Central Depository Services: Stable Growth Story

Central Depository Services

Stable growth story
June 20, 2017 Central Depository Services Limited (CDSL) is the second largest depository in India.
It commenced the depository business in 1999 with the objective of providing
Vidhi Shah convenient, dependable and secure depository services at affordable cost to all
vidhishah@plindia.com market participants It offers services to the Depository Participants, Corporate,
+91‐22‐66322258
Capital Market Intermediaries, Insurance Companies and Others. At the upper
IPO Note
R Sreesankar band of Rs149, CDSL will trade at 18x FY17 EPS of Rs8.3 which we believe is fairly
rsreesankar@plindia.com priced. We recommend investors to subscribe to the issue with a long term
+91‐22‐66322214 objective.
Pritesh Bumb  Stable revenue base due to repeat business in multiple offerings: CDSL’s
priteshbumb@plindia.com
+91‐22‐66322232
diversified offerings to several client bases including DPs, corporates, stock
exchanges, clearing corporations, registrars and the investors have provided
Rating Subscribe them with multiple streams of stable, recurring operating revenue. They have a
Price Band Rs145‐Rs149 high stability of operating income from the fixed annual charges (~35% of
revenue) collected from companies registered with them and transaction based
fees (21% of revenue) collected from DPs. Further, they have leveraged on their
existing relationships with corporates to offer them other consistent revenue‐
IPO Fact Sheet generating services including e‐notices and e‐voting services to companies
Opening Date June 19, 2017 enabling their shareholders to receive notices in electronic form and to allow
Closing Date June 21, 2017
shareholders to cast their votes electronically, remotely or at the meeting
BRLMs‐ Axis Cap, Edel, Nomura & SBI Cap
venue.
Issue Size Rs 5,099mn – Rs 5,240mn
 High economies of scale leading to steady growth in profitability: CDSL’s fixed
operating cost has resulted in high economies of scale. Its main cost is employee
wages and post employee benefits and software development and maintenance
Objects of the Issue
costs. Its consolidated revenue from operations has grown at ~18% CAGR over
To reduce the stake of the promoter last 3 years. The high economies of scale have been further enhanced by a
growth of BO accounts at a CAGR of 12.98% over last 3 years.

Issue Details
Pre‐issue equity (m shares) 104.5 Key financials (Y/e March) 2014 2015 2016 2017
Post‐issue equity (m shares)* 104.5 Revenue from Operations (Rs m) 889 1,053 1,229 1,460
Post‐issue Market Cap (Rs bn)* 15.57 Growth (%) (2.0) 18.4 16.7 18.8
PAT (Rs m) 495 558 911 866
EPS (Rs) 4.7 5.3 8.7 8.3
Growth (%) (1.9) 12.6 63.3 (5.0)
Book Value (Rs) 33.8 39.8 45.9 51.0

Share Holding Profitability & Valuation 2014 2015 2016 2017
(%) Pre‐IssuePost‐Issue* RoAE (%) 14.5 14.5 20.4 17.1
Promoters 50.1 24.0 RoAA (%) 11.4 11.5 17.1 14.9
Foreign Holding 0.0 0.0 P/E (x) 31.4 27.9 17.1 18.0
Public & Others 49.9 76.0 P/BV (x) 4.4 3.7 3.2 2.9
*Equity issuance calculated on higher band price
Source: RHP; PL Research
Note ‐ (1) Valuations based on upper band
Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that

the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to important disclosures and disclaimers at the end of the report
Exhibit 1: Issue details
No. of Shares Value
in million
offered offered
Total issue 42.0 8,825
Offer for sale 25.0 5,243
BSE Limited 3.5 385
State Bank of India 3.1 337
Bank of Baroda 1.8 193
The Calcutta Stock Exchange 2.5 278
Source: RHP, PL Research
Exhibit 2: Post‐issue Top 10 Shareholders
BSE Limited 24.00%
HDFC Bank 7.17%
Standard Chartered Bank 7.17%
Canara Bank 6.44%
Bank of India 5.56%
State Bank of India 5.00%
Life Insurance Corporation of India 4.14%
Bank of Baroda 2.99%
Union Bank of India 1.90%
Bank of Maharashtra 1.90%
Total 66.27%

