Neutral CDSL Ltd for the Target Rs.1,400 by Motilal Oswal Financial Services Ltd
Weak operating performance
* CDSL’s operating revenue grew 1% YoY and 15% QoQ to INR2.6b (8% miss), primarily due to a 49%/31% YoY decline in IPO & corporate action charges/online data charges.
* EBITDA declined 16% YoY but rose 19% QoQ to INR1.3b, resulting in an EBITDA margin of 50.4% (vs. 60% in 1QFY25 and 48.7% in 4QFY25). Operating expenses surged 25% YoY to INR1.3b due to a 46%/17% YoY increase in employee costs/other expenses.
* PAT for the quarter declined 24% YoY but rose 2% QoQ to ~INR1b, a 28% miss due to: 1) lower-than-expected revenue and 2) higher-than-expected employee costs and tax rate. PAT margins came in at 39.6% vs 52.1% in 1QFY25 and 44.8% in 4QFY25.
* CDSL continues to invest in human resources and technology to support its expanding operations and reinforce its role as a key market infrastructure institution. These investments are aimed at enhancing service delivery, improving system scalability, and ensuring long-term operational resilience.
* We have cut our earnings estimates by 19%/11% for FY26/FY27 to factor in higher employee costs, increased taxes, a slowdown in IPO actions, and continued investments in tech and human resources. We expect CDSL to post a revenue/EBITDA/PAT CAGR of 14%/12%/11% over FY25-27. We reiterate our Neutral rating on the stock with a one-year TP of INR1,400 (premised on a P/E multiple of 45x on FY27E earnings).
Higher employee costs impact EBIDTA margins
* On the revenue front, transaction revenue declined 17% YoY to INR620m on account of lower cash delivery volumes during the quarter.
* Annual issuer charges rose 50% YoY and 31% QoQ to INR 1.1b, driven by a sharp increase in investor folios. The total includes a one-time application processing fee of INR52.3m. Unlisted revenue from issuer charges stood at INR63.9m for 1QFY26 vs INR52.3m in 1QFY25.
* Revenue from IPOs and corporate actions declined 22% YoY/16% QoQ due to a smaller number of IPOs. However, corporate actions now account for a higher proportion of income in this segment.
* Online data charges declined 42% YoY/16% QoQ due to subdued market conditions leading to fewer account openings. KYC revenue contributed ~33% to consolidated revenue.
* During FY25, the total income of its subsidiary, CVL, declined 32% YoY to INR420m, while total expenses remained flat YoY at INR264.3m. PAT declined 57% YoY to INR164m.
* Total expenses surged 25% YoY to INR1.3b, led by a 46%/34%/9% YoY increase in employee/IT/admin and other expenses.
* Employee costs increased 46% YoY and 24% QoQ, mainly due to variable payouts recorded in Q1 and new recruitments done in line with business growth. Bonus provisions made during the quarter were consistent with the company’s longstanding policy.
* Demat account additions during the quarter reduced to 5.7m in 1QFY26 from 6.4m in 4QFY25 and 9.9m in 1QFY25.
Key takeaways from the management commentary
* Tax rate was higher during the quarter at 32% compared to 23% in 1QFY25 and 21% in 4QFY25. The increase was due to tax adjustments on dividends received from the subsidiary company.
* In the insurance repository segment, CDSL crossed 1.8m policies and holds ~2m e-insurance accounts.
* CDSL has taken calibrated pricing actions with regulatory approvals, currently charging INR3.5 per transaction—50 paise lower than its competitor—while also offering a 25 paise discount for female investors for two years and for all investors transacting in bonds and mutual funds through demat accounts.
Valuation and view
* A slowdown in demat additions and fewer IPO listings led to a reduction in revenue, and continued investments in human resources and technology for future growth could restrict gains from operating leverage.
* We have cut our earnings estimates by 19%/11% for FY26/FY27 to factor in higher employee costs, increased taxes, a slowdown in IPO actions, and continued investments in tech and human resources.
* We expect CDSL to post a revenue/EBITDA/PAT CAGR of 14%/12%/11% over FY25-27. We reiterate our Neutral rating on the stock with a one-year TP of INR1,400 (premised on a P/E multiple of 45x on FY27E earnings).
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