Buy CDSL; target of Rs 320: HDFC Securities

HDFC Securities' research report on CDSL

Revenue was up 15.6% QoQ to Rs 584mn (vs est. of Rs 501mn). Growth was supported by 7.5/39% QoQ rise in Issuer charges/IPO & corporate action. Total 655 un-listed companies applied for Demat services by paying ~Rs 15K/company. CDSL is adding ~200-250 un-listed companies per month vs. ~500 by NSDL. Annual issuer revenue (+23.3% FY20E) is driving growth for CDSL and is a multi-year opportunity. Others (e-CAS, e-Voting, Govt.) was up 42.7% QoQ led by one-off Govt. project (Rs 69.3mn, adjusted total revenue was up 1.8% QoQ). The Govt. project is at 31% margins and may continue till this year-end. Reported margin contracted 1,675bps QoQ to 38.8% led by wage hike, provisions, and lower margin Govt business. Adjusted margin stood at 52.5% vs. est. of 55%. Steep wage hike of ~30% was a negative surprise and will increase employee cost by ~36% for FY20E. CDSL continued to gain a Beneficiary Owner (BO) market share (49%, +202bps YoY). Incremental market share for CDSL stood at 74% (vs. 64%) which indicates the rising preference of CDSL over NSDL. There are ~546 (vs 520 QoQ) universities registered under NAD and ~17.1mn academic records have been generated. This is a future revenue driver.

Outlook

We maintain BUY on CDSL post higher revenues but lower margins in 1QFY20. Annuity revenue (+23% YoY) is driving growth led by the unlisted opportunity. Our SoTP of Rs 320 is based on 30x core FY21 earnings plus net cash.