Buy CDSL; target of Rs 286: HDFC Securities

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HDFC Securities' research report on CDSL

Revenue was down 9.8% QoQ to Rs 527mn (vs est. of Rs 539mn) due to 7.1/8.7% QoQ fall in Transaction/IPO & corp. action offset by 6.2% QoQ rise in KYC revenue. Total of 460 unlisted companies applied for demat in the quarter. CDSL is adding ~150-200 unlisted companies per month vs. ~350-400 by NSDL. The pace of addition has reduced but the opportunity remains huge. Annual issuer revenue (+19% FY20E) is driving growth for CDSL and is a multi-year opportunity. Others (e-CAS, e-Voting, Govt.) was down 30.6% QoQ led by steep drop in one-off Govt. project (adjusted total revenue was down only 2.5% QoQ). The Govt. project is low margin and lumpy in nature. Reported margin expanded 670bps QoQ to 40.9% due to absence of lower margin Govt. project. Adjusted margin was 46.2% lower than est. of 47.8% due to lower revenue and rise in tech and employee expenses. CDSL continued to gain Beneficiary Owner (BO) market share (49%, +188bps YoY). Incremental market share for CDSL stood at 73% which indicates preference of CDSL over NSDL. CDSL is popular with discount and retail brokers while NSDL is institutional focussed. The no of registered universities under NAD increased to 565 vs 546 QoQ and ~0.48mn students have already enrolled. This can be a future revenue driver.

Outlook

We maintain BUY on CDSL despite revenue and margin miss in 2QFY20. Annual issuer charges (+21% YoY in 6M) is driving growth led by the unlisted opportunity. We value CDSL on SoTP basis by assigning 30x to Sep-21 core profit and adding net cash to arrive at a TP of Rs 286.

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