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

Ladies and gentlemen, good day, and welcome to Central Depository Services (India) Limited Conference Call hosted by Nirmal Bang Institutional Equities. Participants, please note this call is only for buy-side as a part of Nirmal Bang Institutional Equities Annual Investor Conference. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sonal Gandhi from Nirmal Bang Institutional Equities. Thank you, and over to you, ma'am.

Good morning to everyone. On behalf of Nirmal Bang Institutional Equities, I welcome you all to this session with CDSL. The management is represented by Mr. Sunil Alvares, MD and CEO of CDSL Ventures Limited; Mr. Ramkumar K, Chief of Business Development, Operations and New Projects CDSL; Mr. Girish Amesara, CFO, CDSL; Mr. Swaroop Gothi, Vice President; and Mr. Nilesh Kittur as part of our annual investment investor conference. I would request the management to commence the session with some opening remarks on the business environment as it stands today, further to which we can open the floor to Q&A. Thank you, and over to you, sir.

Hello. Good morning to everyone. I'm Girish Amesara, CFO of CDSL. With me Shri Ramkumar has also joined the call, who is Chief of Business and Operation at CDSL; Mr. Sunil Alvares has also joined the call, he is MD and CEO of our subsidiary, CDSL Ventures Limited. And apart from that, Nilesh Kittur, and Mr. Swaroopkumar Gothi from Finance team has joined the call. CDSL welcome you all for this call. And I hope all of us are aware of the operation of the CDSL. CDSL is the first listed depository, and it's into the business of depository services. And we can -- with this, we can start the question-and-answer session, if everyone is okay with that.

[Operator Instructions] The first question is from the line of Sonal Gandhi.

So sir, I mean, in brief, if you could just ran us through your business model, what could be the key revenue drivers from here on, especially annual charges that we charge our transaction people. So any kind of outlook if you could just help us with that for FY '23.

Okay. So I will briefly explain about the revenue that we earn at CDSL as a depository. So our revenue largely consists of income from issuers, income from transaction charges, income from our subsidiary, wholly owned subsidiary. That is online data charges, basically, they are KRAs charges; and corporate and IPO-related income. These are the 4 main income that we earn. Apart from that, we also have income earned from cash statements, e-voting and other miscellaneous area of our operation. So the income stream, which I said, which are 4-major stream is contributing to almost 85% to 90% of our total revenue. And apart from that, as I explained, the other income constitute to roughly around 12% to 15% of the overall total income. And I wanted to say one thing that we will not be making any futuristic statement while on the call. And hence, we should restrict our question only to -- with respect to financials and other business strategies, with respect to the year which has gone by. And with respect to any futuristic statements on the predictability of income or predictability of business, we will not be able to make any comments as of now. I hope, I have answered your question.

Sure, sir. I was looking at more -- I mean, just in case of transaction charges, so even when basically you would be charging only on the cash delivery, and I think that is very strong. So how do we, I mean, expect any probably not to futuristic but just to understand the business, probably even when the markets are not being very large [indiscernible] something happening, shouldn't that in some kind of remain impact of -- not go down much in line with the broader investments. Just wanted to understand that more.

So the depository charges in terms of transition charge is based on every debit that happens to a demat account, irrespective of the volume, okay? So if you are doing a transaction of, say, 1 share, then the same amount of charges that you will pay to depositories for transacting 1 share or more than 1 share. So that is the charge module implemented as of now. And the competition also does the same module of charge. Our charges ranges from -- starts from INR 5.50 and goes down to around INR 4.50 based on the...

No, sir. INR 4.25, sir.

Sorry, sorry, INR 4.25 based on the volume of transaction generated by that particular depository participant. So this is how the structure of our transaction charges income processing is carried out. Now to answer your question on the volatility of markets. Again, it is based on the debit in the demat account. So if there are delivery-based volumes happening, okay, then there would be an income accrued to depository. I hope I have answered the question.

The next question is from the line of Raghav Garg from Nirmal Bang.

Just wanted to get some sense on how exactly do you charge on the insurance depository business and the warehouse receipt business. Just wanted to understand, how exactly do you monetize in this business? If you can just throw some light there.

Ramkumar, can you take this question?

