CDSL Share Analysis | 50% CAGR Returns to continue?

CA Varun Agarwal

17 Feb 202408:44

TLDRThe video discusses the Capital Market company CDSL, a market infrastructure institution in India, which has shown consistent growth and is expected to continue delivering good returns. CDSL, the largest depository in India, offers services like securities storage and transaction facilitation. The company's stock performance has seen a rise, with revenue growth and margin expansion, despite a temporary slowdown during the pandemic. The management's outlook is positive, with a growing number of demat accounts and potential for further services expansion. However, risks include government policy changes, market cyclicality, and technology disruptions. The stock is currently fully priced, suggesting potential returns in line with earnings growth.

Takeaways

🏢 CDSL is a market infrastructure institution playing a key role in the functioning of the stock market and other industries like insurance.
📈 The company has been a consistent compounder and is expected to continue delivering good returns in the future.
💼 CDSL provides services like storage of securities in depository accounts and enabling smooth buy/sell transactions.
🏦 It is the largest depository in India in terms of the number of accounts and offers various services including e-voting and e-locker.
🔄 The company has three subsidiaries: Insurance Depository Limited, CDSL Commodity Repository Limited, and Ventures Limited.
📊 CDSL's stock performance has seen growth, especially with an increase in demat accounts post-COVID, but has experienced cyclical fluctuations.
💹 The revenue and stock price have increased significantly, with the stock price reaching around 2,000 levels recently.
📈 The company has shown consistent growth with a CAGR of over 20% in the last 3, 5, and 10 years.
💰 CDSL's margins have expanded due to operating leverage, leading to profits growing faster than revenue.
🔄 The stock currently trades at around 55 times earnings, which is higher than its historical median of around 40 times.
⚠️ Risks include changes in government policy, market cyclicality, and potential technology disruptions affecting the company's growth and customer retention.

Q & A

What is the primary role of CDSL in the capital market?
-CDSL is a market infrastructure institution that plays a key role in the functioning of the stock market and other industries like insurance. It stores securities in depository accounts and facilitates smooth buy or sell transactions.
What types of securities can be stored and traded through CDSL's services?
-CDSL allows storage and trading of various securities including equity shares, debentures, treasury bills, bonds, mutual fund units, and insurance policies.
How has CDSL's revenue and stock price performed in recent years?
-CDSL's revenue grew from 200 crores in FY20 to 550 crores in FY21, and the stock price experienced a rise from its low during the COVID period to around 2000 levels as of the current discussion.
What is the significance of the increase in Average Brokerage per Account (ABA) for CDSL?
-The increase in ABA from 89 crores to 365 crores and then above 400 crores indicates margin expansion due to operating leverage, showing the strength and competitive edge of CDSL's business.
What are the ownership and management structures of CDSL?
-BC Limited is the largest shareholder with a 15% stake, and the company is professionally run with minimal promoter holding. Other major institutional holders include Standard Chartered Bank, BPF Mutual Fund, and LC.
What factors contribute to the growth prospects of CDSL?
-CDSL benefits from tailwinds such as low penetration of demat accounts in India, potential for more market participants, and the introduction of additional services like insurance and KYC.
How does CDSL's valuation compare to historical multiples?
-As of the current discussion, CDSL trades at around 55 times earnings in the trailing 12 months, which is higher than the median earnings multiple of around 40 times over the last 5 years.
What are the potential risks associated with investing in CDSL?
-Risks include changes in government policy, market cyclicality affecting the number of transactions and account additions, and technology risks that could impact service quality and user experience.
What is the current status of CDSL's depository accounts?
-CDSL is the largest depository in India in terms of the number of accounts, and it has seen a consistent rise in Beneficiary Owners (Bo) accounts, opening around 80 to 85 lakhs per quarter in FY24.
What is the long-term outlook for CDSL's stock performance?
-The long-term outlook is positive with expectations of consistent growth in the coming months, driven by increasing user penetration in India and the potential for new services to drive transaction volumes.
What advice is given for investors considering a position in CDSL?
-Existing investors should continue to hold due to expected growth, while new investors should consider buying at lower levels to benefit from both growth and valuation.

