One of the most anticipated IPOs of the year, that of BSE Ltd’s subsidiary Central Depository Services (India) Limited was subscribed 169.41 times at the close of bidding. This massive response all types of investors resulted in more than Rs 62,929 crore worth of bids against issue size of Rs 369.9 crore (excluding anchor investors’ portion). Against an issue size of 2.48 crore shares, bids for more than 422 crore equity shares were received.
So what made CDSL IPO the highest ever subscribed IPO in the history of India? Let’s find out:
CDSL was established in 1997 by BSE, which holds a 50.05% equity stake in the depository unit which has certainly helped CDSL in growing its business. BSE had earlier come out with its own IPO and the issue got subscribed over 51 times. Just like BSE was the first stock exchange to list in India, CDSL will be the first depository to be quoted on an Indian stock exchange (NSE). SEBI rules bar stock exchange companies from self-listing.
Unique Business Model
The company is one of the two depositories in India. NSE’s NSDL is the only competitor for CDSL. Also, there are multiple entry barriers in the depository business such as regulatory restrictions, capitalization norms and long gestation periods etc.
The company has seen its revenues grow at a CAGR of 3.67% over the past four years with the revenue in FY2016 being Rs 139.4 crore. Just like its revenues, CDSL has seen an uptick in profits as well. ITs net profits have grown at a CAGR of 7.59% over the last four years with the FY2016 profits being Rs 74.1 crore.The company’s margins have been are solid and have never dipped below 34% in the last four years. In the latest year, its profitability was at 53.2%.
“CDSL is the second largest depository in terms of market share and has been growing at decent CAGR of 23%/14% in 3/5 years (and revenues grew by 13%/18%),” Motilal Oswal had said in a research report before the launch of the IPO.
Decent Return on Equity
Before the launch of the IPO, Angel Broking had said in a research report that the average ROE for the last six years has been close to 17%, which the brokerage house believes will sustain going ahead as well.
Diversification of Services
“CDSL will continue to diversify its product and service offerings depending on investors’ needs. It has received the letter of intent to register as a warehouse repository. CDSL has also registered as a KYC service agency (KSA), authorised service agency (ASA), as a KYC user agency (KUA) and authorised user agency (AUA) with UIDAI. It also plans to expand its NAD project including more educational institutions,” ICICI Direct had said in a research report prior to the launch of the IPO.
“Post the tapering of initial high growth, the business model of the company is more of an annuity type with steady earnings. The Indian market has traditionally not rewarded such businesses handsomely in the past and it is quite likely that the same might be the case with this company as well and its stock price may remain range-bound fo a longish period of time. At the same time, given the high cash flow generation, it could be a good dividend play,” Centrum Wealth Research had said in a research report before the launch of the IPO.
Attractive Dividend Payout Policy
CDSL has paid dividends regularly to its shareholders in the last four years and considering that BSE will continue to remain the biggest shareholder, this policy is unlikely to change anytime soon. Out of the Rs 74.1 crore, it earned last year, CDSL paid a total of Rs 31.4 crore in the form of dividends. CDSL paid a dividend at the rate of 25% (Rs 2.5 per share) and this was up from 22% in FY2015.
“At higher price band, the demanded P/E multiple of 18.2x to its FY17 EPS. However, based on FY18E EPS of Rs. 9.2 per share, forward P/E multiple comes out to be 16.3x, which is attractive for a dividend paying company with a RoE of around 15%,” Choice Broking had said in a research report before the launch of the IPO.