In this article, we will be discussing a company’s stock that is a monopoly player in the duopoly market. Further, we will discuss What is a depository, why it is important, and what are the industry headwinds and tailwinds. Also, we will discuss Why CDSL is growing and how it is owning monopoly market in the duopoly industry, and whether will it be able to sustain itself?
What is Depository and Why it is Important?
- Depositories are an organization that holds securities and assists in trading securities for investors.
- There are only 2 depositories in India i.e., National Securities Depositories Limited (NSDL) and Central Depository Services Limited (CDSL).
- But an investor cannot directly connect with Depositories and hence there is an intermediary called Depository Participants (DP) or Brokers like Zerodha, etc.
- The importance of depositories is rising over time as the number of Demat accounts is rising rapidly.
Why CDSL is Growing?
- CDSL was having a market share of just 40% in FY14 which has now grown to 70% in FY22.
- In terms of new accounts opening every year with CDSL, which we call Incremental Market Share stands at 86% as of FY22 for the company against around 55% in FY14.
- The CDSL has been able to grow exponentially due to the increasing share of Depository Participants or discount brokers like Zerodha etc. CDSL is currently having over 583 DPs whereas NSDL is only having 278 DPs.
- Also, the shift of DPs towards CDSL has led to increased performance of the company. Most DPs associated with CDSL are discount brokers who are connected with retail investors. Whereas NSDL focuses on institutional investors.
- CDSL is having tie-ups with leading brokers like Zerodha, Angel One, 5Paisa, etc. in the discount broking segment and with ICICI Securities, HDFC Securities, etc. in traditional brokers.
- CDSL charges maintenance charges from the Depository Participants which are being then further pushed towards investors. Here, an interesting thing one should notice is that CDSL doesn’t charge any amount with DPs if there are no trading activities are there in the Demat account, but the same is not the case with NSDL.
- Also, there is a different platform for the trading/investing of unlisted firms. Earlier, for unlisted companies, Demat was not necessary, but the Ministry of Corporate Affairs (MCA) 2018 has made it mandatory for the firms to open a Demat account.
- CDSL has around 30% market share for unlisted companies. For FY21, CDSL added 1,668 unlisted companies.
- With the increasing retail participation, CDSL highly benefited as it has tie-up with many discount brokers which are more common among new retail investors.
- Under penetration: Currently, CDSL is having around 6.99 Cr. accounts which are quite less figure as compared to the total population of the country. Due to such under penetration, there are high growth prospects in the industry and hence because of a duopoly in the market and leading market share, CDSL could be the largest beneficiary of this industry tailwind.
- Rising IPOs: After the pandemic, the Indian stock market witnessed a flood of new Initial Public Offerings (IPOs). Due to the connectivity of people with the new company listing whether related to its brand name, business model, etc., individuals tend to invest in the IPOs for which Demat accounts need to open, which is another favorable factor for the industry. In FY21, around 69 IPOs had gone onto the floor and have raised around Rs. 74,707 Cr. In FY20, around 39 IPOs were launched and raised only Rs. 37,677 Cr.
- Rising Retail Participation: Since there is under penetration of the participants in the stock market and with the new listing of the IPO, there is rising retail participation, which proves to be another tailwind for the industry.
- Digital Account Opening: The ongoing positive wave of Demat account opening that too in a very easy and flexible manner has also led to the growth of the industry and hence the depositories are benefited.
- Capital Market Condition: When the stock market remains volatile or goes through time/price correction, the market or the participant’s sentiments gets weak which turns out to be a negative factor for the Depositories.
- Regulations: Since there is a duopoly in the depository industry which is being owned by CDSL and NSDL only, there is a chance of strict government regulation, if their presence becomes stronger.
- Technology: In the current digital environment, there are always chances of disruption in the industry which could become a bigger challenge for the companies operating in the industry.
- Competition: Recently in June 2022, NSDL said that the company is planning to get listed, and if this company gets listed, then CDSL might lose its scarcity premium
What Should Investors Do?
Central Depository Services Limited (CDSL) is one of such companies which enjoys a monopoly game in the duopoly market. There are several industry tailwinds and strong business factors on account of which CDSL has grown in the recent past and may continue to grow. But along with favorable factors, the challenges in the industry especially the listing of the competitor may impact CDSL as it might affect its scarcity premium. Hence, an investor looking for this counter should properly assess it before making any investment decision.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.