CDSL is the market leader in BO accounts with 73% market share. Buy for target price of Rs 1470: HDFC Securities

CDSL

Restoring growth

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. 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.

High annuity revenue: CDSL derives 33% of its revenue from issuer charges, which is a pure annuity income. Apart from this, e-voting and e-CAS revenue is also recurring in nature; thus, the total non-market linked revenue for CDSL is ~48% of revenue. The non-market linked revenue has registered a CAGR of 31% post-covid (FY20-23) vs 17% pre-covid (FY15-20). The annual issuer charges have a high correlation with growth in the number of Demat accounts, and recovery in BO account addition will aid growth. We expect the non-market-linked revenue stream to grow at a CAGR of 19% over FY23-26E, driven by higher BO account growth (~20% CAGR).

Recovery in market-linked revenue: CDSL derives ~52% of revenue from market-linked sources (transaction, IPO/corporate action, and KYC). The market linked revenue was down ~17% in FY23, led by a ~20/17% drop in transaction/IPO revenue. The transaction revenue is cyclical and has a high correlation with growth in delivery trades. The delivery volume has registered 12% YoY growth in Q1FY24 after five quarters of sequential decline and the KYC revenue is also expected to recover. We expect the market-linked revenue to register a CAGR of 17% over FY23-26E, driven by a 17/15/18% CAGR in transaction/IPO/KYC revenue.

Insurance opportunity: The compulsory dematerialisation of insurance policies will open up new opportunities for the four IRDA-registered insurance repositories (NDML, CAMS, KARVY, and CIRL). Currently, only 2% of the policies are in demat form, and as per our estimate, the total recurring opportunity for repositories will be ~INR 1.52bn. CDSL can generate additional revenue of INR 0.38bn, assuming a 25% market share, which is ~7% of FY23 revenue.