Buy CDSL; target of Rs 1470: HDFC Securities

HDFC Securities' research report on CDSL

Central Depository Services India Ltd (CDSL) registered two years of solid growth (>50% YoY in FY21-22, driven by ~4/4x rise in transaction revenue/Demat accounts), which flattened in FY23. The growth in FY23 was impacted by a 17% decline in market-linked revenue (transaction, IPO and KYC (fetch), offset by a 30% YoY growth in the annuity stream (annual issuer charges, e-voting and e-CAS). We expect the company growth to recover in FY24E, supported by (1) recovery in BO account addition, (2) higher transaction revenue driven by growth in delivery volume, and (3) continuity of growth in the annuity revenue stream. CDSL continues to be a market leader in the number of BO accounts, with a 73% market share and 85% incremental share. CDSL is adding ~2mn accounts monthly, which is up 46% YoY but down 36% from the peak. The insurance opportunity remains an option value (regulatory push) and will add ~7% to revenue, assuming a 25% market share. We increase our EPS estimate by ~5/7% for FY24/25E, implying revenue/EBITDA/APAT CAGR of 18/21/20% over FY23-26E.

Outlook

We upgrade our rating to BUY from ADD and assign a TP of INR 1,470, based on 37x June-25E EPS. The stock has traded at an average 3Y/5Y 1-year forward P/E multiple of 42/32x. CDSL has a RoE of 24%, RoIC of 78%, 5Y average cash conversion of >80%, and net cash of INR 10.6bn which is ~9% of the market cap.