Outlines

00:00

📈 Introduction to CDS & Company Overview

The video begins with a warm welcome and introduces the topic of discussion - CDS, a company in the Capital Market space. The speaker highlights CDS as a consistent compounder and anticipates good future returns. The company's role as a market infrastructure institution is explained, emphasizing its key function in the stock market and other industries like insurance. The script outlines the services provided by CDS, such as storage and transaction of securities, including equities, debentures, bonds, and mutual fund units. The company's size and structure, including its subsidiaries and ownership, are also detailed. The largest shareholder is BC Limited, and other significant institutional holdings are mentioned. The video aims to provide an analysis of CDS's business model, stock performance, financial parameters, management outlook, valuations, and potential risks.

05:00

📊 Financial Performance and Growth Prospects

This paragraph delves into the financial performance of CDS, discussing its revenue growth and stock price trends. The impact of market participation and cyclical nature of the stock market on CDS's performance is highlighted. The script mentions a significant increase in users and revenue in FY 2021-22, followed by a consolidation phase and a subsequent rally. The operating margins are noted to have expanded due to the nature of the business, leading to faster profit growth than revenue. The company's professionally run nature, with a low promoter holding, is emphasized, and the bounce back in stock performance and sector tailwinds are discussed. The potential for future growth in the sector, driven by increasing demat accounts and additional services, is also highlighted. The paragraph concludes with a valuation discussion, noting that the stock is currently fully priced but has room for growth in line with earnings and profitability.

Mindmap

Keywords

💡CDSL

CDSL, or Central Depository Services Limited, is a market infrastructure institution in India that plays a key role in the functioning of the capital markets. It provides services such as the storage of securities in depository accounts and facilitates transactions for various types of securities, including equities, debentures, treasury bills, bonds, mutual fund units, and insurance policies. The company is the largest depository in India in terms of the number of accounts and offers additional services like e-voting and e-locker services. The video discusses the company's business model, stock performance, financial parameters, and future outlook.

💡Capital Market

The capital market refers to the collection of markets where financial assets, such as stocks, bonds, and other securities, are bought and sold. It is a platform that allows companies to raise capital by issuing securities, and it provides investors with opportunities to invest their surplus funds for potential returns. In the context of the video, the capital market is the space in which CDSL operates, offering its services to various market participants like brokers, depositories, and investors.

💡Compound Annual Growth Rate (CAGR)

Compound Annual Growth Rate (CAGR) is a measure of the rate of return of an investment over a period of time, compounded annually. It is used to smooth out the returns of an investment over time, giving a clear picture of the growth rate. In the video, the CAGR is mentioned to highlight the consistent growth of CDSL's stock and its potential to continue delivering good returns in the future.

💡Stock Performance

Stock performance refers to the change in the price of a company's stock over a period of time, reflecting the market's perception of the company's financial health and future prospects. In the context of the video, the stock performance of CDSL is analyzed by looking at its historical price movements, revenue growth, and other financial parameters to assess its potential for future growth and investment returns.

💡Financial Parameters

Financial parameters are quantitative measures used to assess a company's financial health and performance. These may include revenue, net income, earnings per share, and other metrics that provide insights into the profitability, efficiency, and stability of a company. In the video, the main financial parameters of CDSL are discussed to evaluate the company's past performance and to make predictions about its future prospects.

💡Market Consolidation

Market consolidation is a phase in the stock market where prices move within a relatively small range, often after a strong uptrend or downtrend. This period is characterized by a pause in the market's movement as investors digest recent price changes and evaluate the stock's value. In the video, the consolidation of CDSL's stock is discussed as a temporary slowdown in its growth, which was followed by a rebound as market participation increased.