June 20, 2017 2
Business Description
Central Depository Services Limited (CDSL) is the second largest depository in India.
It is the leading securities depository in India by incremental growth of Beneficial
Owner (BO) accounts over the last three Fiscals and by the total number of
registered Depository Participants (DPs), as at the end of FY16.
They offer services to following clients:
 Depository Participants and other capital market intermediaries: They offer

dematerialization for a wide range of securities including equity shares,
preference shares, mutual fund units, debt instruments, government securities.
As a securities depository, they facilitate holding of securities in electronic form
and enable securities transactions (including off‐market transfer and pledge) to
be processed by book entry. The DPs act as their agent and offer depository
services to the BO of the securities. The Registrar and Transfer Agents (RTAs)
and Clearing Members (CMs) are the other intermediaries involved in the
process of issue and transfer of securities on the electronic platform.
 Corporates: They offer facilities to issuers to credit securities to a shareholder's
or applicant's demat accounts to give effect to a range of non‐cash corporate
actions such as bonus issue, subdivision of holdings and conversion of securities
in a merger, amalgamation or in an IPO.
 Capital market intermediaries: They offer KYC services in respect of investors in
Indian capital markets to capital market intermediaries including mutual funds.
 Insurance Companies: They offer facilities to allow holding of insurance policies
in electronic form to the holders of these insurance policies of several insurance
companies.
 Others: They also offer other online services such as e‐voting, e‐Locker, National
Academy Depository, easi (Electronic Access to Security Information), easiest
(Electronic Access to Security Information and Execution of Secured Transaction)
drafting and preparation of wills for succession (myeasiwill) mobile application
(myeasi, m‐voting) and Transactions using Secured Texting (TRUST). They
regularly conduct investor meetings and other awareness programs.
As of April 30, 2017, it has
 over 12.4 million investor accounts. In FY17, it held a 59% market share of
incremental BO accounts with a net growth in BO accounts of 13.68% from FY16
to FY17.
 over 253 billion securities of 9,934 issuers under its custody representing a total
value of Rs18.3 trillion.
 589 registered DPs who had over 17,000 service centres across India.
 over 15 million KYC records with a market share of approximately 67%.

June 20, 2017 3
Exhibit 3: Revenue is growing at 11% CAGR Exhibit 4: Annual issuers and transaction fees account for ~57% of
the total revenue
Revenue from Operations (Rs Mn) Growth (%)
Ann. Issuer Transanctn IPO/Corp action
2,000 20% Online Data Others
15% 14.8% 18.5% 19.6% 18.6% 19.0%

1,500
12.8% 10.0% 12.5% 12.8%
10% 5.4% 13.9%
6.1% 8.7%
1,000 5.9% 11.3%
5% 24.1% 22.4%
26.9% 21.0% 21.4%
500
0%
42.9% 43.0% 33.7% 39.2% 35.4%
0 ‐5%
FY13 FY14 FY15 FY16 FY17
FY13 FY14 FY15 FY16 FY17
Exhibit 5: Return on Assets trend of CDSL Exhibit 6: Return on Net worth trend of CDSL
RoAA (%) RoAE (%)
30.8
24.3
17.1 20.4
14.9 17.1
11.4 11.5 14.5 14.5
FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17

Source: RHP, PL Research Source: RHP, PL Research
Exhibit 7: Fees payable by DPs
Particulars NSDL CDSL
Settlement fees (per instruction)
Settlement fees per debit instruction 4.5 5.5
Re. 1 with min charge of Rs.
Settlement fee per instruction for securities received
1,500 and max Rs 5,000 per
from CC into the pool account of CM 500 (per
quarter per CM account.
month)
Settlement fee per debit instruction for transfer of
4.5
securities for inter settlement transfers
Transaction fees by CDSL for debit instructions

(Based on monthly transaction bill amount)
More than Rs 1.5m ‐ 4.25
More than Rs 0.4m and upto Rs 1.5m ‐ 4.5
More than Rs 0.1m and upto Rs 0.4m ‐ 5
Upto Rs 0.1m ‐ 5.5
List of charges is not exhaustive list
Source: Company Data, PL Research