Sorry, I couldn't hear it properly, sir. If can you repeat the question?

Sure. Sir, I was asking in the insurance depository business as well as in the warehouse receipts business, what exactly -- how should we understand the monetization of the business or how do you make revenues there? How do you -- how should we understand about the charges that you increment?

So basically, your question is related to how we charge for holding policies through the electronic form in CIRL and for holding commodities in the electronics warehouse receipts form in the CCRL system? Just like your previous question CDSL, right?

That's right. That's right.

Okay, fine. So first, I will explain about CIRL, then I'll go into CCRL. CIRL is insurance repository. So here, we charge the -- there is no charge on the investor or the policyholder as we call them, in the life insurance or general insurance product. So the policyholder doesn't pay anything for the services used. Who pay for this is the insurance company. So we use our insurer. So insurance company makes the payment. There are 2 types of payments that they make. One is a onetime payment, which is for creating or setting up a policy. So creating means it could be a fresh policy that is credited directly in the electronic form in the CIRL system. So that is called e-policy. Second type is where you already hold a policy and you want to get it converted into electronic form from the digital. So this is equivalent for demat as we have it in CDSL or in the day-to-day market. So these are the 2 types by which the policies are credited into the system. As far as charges are concerned, again, there are 2 types of charges. First charge is for the setup or conversion. Second charge is called a AMC. So setup charge is ranging from INR 5 to INR 10 depending on the volume given by a particular insurance company -- sorry INR 12, INR 5 to INR 12, depending on the volume given by the insurance company. And AMC charge is typically is about INR 5 per annum for a policy. Typically, the AMC will be triggered only for a life insurance policy and maybe for some health policies and motor policies. It's a [ few and far between ] those are multi-year policy. Otherwise, by definition, a general insurance policy only takes -- or we get only onetime fees for the creation of the policy. Sir this answers the question about your charges for insurance depository. In the case of CCRL, that is commodity repository also the logic is more or less same. The logic is that the insurance -- sorry, the payment is made sure by the concerned entity. So it could be a farmer or entity means it could be a farmer or a trader or anybody else who holds their stock in the digital form in there warehouse. So this person makes the payment based on the service which stored by -- in the warehouse. This is one part of the charge. Second part of the charge is the warehouse storage charges also get built into this person's holdings because it depends on where the location of the warehouse is, what is the rate charged by that particular warehouse, and what is the frequency of the services based on which the charges are made by the warehouse on him to the depository -- through the depository, sorry. And the third type of charge is the charge that we charge to the -- in case of the pledge case to the pledgee. So here, there will be -- what I explained earlier was a deposit charge, followed by the storage charge which is also kind of deposit charge. Then for a transaction, there are 2 types of transaction, one is a pledge transaction where we charge the pledger and as well as the pledgee, just like in the securities depository. Again, this is based on the commence. The first -- the second type of transaction is a debit type of transaction, which could be because of off-market transaction or it could be because of a market transaction resulting from a delivery that is initiated because of some transaction that is carried out in the derivatives market that is NCBI [indiscernible] for BSE or NSE as adjustment. So here also it is based on the company. This, I hope answers your question.

Mr. Raghav, you have any follow-up questions.

No, my question has been answered.

[Operator Instructions] The next question is from the line of Pritesh from Lucky Investment Managers.

Sir, I had not attended the part of a call. If you could help us, given the [ INR 151 crores ] FY '22 revenue breakup in our key line items of transaction charge issuer, operation, KYC, e-voting?

Sure. I will give that. So you want quarterly numbers or you want yearly numbers?

No, I just want the annual number.

Okay. So transaction charge, we had closed at INR 199.48 crores.

If you could give alongside FY '22 also. So I'll just note down, if you have it handy.

So I will start with transaction charges. In FY '20, in March '22, we closed at INR 199 crores as against previous year of INR 119 crores. Online data charges, we had closed at INR 120 crore, roughly INR 120 crore as against INR 56 crore of previous year. IPO corporate action charges, we had closed at INR 60.53 crores as against INR 33 crores in the previous year. Annual issuer income, we had closed at INR 115.40 crore as against INR 86 crore again the previous year. Apart from that, cash statement income, we had closed at INR 16.25 crore as against INR 12.5 crore in the previous year. In case of e-voting income, we had closed at roughly INR 9 crore as against INR 6.61 crore in the previous year. So these are the major income items that I have described and rest all contributing around 2% to 3% to overall revenue.