💡Margin Expansion

Margin expansion refers to the increase in a company's profit margin, which is the percentage of revenue that turns into profit. This can occur when a company's costs remain constant or decrease while its revenue grows, leading to a higher proportion of each sale being retained as profit. In the context of the video, CDSL's margin expansion is highlighted as a positive sign of the company's operational efficiency and competitive edge, as it indicates that profits are growing faster than revenues.

💡Tailwinds

In the context of the video, tailwinds refer to favorable market conditions or trends that can help a company's growth and performance. For CDSL, tailwinds include the increasing penetration of the stock market and the number of demat accounts in India, which suggests a potential for continued growth in the company's user base and transactions.

💡Beneficiary Owner's Accounts (BOA)

Beneficiary Owner's Accounts (BOA) are accounts opened with a depository where the securities of the investor are held. In the context of the video, CDSL has seen a consistent rise in the number of BOAs, indicating an increase in the number of investors using its services to store and transact in securities, which is a positive sign for the company's growth prospects.

💡Valuations

Valuations refer to the process of determining the economic value of a company or its stock. It is often done by comparing metrics like the price-to-earnings ratio to industry averages or historical levels. In the video, CDSL's valuations are discussed to assess whether the stock is currently priced appropriately, given its earnings and expected growth.

💡Risks

Risks in the context of the video refer to potential negative factors that could impact the performance of CDSL's stock or the company's operations. These include changes in government policy, market cyclicality, and technology risks that could affect the company's ability to provide seamless and efficient services to its clients.

Highlights

CDSL is a market infrastructure institution playing a key role in the functioning of the stock market and other industries like insurance.

CDSL helps store securities in depository accounts and enables smooth buy or sell transactions.

CDSL is the largest depository in India in terms of the number of accounts.

The company has three subsidiaries: Insurance Depository Limited, CDSL Commodity Repository Limited, and Ventures Limited.

BC Limited is the largest shareholder of CDSL with a 15% stake in the company.

CDSL's stock performance saw a spurt in growth post-COVID with a rise in the number of demat accounts.

The stock price of CDSL hit a high of about 1725 in the post-COVID rally.

CDSL's revenue grew from 200 crores in FY20 to 550 crores in FY21, with a slight dip in FY23.

The company's operating margin expanded from 42% in FY20 to 66% in FY22, showing the strength and competitive edge of the business.

CDSL's beneficiary owners' accounts (Bo accounts) have shown a consistent rise, with 779 lakhs in FY20 and 1,47 lakhs in the recent quarter.

The average CAGR of CDSL's revenue growth over the last 3, 5, and 10 years has been consistently upwards of 20%.

The stock currently trades at around 55 times earnings in the trailing 12 months, which is fully priced compared to the median earnings multiple of the last 5 years.

Investing in CDSL carries risks such as changes in government policy, market cyclicality, and technology risks.

For those holding CDSL, it is recommended to continue holding due to expected consistent growth in the coming months.

Potential investors should consider buying the stock at lower levels to benefit from the expected growth and any valuation gap.

CDSL's sector is in tailwinds with potential growth over the next 5 to 10 years due to low penetration of demat accounts in India.

The company plans to offer additional services like insurance KYC, which will increase transaction usage and user engagement.

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Takeaways

Q & A

What is the primary role of CDSL in the capital market?

What types of securities can be stored and traded through CDSL's services?

How has CDSL's revenue and stock price performed in recent years?

What is the significance of the increase in Average Brokerage per Account (ABA) for CDSL?

What are the ownership and management structures of CDSL?

What factors contribute to the growth prospects of CDSL?

How does CDSL's valuation compare to historical multiples?

What are the potential risks associated with investing in CDSL?

What is the current status of CDSL's depository accounts?

What is the long-term outlook for CDSL's stock performance?

What advice is given for investors considering a position in CDSL?