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CDSL – Negative Operating Leverage Kicking In

Company Name – Central Depository Services (India) Limited (CDSL)

Current Share Price – INR 1,022 (February 1, 2023)

Market Cap – INR 10,677 cr


1. What is interesting about the stock?

"I like to invest in companies that are so simple to run, that even an idiot can run it because sooner or later one will"

- Warren Buffett

Warrenji may have been thinking about CDSL.

CDSL (promoted by BSE) and NSDL (promoted by NSE) are the two entities that operate as depositories in India. Regulated by SEBI and registered under the Depositories Act, 1996, the sheer nature of CDSL’s existence, i.e. promoted by stock exchanges, its business model, and regulatory framework has acted as a strong entry barrier. These entities thus enjoy a duopolistic nature of existence.

While being a late entrant, CDSL (commenced operations in 1999) recently has gained considerable market share over NSDL (started operations in 1996) in terms of demat accounts. CDSL has ~70 million demat accounts and compares with ~30 million demat accounts for NSDL. In terms of market share, CDSL thus enjoys c. 70% of overall demat account accounts as of June 2022. On an incremental basis since March 2020, CDSL’s market share stood at 85% riding the increase in the market share of discount brokerages. CDSL had 580 depository participants (DP) catered through 21,000+ service centers and compares with 277 DPs in the case of NSDL.

The low operating cost, lower net worth criteria for depository participants (DP), and technology investments are some of the reasons that have possibly attributed to CDSL gaining market share. Hence, most of the new discount brokerages have gone with CDSL. Another shot in the arm for CDSL was the management challenges (after the exit of Chitra Ramakrishna) at NSE which led to a lower focus on NSDL.

CDSL’s transaction charges, which are more linked to several debit transactions, are more attractive than those of NSDL. While NSDL charges a flat rate of INR 4.50 per debit transaction irrespective of the DP’s total monthly transaction bill amount, CDSL has a slab-based tariff structure which leads to a lower value.

Key revenue sources for CDSL are:

  • Annual issuer charges (33% of revenue in Q2FY23) - CDSL charges annual issuer fees to corporates for their securities admitted at a rate of INR 11 per folio, subject to minimum slab-based fees depending on the nominal value of securities. As a security depository, CDSL functions as the central accounting and record-keeping office of the securities of the companies admitted into its system and held with the demat account holders.

  • Transaction charges (30% of revenue in Q2FY23) - Transaction charge for the depositories are directly related to the delivery-based transactions in the cash market and is a factor in the number of shares traded, active beneficiary accounts, and overall investor sentiments.

  • Online data services: CDSL through its subsidiary, CDSL Ventures Limited (CVL) is in the business of KYC services for capital market intermediaries including mutual funds. CVL is the first ever registered KRA entity with SEBI and had around 60% market share

  • IPO/Corporate Charges (9% of revenue in Q1FY23): CDSL charges INR 2 per folio for verification of subscriptions and INR 10 per folio for allotment to the issuing company in the year of issuance.

Key Moats are:

  • Duopoly – regulatory framework provides entry barrier

  • Network effect – Higher number of demat accounts or DPs makes the business more competitive as the fixed cost is distributed on a higher number in an asset-light business

Of India’s 1.4 billion people, only about 3.7% invested in equities, compared with about 12.7% in China, according to stock depository data on the number of investment accounts (and assuming one account per person which we know is not accurate). In the US, by contrast, a poll found that about 55% of the population owns stocks individually or through a mutual fund.

Company was in a perfect place in 2020 and 2021 – a bull market (increase in volume), and a market shifting to discount brokerages. However, the tide has turned in the last 6 months with slowing demat openings and a reduced number of transactions (in turn leading to lower transaction charges).

2. Key Historical Financials

  • CDSL became the first depository to register ~7 cr demat accounts in June 2022 (Q1FY23)

  • The number of demat accounts almost doubled in FY22

  • Company has solid growth (Revenue, EBITDA, and net profit level) in FY22 on the back of increased retail activity. However, the revenue declined in Q3FY23 on both QoQ and YoY basis

  • EBITDA and Net profit have also declined - showing signs of negative operating leverage

3. What is my view on company valuation?

Company share price has appreciated 5x in the last three years primarily on the back of multiple expansions but has declined ~40% since peaking in January 2022. CDSL trades at P/E (TTM) multiple of 37x vs long-term (5 yr) average of ~29x. I expect the earnings could decline for the next couple of years due to negative operating leverage similar to what we have seen in the brokerage companies after the past bull markets.

On an overall basis, business is good but expected to have high earnings volatility. Long-term investors should closely watch the stock for the next year to enter at lower levels.

4. What are the risks to the investment analysis?

Risks to the analysis are:

  1. Liquidity is still high in the market which could lead to a reversal in market sentiments

  2. Jump in non-transaction charges related revenue

  3. NDSL becoming aggressive in the market after recent changes at NSE


About the Author

I have over 17 years of experience in venture capital, private equity, and investment banking in India and the Middle East across various sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.

I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).

I am an Insignificant Investor in the public market and co-founder of SocInvest.


I have had no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.

I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.

I have used publicly available information while writing this article.



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