematerialization, account maintenance charges and other corporate actions and transaction-based fees from DPs for various services, including account opening, transaction processing, and settlement. Transaction fees also include fees for services like e-voting, e-notice dissemination, and KYC registration.

As per CDSL DRHP (2017), CDSL’s revenue from operations (which includes transaction charges) accounted for 78.14%. While the current revenue breakup is not given in the annual and quarterly reports, it is obvious from the growth in revenues that transaction-based charges have only increased as a percentage of total revenue. It is believed that the F&O segment has also handsomely contributed to the revenue.

CDSL’s Growth Drivers

• Growth in Demat Accounts: CDSL has experienced significant growth in the number of demat accounts in recent years. In FY 2023-24, CDSL became the first depository in India to open over 11 crore active demat accounts.  The total number of demat accounts in India grew to 15.14 crore in FY 2023-24. On average, close to 30 lakh new demat accounts were added each month during FY 2023-24. CDSL achieved an 88% market share of new demat accounts in FY 2023-24.
• Financialization of Savings: CDSL identifies the increasing financialization of savings as a key growth driver.  As per capita income and the urban population in India grow, the middle-class population is expected to expand significantly.  This growing middle class is expected to drive demand for investment products, including demat accounts.
• Strong DP Network: CDSL has a large network of DPs, acting as points of service for customers.  As of March 31, 2024, CDSL had over 580 registered DPs with more than 20,000 service centres across India.  These DPs help CDSL reach a wider customer base.
• Technological Advancement: CDSL is committed to investing in technology to improve efficiency, customer experience, and security.  The sources and the conversation history emphasize CDSL’s focus on building a robust technology platform.  This technological advancement is likely to drive future growth by making it easier and more convenient for investors to participate in the capital markets.
• Service Diversification: CDSL is also looking to diversify its services to increase revenue and reduce its reliance on transaction-based fees.  This diversification could include new products and services.

Risks: The stock market has seen a huge growth after Covid in 2020, and a large number of retail investors have entered the stock market. However, these investors have only seen the good times. They have to develop the necessary temperament to survive the market boom and bust cycles, which is not easy. If a small number of retail investors flee the stock market due to a future recession or market decline, it can have a big impact on the company’s performance.

“The four most dangerous words in investing are: ‘this time it’s different.’”

– Sir John Templeton

Financials: (23 May 25)

CDSL boasts excellent growth numbers and return ratios. The revenues and earnings of the company have grown at a CAGR of 37% & 38% for five years. Five-year median ROE & ROCE are 29.4 & 36.6 with operating margins between 55-60%. Increasing other income is also contributing to the bottom line. The company has a debt-free balance sheet of 2162 crores and a market cap of 30562 crores. Dividend payout is above 50%. Cash flows are positive and healthy. The last five years’ average operating cash flows are nearly 80% of operating profits, which is excellent. The average cash conversion cycle is less than 30 days.

Valuations (23 May 25): The stock is currently quoting at Rs. 1462 at a PE multiple of 58.1 against a five-year median of 46.6. PEG is 1.5, P/sales is 28, and P/OCF is 56. Book value is not important for such companies. The free cash flows have increased at a CAGR of 14 % in the last three years. Considering this rate, the DCF calculation gives the intrinsic value of the stock to be Rs.393 and the stock is grossly overvalued. However, the free cash flows have reduced in the last three years because of higher capexand such capex in future may not be required. For the current price to be reasonable, the cash flows need to grow at about 35% CAGR, which is quite possible considering the rapid financialization of the economy and increasing participation of retail investors in the market. About 17% of retail investors invest in equity markets in India, whereas in developed countries this percentage is nearly 60. However, the stock is currently quite overvalued.

“The best way to handle a situation in which you love the company but not the current price, is to make a small commitment and then increase it in the next sell-off.”
― Peter Lynch, 

The company has been reinvesting 52% of the earnings back in business for the last ten years and returns on this incremental invested capital (ROIIC) is a healthy 38%. However, other than technology advancement, company does not seem to have many avenues for reinvestment in to business. For this to happen, new revenue lines in related businesses have to be opened. The company mentions working on these lines.

Management guidance

CDSL does not provide Revenue or Margin Guidance. Still, considering 25% & 35% earnings growth CAGR, a financial model is worked out as below.   This shows that with a 25% earnings CAGR, the stock is available at a 2027-28 forward PE of 29.

A better estimate of the valuation can be made by taking different figures for sales growth. Valuation is largely subjective. The estimates of sales and net profit growth may differ from one analyst to another. Therefore, each investor should evaluate the company on his own and prepare his own financial model and take a decision accordingly.

Conclusion:
The stock market has given a return of about 15% in India in the last 20 years. Considering the strong state of the Indian economy, this percentage will sustain or even increase. Seeing this return, more and more people are turning to investing in the stock market and therefore there is no doubt that the future of this company will be even brighter. Investors should definitely consider this company for long-term investment. However, they should be mindful of the valuations.

Hope you like the article. Let me know of any comments that you may have.

Often the journey is more interesting than the destination

Yours truly

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Disclaimer: The content does not constitute a buy or sell recommendation. Readers are advised to consult their investment advisors for any investment-related decisions.