Nuvama Institutional Equities has revised its rating for Central Depository Services (India) Ltd (CDSL) shares, downgrading them from 'Buy' to 'Hold'. This decision comes in response to the company's weaker sequential performance and observed margin pressures, as detailed in the brokerage's latest report.
Revenue Growth Slows, Profitability Dips
CDSL reported a revenue of Rs 260 crore, marking a 17.1% year-on-year increase but a 13.6% sequential decline. This quarterly drop was primarily attributed to significantly weaker IPO and corporate action charges, which fell by 71.2% quarter-on-quarter, alongside a 1.7% decline in transaction charges.
Profitability was also impacted during the quarter. Nuvama highlighted that higher technology expenditures, coupled with reduced other income, weighed heavily on the company's financial performance. Despite lower employee costs, total expenses rose by 2.2% sequentially.
Margin Pressure and Earnings Impact
The increased expenses led to a notable contraction in CDSL's EBIT margin, which stood at 37.6%. This represents a decrease of 473 basis points year-on-year and a substantial 965 basis points quarter-on-quarter. Consequently, EBIT declined to Rs 98.9 crore, a 4.0% fall year-on-year and a 31.3% sequential drop.
Lower other income further exacerbated the situation, pulling adjusted profit after tax (APAT) down to Rs 80.2 crore. This figure reflects a 20.0% year-on-year reduction and a significant 39.8% decline quarter-on-quarter.
New Target Price and Outlook for CDSL
In light of these financial results and the revised outlook, Nuvama has adjusted its earnings estimates for CDSL for the coming years. The brokerage has reduced its FY27E and FY28E APAT projections by 9.6% and 11.1% respectively. This revision has led to a sharp reduction in the target price for CDSL shares.
The new target price is set at Rs 1,250, down considerably from the previous target of Rs 1,660. At the time of the report, CDSL shares were trading around Rs 1,224.70, reflecting a 1.10% decline on Tuesday's trade and a 20.11% drop over the last six months.
Nuvama stated, "Our FY27E/28E APAT is reduced by 9.6/11.1 per cent yielding a TP (target price) of Rs 1,250 (earlier Rs 1,660) at FY28E EV/NOPLAT of 45x." The brokerage concluded its report by reiterating the 'Hold' rating.