June 20, 2017 4
Exhibit 8: Fees payable by issuers
Particulars (excluding taxes as applicable) NSDL CDSL
*Annual custodial fees (per folio or based on issue capital, whichever is higher)
Annual custodial fees (per folio) (Rs.) 11 11
Nominal value of securities admitted (Rs.)
Issued capital upto 50m 9,000 9,000
Issued capital above 50m and upto 100m 22,500 22,500
Issued capital above 100m and upto 200m 45,000 45,000
Issued capital above 200m 75,000 75,000
Corporate action fee (per record) (Rs.) 10 10
List of charges are not exhaustive list

June 20, 2017 5
Peer Comparison
Exhibit 9: Revenue Mix for CDSL for FY16 Exhibit 10: Revenue Mix for NSDL for FY16
Annual Other Annual fees
maintenace Charges 7%
chgs 5%
2%
Other Annual fees Custody
Charges 39% Fees
38% 37%
Transaction
Transaction
fees
fees
51%
21%
CDSL ‐ Revenue for FY16 NSDL ‐ Revenue for FY16

Exhibit 11: Revenue of NSDL is growing at faster rate than CDSL.. Exhibit 12: .. but margins of CDSL are better and have been improving
Revenue ‐ CDSL Revenue ‐ NSDL NSDL ‐ EBIDTA Margin (%) CDSL ‐ EBIDTA Margin (%)
1600 52.0%
1400
42.9%
1200 39.4% 36.8% 35.1%
1000 30.4%
Rs Mn
27.2% 25.4%
800
600
400
200
0
FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16

Exhibit 13: NSDL is better off than CDSL in acquiring demat A/cs… Exhibit 14: .. but CDSL is slowing increasing market share
CDSL NSDL CDSL NSDL

15.6
14.6
13.1 13.7
12.7 12.3 60% 60% 59% 57% 56%
10.8
9.6
8.3 8.8
40% 40% 41% 43% 44%
FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 0

No. of demant A/c (in mn) No. of Demat A/cs ‐ Mkt Share


June 20, 2017 6
Exhibit 15: CDSL has been aggressively acquiring new investors Exhibit 18: …which is helping it to improve market share
CDSL NSDL CDSL NSDL

1.5
1.2 45% 44% 42% 40%
1.0 61%
0.8 0.9
0.6 0.7
0.4 0.5 0.4 60%
55% 56% 58%
39%
FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17
No. of incremental demant A/c (in mn) No. of incremental demat A/c ‐ Mkt Share

Source: Company Data, PL Research Source: Company Data, PL Research
Exhibit 16: NSDL has better access to corporate clients than CDSL Exhibit 19: .. which has led to increasing of active insturmets
CDSL NSDL CDSL NSDL

1,356
13.1
1,123
11.4
878
742 9.5 9.8
678 9.0 8.5
519 593
477 6.9 6.8
FY13 FY14 FY15 FY16

FY13 FY14 FY15 FY16
No. of active instruments (in '000)
No. of issuers



June 20, 2017 7
Risk factors
 Inability to effectively manage growing DP network: If CDSL is unable to
identify or appoint DPs or the existing DPs do not expand their offerings or
reach, the distribution capabilities is affected. Also if the terms offered to
potential DPs by the competitor are more favorable, they may terminate the
services with CDSL.
 Shift in consumer preferences away from investing and trading in securities to
other products and services: If a significant portion of existing service offerings
becomes outdated or loses market favour and inability to offer new services or
failure to increase the demand by investors, CDSL’s business, financial condition,
results of operations and prospects could be materially adversely affected.
 Interruptions or malfunctions in the operation of IT systems: If the primary
vendor is unable to or declines to provide continuous support, CDSL will incur
disruptions and substantial costs in transiting to new service provider and will
affect the business. Also interruptions in IT systems and inability to make
alternative arrangements in a timely manner could cause losses due to
temporary loss of connectivity with DPs.
Valuation
At upper band of Rs149 CDSL will trade at 18x based on post‐issue EPS of Rs8.3
which we believe is fairly priced. We recommend investors to subscribe to the issue
with a long term investment objective.

