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High base is a challenge, but fundamentally enjoys several tailwinds

Central Depository Services (CDSL) remains a stable play on capital markets and is prime beneficiary of higher retail participation. This is reflected in 53%/60% growth in FY21/22 revenue split 69%/31% between market-linked/non-market linked components as on 9MFY22. While CDSL’s leadership in demat account additions and cost control remain strong achievements in FY20-FY22, the cyclical nature of retail business is an inherent limitation to factoring in >15% structural growth. Going ahead, growth will become challenging on the high base of FY21/FY22. Yet, the high possible revenue growth during a retail upswing as seen in FY21/22, dominant position in the duopoly depository market and tailwinds of digitisation and momentum in Indian capital markets are strong investment arguments for the company. Upgrade to ADD (from Hold) with a revised target price of Rs1,510 (earlier: Rs1,595) based on 40x FY24E (earlier FY23/24).

Why we factor in 15% revenue growth in FY23E/FY24E: On a YoY basis, growth in transaction revenue has been volatile in the past. On a CAGR basis, transaction charges clocked 14% CAGR between FY16-FY20 while it grew 177% in FY21 and 79% in 9MFY22. Non-transaction revenue has been relatively stable with 17% CAGR between FY16-FY20 and 23%/69% growth in FY21/9MFY22 (FY22 data is awaited). Growth in non-transaction revenue from sharp increase in IPO/corporate action revenue is lumpy in nature and cannot be extrapolated for estimating further revenue growth. Growth in demat account additions (Chart 2), growth in number of companies (Chart 3) and a possible hike in annual issuer charges (last happened in FY06) are available revenue levers.

Q4FY22 registered QoQ dip in revenues and margins. This could have been on account of lower IPO / Corporate charges (22 IPOS in Q3FY22 and 6 in Q4FY22) and lower transaction charges as as average ADTV of NSE cash declined 6% QoQ and % of Shares Deliverable to total Shares traded declined from average 19.3% between OctNov-Dec to 17.1%/17.4% in Jan/Feb’22.

Growth optionalities ahead: These include: 1) Depository operations in IFSC, 2) depository operations for gold exchanges, 3) extension in scope of account aggregator to non-financial data, and 4) possible future monetisation of MF Central. 5) CDSL bought 6.78% stake in Open network for Digital Commerce (ONDC) which strives to promote open networks developed on open source methodology with the use of open specification and open network protocols independent of any specific platform (Link)

Upgrade to ADD: We expect a revenue CAGR of 15% between FY22-FY24E driven by 17% CAGR in market-linked revenues and 9% CAGR in non-market-linked revenues. We also forecast operating leverage benefits resulting in margin expansion from 66.5% in FY22 to 67/67.4% in FY23E/FY24E. We value CDSL at 40x FY24E core EPS of Rs33.8 and free cash of Rs157/share to arrive at a target price of Rs1,510 (earlier: Rs1,595).

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