The shares of this Market Infrastructure Institution (MII), which functions as a central securities depository, have been downgraded by ICICI Securities due to concerns over high valuations and elevated multiples.
Price Movement
The share price of Central Depository Services Limited dropped by nearly 2.5 percent, hitting an intra-day low of Rs.1,497, down from its previous closing of Rs.1,534.7. It is currently trading at Rs.1,506.5 per share.
Reason for the fall
ICICI Securities, a domestic brokerage firm, has downgraded its rating on Central Depository Services Limited (CDSL) from ‘hold’ to ‘reduce’. The downgrade is due to concerns about peak cycle valuations and the possibility of lower-than-expected earnings growth on a high base, making the risk-reward ratio less attractive.
Despite this downgrade, the brokerage has increased its target price for CDSL to Rs.1,320 per share, up from the previous target of Rs.1,118. However, this new target still represents a 12.4 percent potential decline from the current market price of Rs.1,506.5 per share.
The report by ICICI highlights that CDSL’s stock has seen significant price surges, especially between FY20 and FY22, and strong returns in FY24 and FY25. However, ICICI Securities cautions that current high valuations and upcycle multiples may not be sustainable.
Elevated Multiples
The brokerage notes that the stock is trading at 59 times its 1-year forward core EPS and 53 times its FY26 forward EPS, nearly double the historical averages.
It highlights past periods of flat or declining revenue growth, like in FY18–20 and FY23, along with shrinking EBITDA margins due to higher costs and slower growth in FY19 and FY20.
Bonus Issues
Recently CDSL announced the allotment of 10.45 crore bonus shares, following approval from the Board of Directors. The record date for the bonus issuance was set as 24th August 2024.
Financial Performance
Diving into the company’s financial performance, CDSL reported consolidated revenue of Rs.257 crore in Q1 FY25, a notable 71.33 percent increase from Rs.150 crore in the same quarter last year. In terms of net profit, CDSL earned Rs.134 crore in Q1 FY25, reflecting an 81.08 percent increase from Rs.74 crore in Q1 FY24.
Company Profile
Central Depository Services Limited is a part of the capital market structure that serves all market participants, including exchanges, clearing corporations, depository participants (DPs), issuers, and investors.
It facilitates the holding of securities in dematerialized form and enables securities transactions. As of June 2024, CDSL held a 77 percent market share in the number of demat accounts. CDSL is the only depository securities company listed on the stock exchange.
Written by – Siddesh S Raskar
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