June 20, 2017 8
Company Background
Exhibit 21: About the company CDSL, the second largest depository in India, has commenced business in 1999 with
DPs 589 the objective of providing convenient, dependable and secure depository services at
Investor Accounts 12.4 mn affordable cost to all market participants. It has connectivity with clearing
Source: RHP, PL Research corporations of all the leading Indian stock exchanges including the BSE and NSE. It
has entered into MoUs with depositories globally including with DTCC, JASDEC and
Euroclear.
Promoter and Management Bandwidth
 Mr. Padala Subbi Reddy is the MD & CEO. He has been on CDSL’s Board since
March 6, 2009. He completed his bachelors in arts (economics) from Andhra
University and a master’s degree in arts (economics) from University of
Hyderabad. Prior to joining CDSL, he was associated with BSE as Chief GM of
surveillance and inspection. He is also a member of various committees of SEBI
including the Secondary Market Advisory Committee and Corporate Bond and
Securitization Advisory Committee. He is also a member of the National Council
for Capital Markets of Confederation of Indian Industry and the Associated
Chambers of Commerce and Industry of India.
 Mr. Bharat Sheth is the Executive VP and CFO. He completed his bachelors in
science from Mumbai University. He is a qualified chartered accountant from
the ICAI. He has been associated with our Company since May 27, 1998. Prior to
joining CDSL, he was associated with Shepan Consultant Private Limited as a
designated director. He has over 25 years of experience as a statutory auditor,
share accountant and co‐manager or registrar to public issues, registrar and
transfer agents to issuers.
 Joydeep Dutta is the ED and Group Chief Technology Officer. He completed his
bachelor in electrical engineering from University of Kolkata and masters in
electrical engineering and computer science from Tuskegee University, USA and
Drexel University, USA, respectively. He has been associated with CDSL since July
7, 2014. Prior to joining CDSL, he was associated with various ICICI Bank group
companies in India and multi‐national companies in United States. He has over
34 years of diverse work experience in India and US in industries in both
management consultancy and company executive roles.

June 20, 2017 9
Exhibit 22: Board of directors
Padala Subbi Reddy MD & CEO
Joydeep Dutta ED & Group Chief Technology Officer
Bharat Sheth Executive Vice President and CFO
Cyrus Khambata Executive Director
Nayana Ovalekar Executive Vice President – Operations
Sunil Alvares Executive Vice President – Business Development and Admission Cell
Ramkumar K. Executive Vice President and Chief Risk Officer
Farokh Patel Vice President ‐Audit and Inspection
N. V. S. Pavan Kumar VP ‐ Legal and Group Company Secretary and Compliance Officer
Exhibit 23: Pre‐issue Top 10 Shareholders
BSE Limited 50.05%
State Bank of India 9.57%
HDFC Bank 7.18%
Standard Chartered Bank 7.18%
Canara Bank 6.45%
Bank of India 5.57%
Bank of Baroda 5.07%
Union Bank of India 1.91%
The Calcutta Stock Exchange Limited 0.96%
Total 93.94%

June 20, 2017 10
Financials
Exhibit 24: Income Statement (Rs m)
Y/e March 2014 2015 2016 2017
Revenue from Operations 889 1,053 1,229 1,460
Growth (%) ‐2.0% 18.4% 16.7% 18.8%
Other Income 339 402 385 408
Total Income 1,228 1,455 1,613 1,869
Growth (%) ‐1.0% 18.4% 10.9% 15.8%
Employees 175 192 215 249
Depreciation 50 62 42 37
Impairment loss on financial assets 0 11 11 2
Other expenses 388 398 363 415
Total expenditure 612 664 631 703
Profit before exceptional times and tax 616 791 982 1,166
Growth (%) ‐7.2% 28.4% 24.1% 18.7%
Exceptional Items 6 0 331 0
Profit before tax 622 791 1,313 1,166
Tax 127 233 402 300
Effective tax rate (%) 20.3% 29.5% 30.6% 25.7%
PAT 495 558 911 866
Adjusted PAT 490 558 580 866
Growth (%) ‐4.0% 13.9% 4.0% 49.2%

