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Margins disappoint in every segment

* NSDL’s operating revenue grew 66% YoY/13% QoQ to INR5.2b (22% beat due to a 47% beat on the banking services segment). Depository revenue (35% of mix) grew 13% YoY/7% QoQ, while the banking services segment (61% of mix) surged 136% YoY/18% QoQ.

* Operating expenses rose 92%/17% YoY/QoQ to INR4.2b (34% higher than est.). Employee costs increased 41% YoY (10% higher than est.), while other expenses jumped 103% YoY (39% higher than our estimate). EBITDA rose 6% YoY but declined 3% QoQ to INR1b (11% miss due to higher opex than est.), resulting in an EBITDA margin of 19.5% (vs. 30.5% in 1QFY26 and 22.7% in 4QFY26).

* PAT for the quarter rose 10% YoY/9% QoQ to ~INR983m (3% miss due to higher opex). PAT margin came in at 19% vs. 28.7% in 1QFY26 and 19.7% in 4QFY26.

* NSDL Payments Bank revenue was boosted by a one-time card onboarding project, including a joining fee (largely shared with the implementation partner). Revenue is expected to normalize from 2QFY27 towards 4QFY26 levels, while profitability should gradually improve as customer transaction activity ramps up.

* We cut our earnings estimates for FY27/FY28 by 1%/2% to factor in higher operating expenses based on its 1QFY27 performance. We expect NSDL to post a revenue/EBITDA/PAT CAGR of 30%/11%/11% over FY26-28E. We reiterate our Neutral rating on the stock with a one-year TP of INR930 (premised on a P/E multiple of 40x on FY28E earnings).

Share of banking mix in the overall revenue improves

* On the revenue front, the banking services income grew 136% YoY/18% QoQ to INR3.1b, with the share in the revenue mix rising to 61% from 43% in 1QFY26 and 58% in 4QFY26. In contrast, the depository revenue rose 13% YoY/7% QoQ to INR1.8b, with share in the mix at 35% vs. 52% in 1QFY26.

* Within the depository revenue, the share of recurring income rose to 55.5% from 36.7% in 1QFY26 at INR1b, up 30% YoY/4% QoQ.

* The non-recurring portion comprising corporate actions fees (Incl. IPO) grew 20% YoY/17% QoQ (due to improving corporate actions in 1Q); e-voting charges rose 31% YoY/65% QoQ; settlement charges were largely flat YoY/ up 13% QoQ; pledge fees rose 29%/18% YoY/QoQ; and other transaction charges were down 35% YoY/11% QoQ.

* Under the subsidiaries, the NPBL segment revenues rose sharply by 136% YoY/18% QoQ to INR3.1b; bank margins were impacted by upfront revenuesharing costs tied to a specific partner onboarding project; management expects normalization to 4Q-like levels from 2Q onward as transactionbased revenue scales.

* NDML’s revenue grew 13% YoY (down 2% QoQ) to INR206m in 1QFY27. As per IRDAI guidelines, its Insurance Repository business is being transferred to a separate subsidiary, with the restructuring currently underway.

* Custody income grew ~30% YoY/4% QoQ to INR1b, led by large onboarding of unlisted companies (~3.6k unlisted companies were added during 1QFY27 and over 33k in FY25, and ~30k in FY26).

Valuation and view

* With the share of recurring fees rising to ~55.5% in 1QFY27 depository income, imparting greater stability to the annuity-led business model, and increasing contribution from banking services, NSDL is well positioned to benefit from operating leverage, supporting improvement in profitability. Sustained momentum in demat account additions and successful onboarding of new fintech partners remain key monitorables for future growth.

* We cut our earnings estimates for FY27/FY28 by 1%/2% to factor in higher operating expenses based on its 1QFY27 performance. We expect NSDL to post a revenue/EBITDA/PAT CAGR of 30%/11%/11% over FY26-28E.

* We reiterate our Neutral rating on the stock with a one-year TP of INR930 (premised on a P/E multiple of 40x on FY28E earnings).

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