The initial public offering of Central Depository Services (India) Limited (CDSL), which closed on Wednesday, received an overwhelming response from capital market investors. The depository’s maiden issue was subscribed 170 times, making it the most subscribed IPO so far in 2017, higher than Avenue Supermarts’ (D-mart) 104.59 times in March.
The issue was an offer for sale for 35.2 million shares at a price band of Rs 145-149, providing exit opportunities to BSE India, State Bank of India, Bank of Baroda and the Calcutta Stock Exchange, the leading shareholders in the company. BSE India which holds 50.1 percent in CDSL will see its stake come down to 24 percent post-offer.
CDSL is among the only two depository companies in India, it’s lone competitor being NSE’s National Securities Depository Limited (NSDL), which controls around 56 percent of the beneficial owner (BO) market. CDSL has 12.4 million accounts and over 253 billion securities of 9,934 issuers, valued at Rs 18.3 lakh crore.
Despite its lower market share, CDSL has topped NSDL in terms of incremental growth of BO accounts over the last three years. The company charges fixed annual fees to its customers, which includes registered companies, and also transaction fees from depository service providers. CDSL held a 60 percent share of the incremental BO accounts in FY2017.
Between FY2015 and FY2017 the revenues of CDSL grew 18 percent to Rs 146 crore. Similarly, the operating profit margin of the company improved from 44 percent in FY2015 to 54.5 percent in FY2017. The net profit of the company stood at Rs 86.6 crore in FY2017.
CDSL’s sound financial health apart, the current exuberance prevailing in the capital markets may also have contributed to the frenetic IPO response. “The overwhelming response to the offer basically reflects the euphoria in the equity markets. While the business model of the company is stable, the growth rate is not so exciting. The overall response to the IPO has a lot to do with the positive mood about equities as an asset class,” said a fund manager who is sceptical about the present valuation of India’s stock markets.
Shares of CDSL were offered at 17.7-18.2 times the company’s FY2017 earnings, which seems reasonable in a market that is trading at extremely high valuations. Over the last year, the Sensex has risen 17 percent inflating the index’s price-to-earnings ratio (P/E) to 22.6 times.
While most fund managers agree that the current market is overvalued, they are optimistic that the financials of large companies will show an improvement in the next few years. Besides, in 2007-08 the market was trading at a high price-to-book value of 5.47, compared with 2.94 in 2017.
As for CDSL, one of its biggest strengths is the stability of operating income on the back of fixed annual charges from registered companies and transaction-based fees from depository participants (DPs). The revenue from operations includes transaction charges, account maintenance charges and settlement charges paid by DPs and annual fees, corporate action charges and e-voting charges paid by companies whose securities are admitted to the CDSL system.
A report by the diversified financial services company IIFL sums it up: “[CDSL’s] robust margins have come from stable income sources, helped by low operational costs from efficient operations, high economies of scale and innovaive service implementations. Also, its direct DP connection through a centralised database system ensures relatively low initial set up costs and minimal incremental costs.”
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