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Factoring dip in market-linked revenues
In the past one month, financial markets have witnessed correction in asset prices globally. India’s financial markets too faced the brunt of the global sell-off, amidst weak sentiment across market participants. Persistent weak sentiment tends to have a direct impact on trading activity leading to lower cash deliveries and lower public offerings, which have a negative impact on CDSL’s revenues, which derived ~45% of its revenues from market-linked sources in FY19. We now factorin a 20% dip in market-linked business in FY21 leading to overall decline of 8% in the company’s FY21 revenues. Based on recovery expectations in FY22, our revenue/EBITDA/PAT CAGRs stand at 2%/1.5%/-3% between FY20E-FY22E. Maintain BUY based on 30x FY22E core EPS of Rs6.6 (ex-effect of other income) and Rs8.1bn (Rs77/share) free cash as of FY22E.
* Market-linked revenues expected to remain under pressure in FY21… CDSL derives its transaction revenues on the basis of number of debit transactions. We expect 10% decline in revenues from transaction charges in FY21E. We also factor-in a sharp decline of 60% in IPO/Corporate action charges as weak market conditions will inhibit primary market activities.
*…as seen in similar instances in past. CDSL’s transaction revenues declined in: a) FY09 on account of global financial crisis, (b) FY12-FY14 due to weak market sentiment, and (c) FY19 as mid- and small-cap stocks corrected sharply (chart 1).
* Non-market linked sources to lend stability: Non-market linked revenues include annual issuer charges, which is like an annuity business. We expect annual issuer charges (~35% of FY19 revenues) to grow at 12% CAGR between FY19-FY22E on account of gradual increase in ownership base of companies. Other non-market linked revenue streams are expected to grow at 10% CAGR for the same period and include E-CAS, E-voting, etc. CDSL received government orders worth Rs94mn in H1FY20 and the company expects some in FY21 too.
* Growth optionalities remain strong: CDSL has a strong execution track record. In the past five years, the number of demat accounts has grown at a CAGR of 19% vs 8% at NSDL (driven by growth in discount brokerages). Currently, 597 DPs registered with CDSL are providing services at over 19,000 locations across the country. Optionalities include dematerialisation of shares of unlisted companies, electronic negotiable warehouse receipts, single demat accounts and opening of branch at Gift City.
* Maintain BUY: We cut our FY21E and FY22E revenue estimates by 16% and 15% respectively. Accordingly, our revised target price stands at Rs275 (earlier: Rs331) based on 30x FY22E core EPS of Rs6.4 and free cash of Rs77/share for FY22E.
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