Central Depository Services (India) Limited (CDSL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the conference call organized by Central Depository Services (India) Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nilesh Kittur. Thank you, and over to you, sir.

Yes. Good day, and welcome to conference call of CDSL. For today's call, CDSL management team is represented by Mr. Sunil Alvares, MD and CEO of CDSL Ventures Limited; Mr. Girish Amesara, CFO of CDSL; Mr. Ramkumar, Head of Business Development, Operations and New Projects; and Mr. Swaroop Gothi is the Vice President. So I request the operator to open the floor for discussion.

Thank you very much.

Thanks, Nilesh. This is Bala here from Investec. Nikhil has already dialed in.

Yes. Well, thank you for your time. I really appreciate you taking the time out during -- out of your schedule. I only have a few questions. And just in terms of background, I work at American Century Investments, which is mutual fund based out of U.S. and within that, I work in the emerging markets team. And we have invested in CDSL. We've gotten at a pretty good level at 400 or so and being pretty happy with our investments. But I thought it's been a while and it would be good to just quickly catch up on just a few things. We really don't need more than a little bit of time on this call. And so I thought it will be a good time to catch up. So the primary -- one of the primary reasons is -- of the call is I understand there are different segments that the company has, some of which are cyclical, some of which are structural. Within the cyclical part, I thought I'll try and understand how things can work in the coming period, if there were to be, as people say, bear market, the volumes can decline a little bit, et cetera, or what have you. But at the same time, annual issuer charges and those charges are expected to probably continue to grow. Overall, and while I understand it's very difficult to predict what the volumes can be like, et cetera. But overall, just trying to understand how are you thinking over the next few quarters. And I understand there are a lot of different segments where the company is planning to grow, which are new. But at the end of the day, transaction charges are still a good proportion and IPO also used to be a good portion of the company's revenues. So just generally wondering what are your thoughts on those segments before I continue with other segments.

So just to reiterate, the revenue of CDSL is largely contributed by issuer income, transaction charges, online data, which is our KRA business and IPO -- corporate IPO charges. So these are the 4 main drivers of our income, and rest of the income are ancillary to this activity. Now having said this, you must have witnessed a very robust contribution of all this income in our overall yearly closing that we did and quarterly closing. And see, in terms of future predictability, it's something that we generally don't do it because futuristic statements, we generally don't make it. But you can look at the overall market conditions, which are prevailing in India. And it is based on geopolitical pressure or any such pressure due to which there will be a volatility in the market. So I guess we will not be in a position to give any heads-up on this, but as a market participant, you may -- no, you may have various other sources to find this out.

Understood. Sure. I appreciate that. And the base will become higher for those segments as well slowly as we keep moving forward. And I'm guessing that the other segments are still too small to be able to compensate for that base in order to ensure that the growth remains strong, right? Some of the other new segments that the company is targeting. Those will take time to scale up. Is that correct?

Yes, that is correct. That is correct.

Yes. And what has been the impact of recent regulation, the broker margin levels went up, which resulted in some pressure on retail consumers and brokers in terms -- and I think there's some impact on volumes as well. Anything that you sense from the market based on the recent changes.

Ramkumar, can you touch up on this?

Yes. Sure. I was on mute. See, basically, the question is more like, as a depository, we are not directly connected or direct -- our business is not directly related to margin or any other such activity imposed on the brokers or the clearing members or the trading members by the regulator. So the impact of this, if at all, would be felt by the clearing member or trading member who does a trade in the market, but it will not be directly impacted to the depository. This is one. In terms of whether the volume drop or increase is related to this or not is something that we will not be able to judge up for you.

Okay. And what was the change in regulation in particular in the month of May?

Sir, this, I think, this call is about details of 31st March, no? So I don't know whether we will be talking about April and May. Nilesh, we are supposed to be giving information on April, May also in this call? Or how does it work?

That we can speak only after 30th June. But I guess your question is on the margin pledge activity, which was initiated last year?

No. From what I understand, there was some regulatory change, which was implemented...

Sir, I think what you are talking about is, sir, requirement of margin, correct?

Yes, requirement at the individual client -- at the individual client level?

Yes, yes. So that again -- so that affects the clearing member or the trading number. It doesn't affect the depository and that is imposed on the clearing member who is a registered member of the exchange, not of the depository. So this is something that we will not be able to comment on, sir.

Okay.

So that impact would be on stock exchange or a clearing corporation?

Yes. That's what I -- yes, that's what I meant. And I was trying to understand that better because in a way, clearing members or brokers, if they get impacted, then volumes get impacted. So I was trying to understand what exactly who was at that new regulation that we have to deal with. But anyway, it's okay if you cannot comment on that. And the other thing was the -- you're still in discussions with SEBI to see if they can raise the fee, it's been pending for a while, right? Are you getting any [ fillers ] from the regulator on whether they are alarming up to this or they are open to listening to this at the moment?

On these charges, basically, it is a combined effort between both the depository to be taking up with SEBI. And there is no -- it's recently that the COVID-related restriction has been lifted somewhere in last month or so. So we are still thinking of getting into a discussion with NSDL or like internal discussion. Thereafter, we will see as to how we can take it to SEBI. So we have yet not approached to SEBI on this. And we'll wait for some time to discuss on this.

