Up 1,440% in 5 year, CDSL shares get 'Reduce' rating from ICICI Securities. Here's why

Shares of Central Depository Services (India) Ltd (CDSL) received a 'Reduce' rating from ICICI Securities against 'Hold' earlier, as the domestic brokerage believes the peak cycle multiples -- the stock trades at 53 times one-year forward EPS; and risk of lower earnings growth on high base make the risk-reward unfavourable on the counter.

The stock has risen 168 per cent in the past one year and roughly 1,440 per cent in the past five years. ICICI Securities offered instances of flattish or lower revenue and weak margins for CDSL, which led to stock price corrections historically. 

"If markets are factoring in any major increase in cash volumes from restriction in options, this is likely to happen more in intraday segment compared to delivery. CDSL benefits only on more volumes in delivery segment. Additionally, as a trend, delivery as a percentage of total cash trades has declined from 26 per cent in FY18 to 21 per cent in FY24," it said.

ICICI Securities said CDSL is an attractive play in bull markets, which was evident from past trends – between FY20 and FY22, CDSL’s stock price bagged 6 times returns, significantly higher than AMCs, RTAs, brokers or wealth managers. 

"Similarly, it had 88 per cent return in FY24 and 70 per cent in FY25-TD as quarterly Ebitda increased to Rs 150 crore in Q4FY24 and Q1FY25 from average Rs 80 crore in FY23.

"CDSL is now trading at 59 times 1-year forward core EPS and at 53 times 1-year forward EPS on FY26E, which is almost double compared to historical averages. Historically, overall revenue growth indicates that there are periods of flat/declining trend as seen in FY18-20 and FY23. Ebitda margin has also shown decline in the past basis higher costs and lower revenue growth as seen in FY19/FY20," ICICI Securities added. 

The brokerage said the recent price cuts indicate a possible passing of benefits of operating leverage to consumers, which will likely limit margin expansion. The brokerage suggested a target price of Rs 1,320 on the stock, suggesting a potential 14 per cent downside ahead. The stock was trading at Rs 1,507 apiece on Tuesday. 

"We factor in FY24–26E revenue/Ebitda/PAT CAGR of 26 per cent/29 per cent/28 per cent, respectively. Accordingly, CDSL’s core EPS is estimated at Rs 22.90/Rs 27.90 for FY25/26E, respectively. We also add free cash investments of Rs 63 per share to the valuation," ICICI Securities said.

The brokerage said its 45 times multiple for CDSL reflects a strong growth in capital markets, possible higher growth in cash volumes post restrictions in options, lower regulatory risk among capital market plays, possibility of operating leverage ahead and growth optionality in insurance depository business. 

"Our downgrade in rating factors peak cycle multiple against possible lower earnings," it said.