Published on 16/09/2020 9:51:35 AM | Source: ICICI Securities Ltd

Hold Central Depository Services Ltd For Target Rs.354 - ICICI Securities

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Retail participation is volatile and not linear in growth

Market-linked revenue transaction and IPO / corporate action charges (play on retail participation), which contributed 29% in FY20, have a volatile track record. Contrary to our expectations of a slowdown in cash delivery volumes on account of Covid-19 outbreak in FY21, there has been strong 45/31% growth in NSE/BSE share deliveries in Q1FY21. While this coupled with better cost outlook leads to 40/34% upgrade in our FY21/22 PAT estimates, the volatile nature of retail cash delivery volumes makes structural growth uncertain. Post 45% rally in the stock price in the past two months, we downgrade the stock from Buy to HOLD. At CMP, stock trades at 25x FY22 core EPS.

* FY21 begins on an optimistic note: Revenue grew 12% YoY in Q1FY21. Surge in retail participation led to strong 108% YoY growth in transaction revenue in Q1FY21. Annual issuer charges and online data revenue were 8% and 29%, respectively. Annual issuer charges grew by a slower pace of 8% YoY as fewer companies were added in Q1FY21. Weak market sentiment impacted the IPO / corporate action charges (down 5% YoY), while other revenues declined 45% due to absence of government order in Q1FY21 (this business stream was margin dilutive). Margins grew from 39% in Q1FY20 to 58% in Q1FY21 as employee cost declined 30% YoY on account of reversal of bonus provisions while other expenditure declined 29% YoY.

* Expect revenue to grow at 13.5% CAGR between FY20-22. We expect transaction revenues to grow at 21% CAGR between FY20-22 compared to 10% CAGR witnessed between FY15-FY20. Annual issuer charges are expected to grow at CAGR of 12% compared to 17% between FY15-FY20. Any rate hike (as seen in FY16) can give a positive surprise to earnings. Revenues from IPO / corporate action are expected to grow at 13% CAGR between FY20-FY22 compared to 26% CAGR between FY15-FY20 and online data charges may grow 11% during the same period (19% CAGR in FY15-FY20).

* Expect EBITDA margin to increase from 47% in FY20 to 55% in FY22. Stable revenue growth and CDSL’s target to maintain cost should enable operating leverage


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