Okay. And then LIC IPO, which has happened recently, I noticed that new accounts grew from $40 million to $63 million in just 9 months, pretty fast. And I'm wondering how much of it might have been mainly because of that IPO because while everywhere in the world, we are seeing retail participation increasing. But I'm guessing you would have better visibility in terms of how many people are only there for LIC out of the new accounts that might have opened? How active are these in general? So you don't have to go into all the details, but I was hoping to get some color on possible -- out of these accounts, how much might be LIC impact and going forward, so that I can get some understanding of what might be that one-off we might see because of LIC IPO, if at all.

Sir, LIC IPO details pertain to this financial year for this quarter. So this is something that I think we should not be discussing, sir, because we are here to discuss about the last quarter of the previous financial year. And of course, you can ask about everything that has happened in the previous financial year. This is my understanding, sir.

Okay. That's fine, if you cannot discuss it. And in terms of annual issuer charges, I just want to understand one thing that if the overall, let's say, hypothetically, if there were to be a slowdown in the economy, et cetera, then annual issuer charges from what I understand also has nonlisted entities, which is continuing to grow. So is there -- do you -- would you expect that to continue to happen at a good pace even if there were to be a slowdown, just in non-listed space, is there a lot of interest in that segment?

Sir, there is, see, basically, the unlisted companies are supposed to admit their capital with depository in case they have to come out with any corporate actions. And there is no compulsion on them to remain with both the depository. They can either be with NSDL or CDSL. So there are chances that company may decide on their preference as to which depository he wants to admit that capital. Now having said this, once any corporate action is conducted by the unlisted company, they have to continue to get -- remain admitted with the depository. So as I told, they keep on moving between 2 depositories, but they have to remain with one depository.

Okay. Would you expect large market share in unlisted also like it is in the non -- the listed one. What is your -- do you know what might be the current market share in the unlisted entity between the 2 depositories?

Rightly, roughly, our market share is 30%. So we may continue to hold that.

Okay. And investment income trends with higher interest rates, should we expect better investment income simply because [indiscernible] everywhere?

See, frankly speaking, investment income is a byproduct income. And we generally don't put our much efforts on that because these are totally driven by the interest rate that RBI decides in India. So if the RBI increases the repo rate or CRR rates, there are highly chances that bond yields will increase and that will result into lower NAV with respect to investment avenues. So if RBI increases rate further from this, there are chances that the investment income would be lower compared to earlier periods. I think we had witnessed that in -- witnessed that during 2021-'22 compared to '20-'21.

Okay. You mean the bond prices were lower because of higher rates, and that was the mark-to-market.

Yes.

I see.

Because of that mark-to-market, gain would be lower compared to earlier periods. And that we witnessed in last year, in '21-'22 witnessed that in comparison with '20-'21.

Okay. Okay. And then just on the cost front, if we were to witness slower growth hypothetically, not really predicting anything here. But if you were to witness slower growth -- I'm just trying to understand how much of the costs are -- how much operating leverage the business would have? Are there a lot of cost control measures that you can -- you can work with to ensure that margins are, if not protected, at least they don't go down much or are most of the costs likely to be a little bit sticky?

If you look at our profit -- profitability and the expenses compared to our income, we have tried to remain our -- tried to control our costs to a larger extent. And the main driver for our cost increase is with respect to technological cost and the employee cost because being into service industry, these 2 costs are the main costs based on which the business is going to run. And everywhere we hear this great resignation trend that is happening for almost like 6 to 9 months. So there is a likely impact of increase in costs with respect to [indiscernible] cost and employee cost. But having said that, what we achieved during March is what we -- if you look at it, we are quite high compared to what we had achieved 2 years back. In '20-'21 and '19-'20, if you compare our profitability, we are at all-time high. So cost is going to remain like this. And I can only comment in first quarter of June as to what could be the cost.

Right. Sure. And is it reasonable to generally expect cost to at least grow [indiscernible] with inflation?

There could be inflationary pressure on the cost as well as, as I already told you, this great resignation is trending to increase employee cost to extent. We had witnessed -- all large technological companies are witnessing increasing their costs. So that trend is likely to continue overall basis.

Got it. Okay. And then just last question from me. Of all the things you're doing outside of the main revenue streams, if I look 5 years from now, what would be something that as I see the most -- where do you think the business can be quite exciting for the company in the next 4, 5 years. Which segment or which new business would that be upcoming?

Ramkumar or Sunil?

Yes, sir. We will not be able to make forward-looking statements to that extent. This question particularly cannot be answered, but if you have any specific questions on any of the projects that were undertaken in the past like, for example, your gold depository, which is in the news or the securities and covenant monitoring, we can answer that, sir. In terms of the open projects, that is something that we'll not be able to comment on.

Okay. Yes. Yes.

[indiscernible] project, which is released by us or by the regulator as a press release or by a public statement, that we can definitely answer.

Okay. No, I don't have anything specific. And I guess it was mainly the current big segments that I want -- I was curious about. Okay. In that case, that's all from me. Thank you again for your time, really appreciate it, and have a great evening, all of you.

Thanks a lot, sir.

Thank you.

Ladies and gentlemen, on behalf of Central Depository Services (India) Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.