Central Depository Services (India) Limited (CDSL) is entering the primary market on Monday 19^th June 2017 with an offer for sale (OFS) of up to 3.52 crore equity shares of Rs. 10 each by BSE, SBI, Bank of Baroda and Calcutta Stock Exchange, in the price band of Rs. 145 to Rs. 149 per share. Representing 33.65% of the post issue paid-up share capital, issue will raise Rs. 524 crore at the upper end and close on Wednesday, 21^st June. Listing is expected on 30^th June, on NSE alone.

CDSL, BSE Limited’s 50.05% subsidiary, is one of the two securities depositories operating in India (besides NSDL) with 59% incremental market share and 44% market share, as of 31-3-17, comprising 1.23 crore demat accounts. Company's earning revenue in the form of transaction charges, account maintenance, settlement charges, corporate action charges and e-voting charges, clocked total income of Rs. 187 crore in FY17, up 16% YoY, split Rs. 146 crore in revenue and Rs. 41 crore in other income. Service pricing fixed by SEBI limits superlative revenue growth for the company, however volume uptick and newer business avenues can aid topline growth. Besides, business bearing fixed costs, operating leverage can strengthen margins.

CDSL’s operating profit (before exceptions) stood at Rs. 117 crore in FY17, up 19% YoY, while PAT came in at Rs. 87 crore, leading to net margin of 59%. FY16 reported an exceptional income of Rs. 33 crore on retrospective reversal (effective Sep 2012) of transfer to Investor Education and Protection Fund (IEPF), as mandatory transfer reduced from 25% of total income to 5% of operating income. Thus, FY17 PAT is showing a drop vis-à-vis FY16’s PAT of Rs. 91 crore, latter being augmented by one-off gain. On equity of Rs.104.50 crore, FY17 EPS stood at Rs. 8.21.

As of 31-3-17, net worth stood at Rs. 533 crore, translating into BVPS of Rs. 51. Company is debt-free with cash and investments of Rs. 548 crore, or Rs. 52 cash per share. BSE holds 50.05% stake, which will shrink to 24% post issue, in compliance with the provisions of the Depositories Regulations. CDSL has 14 other shareholders including SBI (9.57% pre-offer holding), HDFC Bank (7.18%), Standard Chartered Bank (7.18%), Canara Bank (6.45%), Bank of India (5.57%) and Bank of Baroda (5.07%).    

At Rs. 149 per share, company’s market cap will be Rs. 1,557 crore, with EV of Rs. 1,009 crore. This translates into EV/EBITDA multiple of 8.4x and 7.3x based on FY17 and FY18E earnings, and a PE multiple of 18x and 17x respectively, which is not expensive. Since there are no listed peers, relative valuation comparison cannot be done. However, on 14^th Oct 2016, BSE sold 43.37 lakh equity shares representing 4.15% stake in the company to LIC at Rs. 79 per share. Upper end of Rs. 149 is 89% jump in sale price, in barely 8 months, despite the seller being the same, and FY17 profit growing only in double digit (and not doubling) during this period. While current IPO pricing is a steep premium to last transaction price, based on company’s steady growth and strong fundamentals, IPO valuations, nevertheless, appear fair.

While securities depository is a duopolistic market in India, low penetration leaves enough room for both players to co-exist and grow. Complementary services like commodity repository (approval in place, to be launched shortly), KYC services via subsidiary CDSL Ventures, e-insurance accounts, e-will etc. in addition to regular annual issuer and transaction charges should aid topline and bottomline going forward.

Giving sound fundamentals, sector tailwinds and inexpensive pricing, the issue is a subscribe.

Disclosure: No Interest.