So data -- so KYC will be your data charges?

The online data charge is the KYC, KRA income, the INR 120 crore as against INR 56 crore.

Okay. And the expense line, which I see at about, let's say, INR 45 crore, INR 46 crore per quarter now. Sorry, INR 47 crores per quarter roughly. This expense line, how do you see it panning out?

See, if you look at our expense. Largely our expenses are on 4 fronts: technology costs, employee costs, regulatory costs and other business ancillary costs, okay? Now we've been into some kind of an service provided related activity, which is largely depending on technology. We will have these 2 costs, employee costs and technology costs contributing to a major chunk of the total expenditure. Apart from that, regulatory cost is something which will increase based on our increase in the overall operating profitability because there is a SEBI's strict regulation that 5% of our operating profit has to be contributed to the Investor Protection Fund. So that is a variable portion as and when there is a higher operating income, this cost will increase. So roughly last year, our overall cost was around 10% of our total cost. Apart from that, the other administrative expenditure in terms of audit fees, insurance, directors' sitting fees, inter KRA expenses. And routine administrative related expenditure will consist the large portion.

Sir, your variable expense will be regulatory, whereas employee and tech cost will move at a certain rate?

Yes. Yes. Employee and technology would be kind of a fixed cost that we have to incur irrespective of whether [ very ] business opportunity or not, but technology and other expenses are some kind of in -- some kind of variability in that. So higher the business, higher will be that cost.

And on your income side, what will be varied with market volumes will be basically transaction charge, corporate action and issuer charge?

If your issuer is more or less -- it will not be impacted by the volatility of the business because once issuer is admitted and unless there are withdrawals in terms of decrease in folios or withdrawals by listed entity from the overall markets, otherwise if your income is going to remain constant. The market volatility related income would be largely transaction charge and KRA income.

Issuer charge will be linked with the number of corporates basically, right?

So it is based on the issuer listed company admitted with the depository.

Yes. And sir, here there were some price increase taken and this SME related [ demating ] what is the progress there in issuer charges?

In issuer charges, generally, what it happens. In past, what it had happened that every 5-year both the depository used to approach SEBI and SEBI used to decide on the charges that the depository may levy on the receiver companies. Now this activity last it was happened and approved in 2015. And based on the historical trend, it was supposed to be due in '20, but due to COVID-related situations, we had not decided to go to SEBI, considering there could be undue pressure on depository to reduce charges. So this was a possibility that we had thought that it could -- we should wait till this COVID-related restrictions are lifted. And there was a general perception that costs should reduce due to the lockdown. And accordingly, we had not approached to SEBI, and we are still thinking as to what should be the right time to approach the SEBI.

For hike or for reduction?

Generally, all these years, there was a hike given by SEBI. And that's what -- it's an joint activity by both the depositories wherein we have to give various scenarios to SEBI. Based on that, they decide. So last year, when in 2015, when both the depository had approached, SEBI had increased the charges, but at the same time, they had also introduced one incentive to depository that 20% of your issuer income that you collect, differential amount of -- differential that you have to pay to the DP as an incentive. So there could be such incentives introduced by SEBI. So that's the reason we are still thinking as to what should be our future strategy. And time will let us know as to when we decide and when we go to SEBI. So as of now, this is the status.

Incentive of 20% should be given to the issuers?

Yes. It is differential of rate, which was prevailing prior to 2015 and rate approved in 2015, the difference of differential income that gets generated. 20% of that has to be set aside to be provided as an incentive to DPs. And this...

Not for the reason DPs are opening demat accounts.

Yes. Yes.

Sir, one more point sir, if I may add to what you said.

Yes, yes. Please go ahead.

Sir was asking a question about SME. There is no separate tariff for SME. SME is I assume that you're talking about the companies which are listed. SME, sector companies which are listed in the stock exchange, separate platform in the stock exchange. So if you're talking about those companies. There is no separate tariff.

