NSDL Target Price Slashed Amid Cost Pressures and Valuation Concerns

ICICI Securities has lowered its target price for National Securities Depository (NSDL) by 28% to ₹840, while maintaining a 'HOLD' rating. This move signals a shift in investor focus from NSDL's established market position to its operational efficiency and profit growth potential. Although NSDL reported a strong 26% year-on-year revenue increase to ₹458 crore in Q4 FY26, rising operating costs are beginning to affect its earnings. The company's stock has also fallen about 20% in the last six months.

Valuation Multiple Compressed

The brokerage firm reduced NSDL's valuation multiple from 40x to 35x its FY28E core earnings per share (EPS). This adjustment reflects concerns about NSDL's margin sustainability. For the full year FY26, NSDL's net profit grew 10.8% to ₹380 crore on revenues of ₹1,660.2 crore. However, the fourth quarter saw operating expenses jump 30% year-on-year, outpacing revenue growth. This led to a contraction in NSDL's EBITDA margin to 28.9% from 33.4% a year earlier. Lower profitability means a reduced earnings yield for investors, justifying a lower valuation in the current market.

NSDL vs. CDSL: A Tale of Two Depositories

NSDL operates in a market that, while growing due to increasing financial participation in India, shows significant differences between NSDL and its main competitor, CDSL. CDSL, despite a slight sequential revenue drop in Q4 FY26 from lower IPO and corporate action fees, maintains a much higher profitability. For fiscal year 2025 (FY25), CDSL's EBITDA margin was 68.50%, compared to NSDL's 34.54%. CDSL's Return on Equity (ROE) also stood at 29.18%, versus NSDL's 17.11%. While NSDL holds a larger share of custody value (86.1% in FY26) and has more service centers, CDSL leads in total demat accounts, indicating a wider retail investor base. This gap in efficiency and returns is increasingly influencing how investors view each company.

Sector Headwinds Impact Market Sentiment

The broader Indian stock market is currently facing challenges, including significant outflows from foreign portfolio investors (FPIs) totaling over $20 billion in the first four months of 2026. Geopolitical tensions and rising oil prices are also impacting market sentiment. These factors create a difficult environment for all companies, including NSDL, whose business is closely tied to market activity. While NSDL's management is focused on improving digital services and gaining market share, near-term market volatility and margin pressures are currently the main concerns.

Margin Erosion and Key Risks

A key concern for NSDL is the sustained pressure on its operating margins. The 30% year-on-year rise in operating expenses during Q4 FY26 suggests that costs are growing faster than revenue from its core depository services, which increased only 2.4% in the same quarter. This cost management difference is notable when compared to CDSL's stronger profitability. Additionally, a three-day technical disruption in late April has raised operational questions. Investors are also watching the potential impact on future database management revenue from the migration of SEZ-Online filings to the ICEGATE system. Lingering legal risks from NSDL's involvement in the Karvy pledge litigation also remain a minor consideration.

Analyst Outlook and Future Plans

Despite the target price cut, the general analyst sentiment for NSDL is a 'HOLD'. Motilal Oswal maintains a 'Neutral' rating with a ₹1,000 target, and Axis Capital initiated coverage with an 'Add' rating and a ₹1,000 target. This suggests that while near-term challenges exist, analysts still recognize NSDL's long-term growth prospects, driven by India's financial sector expansion and NSDL's infrastructure. The company's board has also approved a plan to spin off its Insurance Repository Business into a separate subsidiary, pending regulatory approval.