CDSL now more valuable than parent BSE Ltd


Mumbai: Shares of BSE Ltd, Asia’s oldest stock exchange, is trading at a discount to its securities depository subsidiary Central Depository Services (India) Ltd (CDSL) for the first time as the former’s scrip fell nearly 8% so far this year.

Currently, the market cap of CDSL stands at Rs2454.71 crore against BSE Ltd’s Rs2452.25 crore. As of September 2019, BSE held 24% stake in CDSL.

As a thumb rule, the parent’s market value should be more than its subsidiary considering parent companies will have their own core business in addition to the subsidiary units.

However, there are some exceptions where units have more market value than their parent companies. For instance, Maruti Suzuki India Ltd, HDFC Bank Ltd and Bajaj Finance Ltd have more market cap than their parent Suzuki Motors Ltd, Housing Development Corp Ltd and Bajaj Finserv Ltd, respectively.

BSE has declined 7.7% so far this year amid continued fall in its market share against its competitor National Stock Exchange. The stock was listed in February 2017 and has fallen 31.7% from its issue price of ?806 a share.

According to Ajit Mishra, vice president of Religare Broking, BSE India’s financial performance has been muted over the past several quarters, which has been reflected in the stock price. Further, its revenue growth has slowed down, it has low return on equity (RoE) and negative operating cash flow which is affecting the company’s performance.

“Despite BSE’s duopoly position, the stock has been on a continuous downtrend ever since its IPO in early 2017. It has been losing market share and the network effect is playing against it which is why it is a dying business model with no visibility for growth and weak durability and sustainability of earnings”, said Umesh Mehta, Head of Research, Samco Securities

CDSL stock, which was listed in June 2017, have surged over 59% from its issue price of ?149 a share. So far this year, it has gained 6.11%.

The net worth of the company stood at ?542.53 crore as on March 2019 compared with ?502.25 crore as on March 2018. The cash generated from operations stood at ?98.23 crore during FY19.

CDSL has an asset light and a well-diversified business model where in 35% of revenue is fixed (annuity based) which cushions it from market volatility. The company also generates strong cash flows and is expected to benefit from the government mandate for all unlisted public companies to dematerialize their securities (as this will lead to more number of accounts with CDSL).

“CDSL has a more secular business working in a duopoly position where there is high visibility of earnings sustainability and durability. The triggers being Government’s new rule that even unlisted companies will have to dematerialize their shares and the huge untapped potential of investors in India around 10%, it currently being just 2%, has laid out the foundation for a rally”, Mehta adds.

News Source: livemint

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