No, sir, I was referring to some unlisted companies where the government...

Unlisted, again the tariff is only to the extent of one extra tariff slab created for companies which are between -- up to INR 2.5 crore as such as earlier minimum of INR 5 crore. To that extent, there is one slab additional created for small unlisted company, sir. Otherwise, the tariff remains the same. So unlisted company having INR 25 crore of capital will pay the same amount as a listed company having 25 crore capital sir.

So sir, this rate incentive will come as an expense, right? So if suppose you pass through this so then the rate approved -- and the rate approved and the rate charged the difference will be passed on as an incentive as an expense back to the corporates who are listed or that's how I should read it?

No. So the differential rate which was approved by SEBI and rate prevailing before the approval of SEBI, 20% of that has to be passed as an incentive to be paid to the depository participants, based on further criteria prescribed by SEBI. They have given a detailed criteria as to who is eligible depository participants, how he is to get those incentives. The detailed circular has been issued in 2015, when this rate was approved and the circular is available in public domain.

So sir, if you are charging, if the rate approved was INR 1. And if you are charging INR 1.15, then INR 0.15 has to be passed as an incentive. So it's an expense or you're charging INR 0.85 where the rate approved was INR 1?

So the rate, in the example, the rate difference is INR 0.5. 20% of that has to be passed separately to be paid as an incentive to DP.

But were you charging INR 1 as approved or you were charging less than INR 1?

So suppose the rate approved was INR 1.5 and the previous rate before this approval was INR 1, okay? So the differential of INR 0.50 [Foreign Language] 20% has to be aside as incentive to DP and if your company gets charged at the rate of INR 1.5.

Okay. Okay. So it's already there in your expense line and it's already there in your revenue?

Yes, it is already -- the income has already increased based on the SEBI approval. And there is an introduction of another expense line, which was not prevailing prior to this approval. So I'm trying to draw your attention that the moment we go to SEBI, there is a possibility of prescribing similar kind of expenditure line by regulator. I'm just trying to draw your attention on that point.

But the last revision did not happen in FY '20 in terms of the rate approved itself, that revision can also come through, right? The higher rates can come through, right?

Yes, there is a possibility.

[Operator Instructions] The next question is from the line of Sonal Gandhi.

Sir, just hoping on the previous question, sir. So despite introducing a new line item, we still had a net-net benefit in terms of revenue. So why is that this thing because our expenses are going up, obviously the markets are kind of supported, the volume supported. I'm not sure if that's going to happen in the future. So why is there this hesitance to go back to the regulator and try at least get the inflation rate align to the numbers?

So you are talking about the rate revision?

Yes, yes.

So I -- [Foreign Language] I have told that we are still thinking of what to do. And we said -- basically, this activity has to be jointly done by both the depositories. So we'll decide the future course of action, it will come as and when it gets discussed and approved by SEBI. So currently, we are still thinking on that. And we have not yet decided as to when we'll approach SEBI.

Okay. Okay. Sir, another question I had was on the issuer charges. So if you could just explain that a bit more. What I understand is, you also have -- you also charge fees on the folios. So basically some -- probably the companies where the retail clients are very high, they will be paying more than a minimum limits that you have. So if you could just explain a bit on the issuer charges and just talk a little bit about it.

Sure. So the model approved by SEBI or if you read the circular issued in 2015, the process is in such a manner that the fee is calculated based on the slab prescribed in the circular, which is starting from INR 20 crore or it's ending at INR 20 crores. So the fees model for listed entity is starting from INR 9,000 and up to INR 75,000 depending upon the bracket in which their share capital falls. This value is compared with folio based revenue, which is prescribed at INR 11 per folio, whichever amount is higher is charged to issuer. I hope, I've answered your question.

Sonal, do you have a follow-up question?

No, no. I think that ends my question.

[Operator Instructions] Next question is from the line of Sapna Laha from Bajaj Holdings.

Sir, I just wanted to understand, if you compare your margins with your peer, your margins are competitively better. So can you explain the what is leading to better margin compared to peers?

If you compare the profitability or if you compare the P&L statement of ours with the competition, you'll see that operating revenue has increased compared to competition and our costs are -- that controls the cost of competition. I think that explains the -- your reasoning for better margin.

