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Structural levers supersede prospects of cyclical earnings dip in near term

We note the combination of increased retail participation in capital markets and increased digitisation are two structural levers for CDSL. These remain germane despite the likely dip in market-related revenues (61%/69% of total revenues in FY21/FY22) in FY23E. Optionalities, execution and duopolistic industry structure provide strong long-term earnings growth potential. Additionally, the possibility of earnings upswing as seen in FY22 lends confidence to our theme despite the likely business dip in H1FY23E. Hence, we adjust our earnings expectations but maintain ADD rating with a revised target price of Rs1,190 (earlier: Rs1,510). Our TP is based on 40x (unchanged) FY24E core EPS of Rs26.3 and cash per share of Rs140 per share. ? Cyclical impact: Q1FY23E earnings to be lower in keeping with market volumes. Transaction revenues jumped from a quarterly rate of Rs107mn in FY20 to Rs298mn/500mn in FY21/FY22 with increased market activity. However, the number of trades (on NSE) has been down from 1.7bn in Q4FY22 to 1.57bn in Q1FY23, partially offset by increase in delivery proportion. Additionally, IPO-related revenues and online data charges (mostly a play on Mutual fund record fetches for KYC purpose) will also be lower. We therefore expect sequential revenue/EBITDA to decline by 3/6.5% in Q1FY23E to Rs1.3bn/0.8bn.

* Cyclical impact: Factoring-in lower market volumes, we cut FY23E earnings. We expect 2.5% / 10% dip in FY23E revenues / EBITDA to factor-in the lower market-related business. Share of market-linked business increased to 69% of the total mix in FY22 from an average of 50% in FY18-FY20. Basis 14.5% YoY revenue growth, we expect FY24E revenue/EBITDA to be Rs6.2bn/3.8bn. As such, our FY22-FY24E EBITDA CAGR stands at 2%. However, scope for strong market bounce-back poses upside risk.

* Structural script remains intact: (1) Number of demat accounts has increased from 12.5mn in May’17 to 67mn in May’22 for CDSL implying 40% CAGR over past 5 years. (2) Total number of NSE-active clients has increased from 10.8mn in Mar’20 to 37.7mn in May’22. (2) Number of companies with CDSL has increased from ~10,000 to 18,613 over past 5 years. (3) CDSL’s market share in total demat accounts has increased from 44% in FY17 to 71% in FY23-TD.

* Optionalities can keep accruing. While the national academy depository has not materialised, there are several optionalities that will accrue to CDSL, such as: increase in traction for eMargin pledge services, insurance and commodity repositories, and operations in CDSL IFSC Ltd.

* Maintain ADD: We expect FY22-FY24E revenue/EBITDA/PAT CAGRs of 6%/2%/3%; this factors a dip in FY23E revenues due to lower transaction revenues. Accordingly, CDSL’s core EPS is expected to be at Rs22/26.3 in FY23/24E. Maintain ADD with a revised target price of Rs1,190 (earlier: Rs1,510) based on 40x (unchanged) FY24E core EPS of Rs26.3 and cash per share of Rs140 per share. Risks include swings in market volumes on both sides.

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