Informist, Wednesday, May 31, 2023
By Rajesh Gajra
MUMBAI – Transaction charges are the primary revenue source of depository companies and a rise in volumes in the equity market increases their income from this subhead.
The story was, however, different for them in the last financial year. Low retail participation led to the reduction in overall volume, which hit the financial performance of Central Depository Services Ltd, and this trend is likely to continue.
"There is a 31% reduction in the year-on-year delivery volume across exchanges...so that's why there has been a lower transaction revenue," Nehal Vora, managing director and chief executive officer of CDSL, told Informist in a post-earnings investor call earlier this month when asked about the decline in the March quarter.
Data from the National Stock Exchange too confirmed a downward trend, with delivery volume falling 7.5% in 2022-23 (Apr-Mar). The trend seems to continue in the current financial year with the April delivery volume down 23.2% from the previous month.
CDSL's standalone revenue in the March quarter was down nearly 17% on quarter to 982 mln rupees primarily due to a 23?ll in transaction charges income to 330 mln rupees. For the full year, standalone revenue rose 8.6% to 4.51 bln rupees but transaction charges income fell 20.3% to 1.59 bln rupees, while the revenue share from this subhead contracted sharply to 35% from 48%.
The financial performance of unlisted National Securities Depository Ltd too paints a similar picture with the standalone revenue in the March quarter falling 14% sequentially to 930 mln rupees. NSDL does not provide a break-up of its revenue but like CDSL, transaction charges and issuer charges together make up for a bulk.
The two depositories impose a transaction charge on a demat account holder every time there is a debit. Investor's demat account is debited when he has sold shares, and he has to effect the delivery at the time of settlement.
"It is basically a slab wise approach so a person who is a frequent user of the system has to pay a per debit lower charge as compared to infrequent user of our system, so it ranges from 5.50 rupees per debit to 4.25 rupees per debit depending on the number of transactions which you are doing," said Vora.
This makes the transaction charges growth dependent on volume growth in the cash market trades on BSE and NSE.
According to Jimeet Modi, founder & CEO of Samco Securities, trading volume in the stock market is directly proportional to black swan events like COVID in 2020-21. "If there are no black swan events this year (2023-24) then the trading volume would be normalised and average, and at this point in time we believe that it would be flattish as compared to FY23," he said.
Sahaj Agrawal, head of research - derivatives at Kotak Securities, said that volumes are a function of market sentiment and cash volumes dipped in recent times on the back of many market impacting events such as interest rate scenario, inflation, and geopolitical developments.
ICICI Securities in a recent research report also highlighted that decline in market volume would remain a key downside risk for CDSL.
Lower retail participation is one of the primary reasons behind the declining trend in trading and delivery volume in the equity market. Vora told investors and analysts in the post-earning call that retail market participation was muted in 2022-23 as compared to the previous year.
The hit on earnings on the two depositories' topline was, however, buffered by the jump in annual issuer charges in 2022-23. According to Jimeet Modi this may have been aided by a new regulatory rule requiring all unlisted companies to dematerialise their securities leading to increase in issuer clients of the two depositories.
In the case of CDSL, the income from annual issuer charges jumped nearly 60% to 1.84 bln rupees in 2022-23, and its share in total standalone revenue expanded sharply to 41% from 28%. The interesting facet of this was issuer charges' revenue share overtook that of transaction charges in 2022-23.
OPERATIONAL PERFORMANCE
The declining trend in volumes is slowing down the earnings growth of the two depositories. The operating profit and margin performance of the two depositories have also weakened due to sluggish revenue and higher costs.
CDSL's standalone operating profit, as denoted by the profit before other income, depreciation, and finance costs, fell 22% on quarter and 16% on year to 560 mln rupees in Jan-Mar. Margin contracted to 57% from 61.2% in previous quarter and 66.5% a year ago.
In 2022-23, the operating profit of CDSL declined 5.4% to 2.67 bln rupees while margin contracted sharply to 59.2% from 68% in 2021-22.
NSDL's profitability trajectory was, however, different. Its operating profit increased 9.5% to 2.06 bln rupees. But there was a small contraction in the operating margin to 50.3% from 50.9%.
Going ahead the depositories' financials would continue to be dependent on the stock market trading activity. And for that to happen, investors should see value emerging in equities, Agrawal said. End
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