Second thing, sir, in last few years, you have gained market share from the competitor. So what is the outlook on that?

In the initial statement, I had said that we'll not make any futuristic statements. So I will not be able to answer that.

Sir, I just want to have a qualitative statement. I don't know want any...

Ma'am, I will not able to make any futuristic statements.

And what is your dividend policy?

Generally, all these years, we have been paying dividend at the rate of -- dividend payout ratio of 60%, and henceforth, we have adhere to in this year also. So out of profit that we earned in any particular year, 60% is paid out.

It's paid out. Okay, sir.

[Operator Instructions] the next question is from the line of Sapna from Bajaj Holdings.

Sir, one question I want to ask you is on the KRA income part. If you see the CKYC has also come up and which has having less charges compared to your charges. So what is the beneficial the customer will have to do a KRA with you rather than going for CKYC?

Sunil, can you answer this?

Mr. Jain or should I answer sir, Girish sir. Sunil is there or should I answer?

Please go ahead. Ramkumar, please go ahead.

Yes, I'll answer. See, so far as KRA is concerned, we have been in operations since [ 2008 ]. We started off with the mutual fund industry and the KRA regulation scripted in 2011. Post that, I mean, to put it in short is that the KYC content was conceptualized, designed and implemented by CVL. And the CKYC came in somewhere around 2017 or so. And the only difference is that while we do a thorough core verification of all the records in current. In the case of CKYC, it is more a repository of information. That is the record that is uploaded by the SMEs because CKYC does not verify the records. To that extent and secondly, from right from the inception for us, PAN has been the KYC identifier, whereas in the case of CKYC, they have a separate PIN number. So to that effect, the capital markets have continued to use the KRA, okay. And we are confident that it will continue to happen better. I hope that answers your question.

Sapna, do you have any follow-up questions?

No.

[Operator Instructions] The next follow-up is from the line of Sonal.

Yes. Sir, just a last question from my end. Probably just 2 points, one is if I look at some large profiles, they have only CDSL as their depository. So I mean, I'm just thinking, we have this base system for the transaction charges, wherein NSDL would charge a flat rate and they would charge on a monthly basis even if transaction happens or not. Could that be the only reason why the discount brokers have chosen us as their main depository?

Ma'am, which flat charges you're talking about, ma'am? Ramkumar, here.

Sir, I was talking about transaction charges that we have. So I mean, I'm just trying to understand why someone like Zerodha would have only us as their depository and not NSDL.

So that might be their decision of the firm, ma'am. So we may not be able to comment on whether it is because of the flat charges or because of something else, but definitely technology plays an important role in deciding and also the cost of setting up operations decide -- are the major factor in deciding the choice of depository as far as the BSDA is concerned. That I hope answers the question, ma'am.

Okay. And sir any glitches, I mean, we had a certain glitch on the technology side. So what have we done over there?

Ma'am your voice is breaking in between, we cannot able to hear it properly, ma'am.

Is it better now, sir?

Yes. In between, it's breaking ma'am, so if you can keep the sentence short, maybe will be able to understand better.

Sure. So we had some technology glitch sometime back. So just wanted to understand a bit on that. I mean, what have you done in -- how good our technology is as compared to the competitor?

Which technology glitch you're talking about, ma'am?

Sir, we had some instance in CVL.

There are some glitch may not be applicable to CDSL. So I don't know which one you're talking about ma'am.

Sir, I think somewhere in the beginning of '21, we had some tech-related glitch we had.

That was not in CDSL, ma'am. That I can say for sure. February 2021, you're talking about, right?

Yes, sir.

Yes, that is not related to CDSL, ma'am. It's related to some other firm maybe.

[Operator Instructions] As there are no further questions, and I'll hand the conference over to Ms. Sonal Gandhi for closing comments.

Yes. Thanks for the opportunity sir, for letting us to host you. I'm looking forward to host you again in the future. Thank you.

Thank you. Thank you very much.

Thanks.

Thank you very much. On behalf of Nirmal Bang Institutional Equities, that concludes this conference. Thank you for joining us. You may now disconnect your lines.

Thank you.

Thank you.