Will CDSL push BSE valuation?

Apart from stake sale or IPO of CDSL by March, there is potential for the bourse to monetise equity holding in other subsidiaries

The BSE exchange is coming up with an Initial Public Offer (IPO) of equity, to raise an estimated Rs 1,000-1,200 crore. The entire issue is an Offer for Sale (OFS) and, hence, none of the issue proceeds will flow into it but there are value unlocking opportunities via stake sale in its many subsidiaries.

One is Central Depository Services (CDSL). By the new regulations, BSE is required to pare its stake in CDSL from 54.2 per cent (as on June 30) to 24 per cent or less by March 31. An IPO would enable this without compromising much on valuations, believe analysts.

Deven Choksey, managing director at KR Choksey Investment Managers, says: “The 30 per cent stake monetisation should fetch BSE around Rs 450 crore. We value its current holding in CDSL at about Rs 74 a share of BSE (on a sum-of-parts valuation), which would come down to Rs 60 a share after the divestment.” Others are optimistic about BSE getting even better valuations for its CDSL stake. V K Vijayakumar, chief investment strategist at Geojit BNP Paribas, says: “Since depositories are a duopoly and there are many restrictions on entry, premium valuations can be justified for CDSL. It had an EPS (earnings per share) of Rs 6 in FY16 and so we believe it can command premium valuations of up to 40 times price-to-earnings, translating to Rs 240 a share. This means the company can be valued around Rs 2,500 crore.” At this value, a 30 per cent stake sale would fetch Rs 750 crore.

Many analysts believe depositories such as CDSL and National Securities Depositories (NSDL) could command premium valuations upon listing and, importantly, continue to add value for shareholders.

“Depositories hold the custody of assets and anybody who wants to use this ends up paying for the data they ultimately consume. At some point of time, the depositories might also want to add new products. So, from that point of view, there is an upside potential in depository business,” adds Choksey.

CDSL can further increase its valuations if it manages to increase the value of its listed accounts by catering to larger shareholders and taking up their value. This will boost its revenue potential. Despite having a similar number of accounts as NSDL, the value of shares listed (tie-ups) with CDSL is only 10 per cent of the total pie versus 90 per cent in NSDL. Any improvement would add to CDSL's valuations, believe analysts, though it might not be easy.

On the flip side, a lower stake in CDSL will also bring down BSE’s consolidated revenue. It also needs to be seen how the market values the combined BSE (including its stake in CDSL). Those like Vijayakumar are cautious, as BSE’s business (trading volumes, etc) is not improving, despite the market doing well. “The CDSL issue can provide some marginal uptick to BSE's valuations,” adds Vijayakumar.

Apart from CDSL, BSE also owns 100 per cent stake each in Indian Clearing Corporation, Marketplace Technologies, CDSL Ventures and BSE Institute, among others. It could look to monetise some of its stake. Healthy cash generation and new ventures such as its upcoming international exchange at Gujarat International Finance Tec-City could also aid the valuation.