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Poised between benefits of capital market momentum and possible cyclical earnings top

Central Depository Services (CDSL) remains a stable play on capital markets and is a prime beneficiary of higher retail participation. This is reflected in the 53% growth in FY21 revenues split 99%/12% between market-linked / non-market linked components and 72% growth in 9MFY22 revenues. While CDSL’s leadership in demat account additions and cost control remained 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 get challenging on the high base of FY21/9MFY22. Yet, the surge in demat account additions and new company listings lend significant business traction. Upgrade to HOLD (from Reduce) with a revised target price of Rs1,595 (earlier: Rs1,310) as we roll over our estimates to FY24E (earlier FY23E).

Why we factor-in 15% revenue growth in FY23E/FY24E: On YoY basis, growth in transaction revenues has been volatile in the past. On CAGR basis, transaction charges clocked 14% CAGR between FY16-FY20 while it grew 177% in FY21 and 84% in H1FY22 (9MFY22 data is awaited). Non-transaction revenues have been relatively stable with 17% CAGR between FY16-FY20 and 23%/64% growth in FY21/H1FY22 (9MFY22 data is awaited). Growth in non-transaction revenues from sharp increase in IPO/corporate action revenues is lumpy in nature and cannot be extrapolated for estimating further revenue growth. Growth in demat account additions (chart 1), growth in the number of companies (chart 2) and possible hike in annual issuer charges (last happened in FY06) are strong revenue levers.

Q3FY22 registered EBITDA of Rs1bn. This is a significant journey from Rs266mn EBITDA in Q3FY20. It incorporates a big contribution from jump in revenues (at Rs1.5bn in Q3FY22 vs Rs541mn in Q3FY20) and also cost discipline leading to margin expansion from 49% in Q3FY20 to 68% in Q3FY22.

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.

Upgrade to HOLD: We expect a revenue CAGR of 29% between FY21-FY24E driven by 37% CAGR in market-linked revenues and 15% CAGR in non-marketlinked revenues. Within market-linked revenues, we expect transaction revenues to witness a strong CAGR of 39%. Within non-market linked revenues, we expect annual issuer charges to clock 16% CAGR between FY21-FY24E. We also forecast operating leverage benefits resulting in margin expansion from 61.6% in FY21 to 67.3% in FY22E (66.6% on 9MFY22), and 67.8/68.3% in FY23E/FY24E. We value CDSL at 40x FY24E core EPS of Rs35.3 and free cash of Rs181/share to arrive at a target price of Rs1,595 (earlier: Rs1,310).

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