Low Retail Participation Hurting CDSL, Pain Likely To Continue In March Quarter

Low retail participation in the country's secondary market is hurting Central Depository Services (India) Ltd. as transaction-making ability becomes increasingly difficult in what the depository called a bear market.

"Obviously the transaction-making ability in a bull market is far higher as compared to our bear market," Nehal Vora, the company's managing director and chief executive officer told analysts in a post-earnings call.

He said that sluggish sentiments contributed by geopolitical issues, overall slowdown in the world, and regulatory changes in the derivatives market have led to a muted retail participation, whether it be transaction or delivery volumes. This has directly affected the market-based delivery transaction income for CDSL.

Continued lower retail activity is likely to hurt CDSL's transaction charges in Q4, according to a note by Nuvama Institutional Equities.

CDSL has reduced transaction charges to Rs 3.5 per debit from a price range of Rs 3.75–5 per debit. This, according to Nuvama, led income from transactions charges to drop 29% sequentially to Rs 59 crore.

Upon being asked why CDSL happens to be the only market entity reducing their transaction charges while every other participant is increasing charges, Vora said that this process is not affecting their profit.

"I think it's economies of scale, which is coming into play. The intent is that only 7% of the Indian population today is in the securities market. How do I make that 20%, 25%, 30%?"

He further said, "We would like more and more people to join the fold of the depository system. And hence, this is kind of an added advantage, which we are working on."

For depositories a prior approval from SEBI is needed to reduce any transaction charges. A similar increase, if any, in the future would also need to go through the same process, Vora said.

As on Dec. 31, promoter BSE holds a 15% stake in CDSL.

Parallels To Mumbai Coastal Road

Vora said that the Depository is prepared for any volume spurt, and is focusing on building a value proposition for its customers.

"It's like your Bandra-Worli Sea Link road or the Coastal Road in Mumbai, which is built with a certain amount of capacity of traffic," he said. "The traffic may not be as much immediately, but it creates that sense of value proposition, which, therefore, creates more demand. And that's where has been our philosophy."

While CDSL saw an increase in employee cost, it was questioned whether this could be reduced in the future due to increased information technology costs. The company said it will continue to invest in employees, considering them as infrastructure costs.

The company said it was focused on creating the right technology products and platforms in three areas: hardware, applications, and security, and network.

Shares of CDSL were down 4.21% on Tuesday after falling over 10% as of 1:08 p.m. on Monday. Shares of BSE Ltd. too, were trading 2.78% lower. The benchmark NSE Nifty index was up 0.97%.