Rising Retailer Participation Boosts CDSL, But Valuations Exceed

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In recent times, the increased participation of the retail sector is boosting the stock of Central Depository Services Ltd. (CDSL). While this leads to an increase in the number of dematerialized (dematerialized) accounts, investors are also watching the growth of transaction income. But a further rise in stock prices could be small on juices. CDSL shares have already jumped 211% in 2020, significantly stretching valuations.

In addition, analysts say transaction fees on income and market-linked securities transactions, which reflect retailer involvement, have a volatile history. Although there has been an increase in delivery volumes on the exchanges, analysts say market trends tend to be fickle and cyclical. A slowdown in retailer participation could decrease the income stream of depository participants.

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Investors are also seen betting on collateral fees which are likely to increase after the margin requirement. However, given the implementation bottlenecks that stock exchanges already face, revenues may be slow in coming.

CDSL nevertheless saw a strong jump in operating profits in the first quarter. While revenues increased 12% year over year, operating profits rose sharply due to lower expenses. The 68% jump in EBITDA year-on-year is due to lower personnel costs and other expenses, as well as the lower nature of the activity’s fixed costs.

Even so, transaction fees could increase this year as the number of demat accounts increases. CDSL is also ahead of its rival in the number of dematerialized accounts. But as previously noted, a slowdown in market confidence could play a spoiling role. ICICI Securities noted in a recent report that “while a better cost outlook leads to a 34% increase in net income estimates, the volatile nature of retail delivery volumes makes structural growth uncertain.”

In addition, some of its other activities have not performed well in recent quarters. In fact, market sentiment had an impact on the initial public offering and securities trading costs. Moreover, the decline in other income of around 45% shows the decline in government orders.

Nevertheless, the recent surge in stock prices may leave little improvement. The stock is already listed at a valuation of around 42 times earnings over 12 months. Even on expected gains of around For fiscal year 22, the stock seems to exceed the valuations generally granted to financial intermediaries.

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