This steady growth, coupled with technological advancements and a shift in risk appetite, has increased household allocation towards equities as an asset class. For instance:
- The number of Demat accounts in India has risen to 15 crore in FY24, up from four crore in FY20, indicating an increase of almost 300%.
- Retail investors accounted for 35.9% of the equity cash segment turnover in FY24, indicating greater stock market exposure.
- Retail investors are currently investing close to ₹65,000 crore every month in the Indian equity market, increasing their ownership to 18.4% in FY24 from 16.6% in FY21.
- The total value of stocks owned by retail investors is estimated at ₹64 lakh crore, which includes ₹36 lakh crore in direct equities.
Investors are moving away from traditional asset classes such as gold and real estate. This trend should accelerate, especially if the Indian stock market continues to deliver double-digit annual returns in the upcoming decade.
Several trading and settlement companies have reported stellar growth due to higher participation from Indian retail investors. Here are three such back-office companies that should benefit from India’s stock market boom.
Central Depository Services India
Valued at a market cap of ₹31,300 crore, Central Depository Services (CDSL) provides various services for depository participants, such as account opening, dematerialization, account statement, pledging, nomination, and SMS services. It also provides services to market participants, including exchanges, clearing houses, depository participants, issuers, and investors. Basically, CDSL facilitates the holding of securities in a dematerialized form and is an enabler for securities transactions.
CDSL Stock Price Comparison
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In FY24, CDSL generated 79% of its revenue from dematerialization, holding, transfer, and pledge of securities in electronic form and by providing e-voting services to companies. Its data entry and storage business accounted for 20% of sales and includes record-keeping of KYC documents of capital market investors. It also earned 1% of its revenue from holding insurance policies and warehouse receipts in electronic form.
CDSL’s revenue increased from ₹89 crore in FY14 to ₹812 crore in FY24. In the last 12 months, its sales have risen to ₹920 crore, rising 56.4% year-on-year. Its asset-light model allows CDSL to benefit from high operating leverage, as its operating margins have widened from 37% in FY14 to 60% in FY24.
In fiscal Q1FY25, its sales rose by 65% year-on-year to ₹257 crore while operating profit almost doubled to ₹154 crore.
With a 58% market share, CDSL is India’s largest depository, providing it with a wide competitive moat. In recent years, it has expanded into verticals such as KYC and insurance dematerialization, which should further diversify its revenue streams and drive top-line growth.
CDSL has a debt-free balance sheet, which enhances the company’s financial flexibility. It currently offers shareholders a dividend yield of 0.63%, while its payout ratio is sustainable at 55%.
Priced at 65.3x times forward earnings, CDSL stock might seem expensive at first glance, However the median sector P/E ratio is similar at 67.6x. CDSL stock went public in June 2017 and has since returned over 1,000% to shareholders.
Computer Age Management Services
CAMS Stock Price Comparison
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Valued at ₹22,329 crore by market cap, Computer Age Management Services (CAMS) is primarily a mutual funds transfer agency. In fact, CAMS is the largest registrar and transfer agent of mutual funds with a 69% share in India. It offers a portfolio of tech-based services such as dividend processing, payment, transaction execution, dividend processing, compliance-related services, and more.
CAMS claims it has built the industry’s first AI-embedded KYC solution to instantly onboard customers. These services are offered to banks, NBFCs, insurance, fintech companies and brokerage houses.
CAMS holds a leadership position in India’s mutual fund registrar and transfer agent (RTA) segment, serving 10 out of the 15 largest mutual funds (in terms of assets under management), creating a strong barrier entry for competitors.
The company is now leveraging its expertise to provide services in digital payments, KYC, and NPS registration, insurance repository, and account aggregation.
CAMS’s revenue increased from ₹659 crore in FY18 to ₹1,137 crore in FY24. In the last 12 months, its sales have risen to ₹1,207 crore, growing by 21.1% year-on-year. Its operating profits have risen from ₹276 crore in FY18 to ₹545 crore in the last 12 months.
Unlike CDSL, which has expanded its profit margins significantly, CAMS’s operating profit margin has risen from 42% in FY18 to 45% in the last 12 months.
CAMS growth story is far from over, given that India’s mutual fund industry is expected to grow at a CAGR of 16% in the next five years due to rising retail investor participation.
Priced at 58.4x trailing earnings, CAMS stock has returned 240% to shareholders since its IPO in October 2020.
For more such in-depth analyses, read Profit Pulse.
KFin Technologies
This back-office stock is valued at ₹18,904 crore by market cap. KFin Technologies provides services and solutions to asset managers and corporate issuers across asset classes in India. It also provides investor solutions such as transaction origination and processing for mutual funds and private retirement schemes in Malaysia, Hong Kong, and the Philippines.
KFin Technologies Stock Price Comparison
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KFin is the largest investor solution provider to mutual fund houses with a 42% equity MF AUM (assets under management) in Q1FY25, up from 28.8% in FY20. It provides services to 25 out of 46 asset management companies in India that manage more than ₹15.6 trillion in total assets.
KFin is focused on gaining traction in international markets which should diversify its revenue streams. It has already secured contracts in 10 countries and aims to service global financial capitals such as Singapore and Hong Kong. In the next five years, KFin expects its non-domestic mutual fund business to account for almost 50% of total sales.
KFin has increased its revenue from ₹162 crore in FY19 to ₹838 crore in FY24. In the last 12 months, its sales have risen to ₹894 crore, rising 22.3% yearo-on-year. Its operating profits have risen from ₹66 crore in FY19 to ₹394 crore in the last 12 months.
The operating profit margin for KFin has expanded from 40% in FY19 to 44% in the last 12 months.
Priced at 69.8x trailing earnings, KFin stock has given 220% returns to shareholders since its IPO in December 2022.
Also Read: Everything is super bullish. Here are five stocks to avoid.
Key takeaway
Armed with diversified service offerings, each of the companies discussed here are growing at an enviable pace. The three stocks are strategically positioned to benefit from higher retail participation, supportive regulatory measures, widening profit margins and ongoing investments in technology.
Alternatively, there are certain risks associated with investing in these stock market service providers. First, these companies’ strong growth rates are associated with a rise in interest in the equity markets. So, investors should be prepared for slower growth when market sentiment turns bearish.
Moreover, all three stocks trade at a premium compared to the average stock market P/E multiple. So, valuations could move lower if they are not supported by steady earnings and revenue growth.
A growing market attracts competition, exposing the companies to technology risk, while the regulated nature of this industry may impact revenue growth.
In short, while on the one hand these companies have done extremely well in the past, it’s also a fact that they trade at a substantial premium to the overall market valuations. One needs to weigh the pros and cons of each of these companies carefully, and then decide whether it’s worth trying to ride this wave from here on.
Note: We have relied on data from www.screener.in throughout the article. Only in cases where the data was not available have we used an alternate but widely used and accepted source of information.
The purpose of this article is only to share interesting charts, data points and thought provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.
Aditya Raghunath has over 15 years of wide experience in the field of finance and financial writing. His interest extends to global stocks as well. He has studied commerce at the Mumbai University, and done his management in finance and from the prestigious T A Pai Management Institute.
Disclosure: The writer owns stocks in CDSL and CAMS.
