Nuvama Boosts CDSL Target to Rs 1,400, But Sluggish Retail Activities Dampen Shares
CDSL announces increased costs and decreased revenue, yet sets a higher target price for Nuvama by 19%. Learn the reasons behind this strategic move.
In a surprising move, Nuvama Institutional Equities has bumped up its target price on CDSL shares to Rs 1,400, yet the brokerage's optimism doesn't seem to have trickled down to the shareholders. With a 'Hold' rating intact, the company's stock is struggling, courtesy of a sluggish retail market and technology expenses.
Primary & Secondary Markets: Retail Pains
The quarter ended FY25 saw a noticeable 19.7% drop in CDSL's sequential revenue, largely due to retail inactivity in the secondary market. Primary markets, too, showed signs of weakness, with only ten mainboard IPOs raising Rs 16,000 crore. This underwhelming performance led to a 7.4% year-on-year and 56.9% quarter-on-quarter drop in IPO and corporate action charges to Rs 25 crore.
In its research note, Nuvama noted that the lethargic secondary market might have influenced slower primary issuances. This secondary market malaise could potentially carry over to corporate action/IPO revenues in FY26.
CDSL's Margins Squeezed by Technology Expenses
CDSL's EBIT margins suffered, contracting by 1,573 basis points year-on-year and 1,073 basis points sequentially to 42.4%, resulting in an EBIT of Rs 95.1 crore. The culprit behind this squeeze was the sharp increase in technology expenses, which climbed 66.9% year-on-year as management continued investing in capacity creation and process streamlining. Employee and other expenses also crept up by 14.1% and 10.7% year-on-year.
However, CDSL managed to cushion the blow with higher-than-expected other income of Rs 31.3 crore and a lower tax rate, supporting the net profit of Rs 100 crore. Despite this, the robust revenue growth still remains a pipedream for the company.
CDSL's Tumble: Four Factors to Blame
- Financial Performance Slump: CDSL's net profit for the March quarter of FY25 dipped 22.4% Year-on-year, down to Rs 100.39 crore from Rs 129.4 crore in the preceding year. This substantial decline in profitability has dampened investor sentiment, causing the share price to plummet.
- Revenue Drop: The company's revenue from operations saw a 6.7% year-on-year decline, landing at Rs 224.45 crore. This significant revenue reduction indicates a slowdown in business growth, adding to the share price woes.
- Sluggish Market Conditions: Economic uncertainties and market volatility have created a cautious market environment, leading to a reduced retail participation in both primary and secondary markets.
- Economic Slowdown: An economic slowdown often leads to reduced investor confidence, affecting retail activity in the stock market.
In conclusion, while Nuvama might have increased CDSL's target price, the current market situation appears to be challenging, largely due to the company's disappointing financial performance and sluggish retail activity.
Investors may find it difficult to meet the new target price set by Nuvama for CDSL shares, as the company's stock has been struggling due to a sluggish retail market and technology expenses that are squeezing CDSL's margins. The decline in CDSL's net profit and revenue, coupled with sluggish market conditions and an economic slowdown, have dampened investor sentiment and affected retail activity in the stock market.
In the quarter ended FY25, a noticeable drop in CDSL's sequential revenue was due to retail inactivity in the secondary market, and the primary market also showed signs of weakness. The underwhelming performance of IPOs led to a decreased revenue from IPO and corporate action charges.
Investors should be aware of the potential carryover of the secondary market malaise to corporate action/IPO revenues in FY26, as Nuvama noted that the lethargic secondary market might have influenced slower primary issuances.
CDSL's EBIT margins contracted due to a sharp increase in technology expenses, which climbed 66.9% year-on-year as management continued investing in capacity creation and process streamlining. Other expenses also crept up, contributing to CDSL's lower net profit.
Despite higher-than-expected other income and a lower tax rate, CDSL's financial performance still needs significant improvement, and the robust revenue growth remains a pipedream for the company. Overall, the current market situation appears to be challenging for CDSL, and investors may want to consider these factors when making their investment decisions in the DEFIs market.