June 20, 2017 11
Exhibit 25: Balance Sheet (Rs m)
Y/e March 2014 2015 2016 2017
Sources of funds
Equity 1,045 1,045 1,045 1,045
Reserves & Surplus 2,489 3,115 3,748 4,288
Networth 3,534 4,160 4,793 5,333
Minority Interest 136 146 147 155
Growth (%) 7.6% 17.7% 15.2% 11.3%
Non Current Liabilities 218 14 34 14
Current Liabilities 670 795 556 571
Total 4,557 5,115 5,530 6,072
Application of funds
Net fixed assets 98 67 37 55
Long term Investments 447 2,232 2,105 2,729
Growth (%) NA ‐5.7% 29.7%
Deferred Tax Asset (Net) 39 8 0 23
Other Non Current assets 115 346 297 228
Short term Investments 3,307 1,909 2,470 2,300
Cash & Bank Balances 410 431 404 483
Other Current Assets 142 121 218 255
Total 4,557 5,115 5,530 6,072
Exhibit 26: Key Ratios
Y/e March 2014 2015 2016 2017
Eq. Shrs. O/s. (m) 104.5 104.5 104.5 104.5
EPS (Rs) 4.7 5.3 8.7 8.3
Book Value (Rs) 33.8 39.8 45.9 51.0
P/E (x) 31.4 27.9 17.1 18.0
P/BV (x) 4.4 3.7 3.2 2.9
Cost‐Income 49.8 45.6 39.1 37.6
Cost‐Assets 13.4 13.0 11.4 11.6
RoAA 11.4 11.5 17.1 14.9
RoAE 14.5 14.5 20.4 17.1

June 20, 2017 12
Prabhudas Lilladher Pvt. Ltd.
3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai‐400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209
Rating Distribution of Research Coverage PL’s Recommendation Nomenclature
50% 44.6% BUY : Over 15% Outperformance to Sensex over 12‐months

Accumulate : Outperformance to Sensex over 12‐months
40% 36.4%
% of Total Coverage
Reduce : Underperformance to Sensex over 12‐months
30% Sell : Over 15% underperformance to Sensex over 12‐months
19.0%
20% Trading Buy : Over 10% absolute upside in 1‐month
10% Trading Sell : Over 10% absolute decline in 1‐month

0.0% Not Rated (NR) : No specific call on the stock
0%
BUY Accumulate Reduce Sell Under Review (UR) : Rating likely to change shortly

DISCLAIMER/DISCLOSURES
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We/I, Ms. Vidhi Shah (CA), Mr. R Sreesankar (B.Sc ), Mr. Pritesh Bumb (MBA, M.com), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research
report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in
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Date: 2017.06.20 09:52:54 +05'30'

Central Depository Services: Stable Growth Story

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Central Depository Services

 Depository Participants and other capital market intermediaries: They offer

15% 14.8% 18.5% 19.6% 18.6% 19.0%

Exhibit 5: Return on Assets trend of CDSL Exhibit 6: Return on Net worth trend of CDSL

CDSL ‐ Revenue for FY16 NSDL ‐ Revenue for FY16

Exhibit 11: Revenue of NSDL is growing at faster rate than CDSL.. Exhibit 12: .. but margins of CDSL are better and have been improving

Revenue ‐ CDSL Revenue ‐ NSDL NSDL ‐ EBIDTA Margin (%) CDSL ‐ EBIDTA Margin (%)

Exhibit 13: NSDL is better off than CDSL in acquiring demat A/cs… Exhibit 14: .. but CDSL is slowing increasing market share

CDSL NSDL CDSL NSDL

40% 40% 41% 43% 44%

FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 0

Exhibit 15: CDSL has been aggressively acquiring new investors Exhibit 18: …which is helping it to improve market share

CDSL NSDL CDSL NSDL

Exhibit 16: NSDL has better access to corporate clients than CDSL Exhibit 19: .. which has led to increasing of active insturmets

CDSL NSDL CDSL NSDL

FY13 FY14 FY15 FY16

50% 44.6% BUY : Over 15% Outperformance to Sensex over 12‐months

10% Trading Sell : Over 10% absolute decline in 1‐month

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