Buy CDSL with a target of Rs 1470: HDFC Securities

HDFC Securities' research report on CDSL

The growth rate of Central Depository Services India Ltd (CDSL) slowed in FY23 after two years of rapid expansion (>50% YoY in FY21-22, driven by 4/4x jump in transaction revenue/Demat accounts). The annuity stream (annual issuer charges, e-voting, and e-CAS) grew by 30% YoY in FY23, offsetting the 17% fall in market-linked revenue (transaction, IPO, and KYC (fetch)). As a result of the aforementioned factors, we anticipate that the company's growth will pick up speed in FY24E. Specifically, we anticipate that (1) BO account addition will pick up, (2) transaction revenue will increase due to increased delivery volume, and (3) the annuity income stream will continue to rise. With a 73% market share and an 85% incremental share, CDSL remains at the forefront of the BO market. Approximately 2 million new accounts are being added to CDSL each month, increasing 46% year over year but down 36% from the peak. With a 25% market share, the insurance possibility will increase revenue by about 7%. This is an option value (regulatory push). Our revenue, EBITDA, and APAT CAGR estimates for FY23–FY26 have been revised upward to 18%, 21%, and 20%, respectively.

Outlook

We are increasing our recommendation to BUY from ADD and setting our TP at INR 1,470, or 37x June-25E EPS. The average P/E for the next three years and the next five years combined is 42x and 32x, respectively. CDSL has a Return on Equity (ROE) of 24%, Return on Invested Capital (ROIC) of 78%, a Cash Conversion (5Y Avg) of >80%, and Net Cash (INR 10.6bn, or 9% of Market Cap).

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CDSL - 14 -07 - 2023 - hdfc

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