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CDSL IPO Opens Today: Should You Subscribe?


Central Depository Services Ltd (CDSL), one of the two depository services providers in India, is offering its shares to public for subscription through an initial public offer (IPO), which will open on June 19, 2017. It is also the first depository in India to come out with an IPO. Priced in a band of Rs. 145-149, the IPO will be open for three days through June 21. Investors can subscribe the IPO in lot sizes of 100 shares. CDSL shares will be listed on National Stock Exchange.

Here are five things to know about the issue:

-CDSL IPO is purely an offer for sale and the company does not intend to raise any fresh capital through this issue. Through this IPO, its existing promoter Bombay Stock Exchange (BSE) is selling 3.52 crore shares to public due to which its stake in CDSL will reduce to 24 per cent from 50.1 per cent currently. The objective of the IPO is also to get the benefits of listing.

-CDSL was promoted by BSE in 1999. Subsequently, BSE diverted part of its stake to leading Indian banks. CDSL facilitates holding of securities in electronic form and enables security transactions, off market transfer and pledge through book entry. It also offers other online services such as e-voting, e-locker etc. As of April 30, 2017, CDSL had 589 Depository Participants (DP) and 12.4 million investor accounts. CDSL has a market share of 43 per cent in cumulative demat accounts.

- The depository business in highly regulated in India with entry barriers in place. With little threat of new entrants coming in, the incremental business is to be shared by both CDSL and NSDL, which makes the business model quite interesting, says Angel Broking. CDSL's demat account base has grown at a compound annual growth rate (CAGR) of 8.6 per cent over FY2011-17. Meanwhile, with capital markets remaining buoyant, the growth in demat accounts is likely to remain strong, the brokerage added.

-CDSL has a diversified source of revenue with 35 per cent coming from annual issuer charges(recurring in nature), 21 per cent from transactions(which is correlated to market and is volatile in nature) and 13 per cent from online data charges. For FY17, it reported a net profit of Rs. 87 crore on revenues of Rs. 146 crore. During FY13-17, CDSL's revenue and net profit have witnessed a CAGR of 10 per cent and 12 per cent respectively.

-At the upper end of the price band, CDSL shares are valued at 18.2 times its FY17 earnings per share, which is a reasonable valuation, says Angel Broking. It has a "subscribe" rating on the issue. "The incremental capital required for doing business in this space is very minimal and this makes it (CDSL) an interesting business model," the brokerage said. Meanwhile, domestic brokerage LKP Securities also has a "subscribe" rating on the issue. CDSL does not has the flexibility to increase its fees as and when its costs go up as these are regulated by market regulator Sebi, which is a key risk in the business of CDSL, analysts say.

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