Whalesbook
Central Depository Services (India) Ltd. (CDSL) is facing a challenging near-term operational environment, leading to a reassessment of its stock. While India's capital markets offer long-term growth prospects for depositories, CDSL's recent financial results show a significant sequential revenue drop and squeezed profit margins. These issues are challenging the high valuation multiples the stock has previously commanded.
CDSL's stock price fell 1% in early trading on May 5, 2026, extending its year-to-date losses to 15%. This followed a sharp 13.6% quarter-over-quarter (QoQ) revenue decline to about Rs 260 crore, though it was still up 17.1% year-over-year (YoY). The QoQ drop was largely due to a 71.2% decrease in IPO and corporate action charges, plus a 1.7% drop in transaction charges.
Profitability also weakened, with EBIT margins falling to 37.6%. This was down 473 basis points YoY and 965 basis points QoQ. Higher technology costs, up 12.0% QoQ, pressured margins, though lower employee expenses offered some offset. Adjusted profit after tax (APAT) fell 39.8% QoQ and 20% YoY to Rs 80 crore, impacted by reduced other income and weaker operations.
Nuvama has revised its rating to 'Hold' with a Rs 1,250 target price, suggesting limited upside. The brokerage also cut its FY27 and FY28 earnings estimates by about 10%, signaling ongoing challenges. CDSL now trades at 45 times its FY28 estimated earnings. This valuation appears stretched given recent performance and rising costs, especially for technology investments (up 41.1% YoY and 12.0% QoQ). Management states these investments are for capacity and streamlining.
Its main competitor, National Securities Depository Limited (NSDL), has a market cap of around Rs 40,000 crore and a more moderate P/E of 35. NSDL has shown stronger YoY revenue growth and maintained margins better, partly due to lower tech spending. India's capital markets show strong demat account growth but volatile primary market activity, affecting depository fee income. Motilal Oswal's 'Neutral' rating acknowledges long-term growth but notes caution due to competition and primary market reliance.
Even with CDSL's position in a sector benefiting from India's financial growth, significant risks exist. The current valuation of 45 times projected FY28 earnings seems high given its recent revenue decline and shrinking margins. Technology investments, while needed for competitiveness and compliance, are adding costs not fully covered by current revenues, especially from volatile IPO and corporate action segments. Compared to NSDL, which has a larger market share and a lower valuation multiple, CDSL's ability to turn investments into sustained profit growth faces questions. While the stock has shown resilience after short-term dips, this may not continue if operational challenges persist or if new regulatory demands, like SEBI's focus on data security, require further spending.
Investors will watch how the strong IPO pipeline converts to actual listings, a key income driver. CDSL's success depends on managing rising tech costs while boosting revenue from transactions and corporate actions. Analysts acknowledge long-term advantages but offer cautious optimism, with revised estimates and 'Hold' ratings suggesting a period of valuation adjustment. Steady growth in demat accounts provides a base, but near-term performance relies on market activity and cost control.