BUY CDSL. Strong Operating Performance; Maintain BUY. Target Price: Rs435. Institutional Equity Research. 2QFY18 Result Update October 31, 2017

Transcription

1 2QFY18 Result Update October 31, 2017 CMP* (Rs) 371 Market Cap. (Rs bn) 39 Free Float (%) 76 Shares O/S (mn) Strong Operating Performance; Maintain Central Depository Services () has reported a strong set of operational numbers in 2QFY18. Its revenue rose by a healthy 22.4% YoY to Rs472mn led by 18.2% YoY growth in Depository segment. On the other hand, Data Processing revenue rose by a strong 35.2% YoY. The strong revenue growth was aided by good health of capital markets with the key indices hitting all-time highs and strong new MF account openings. Key growth drivers in terms of businesses were Transaction charges (+26% YoY), IPO/Corporate Action charges (+68% YoY) and KYC/Online Data Charges (+41% YoY). Owing to operating leverage and cost control, s EBITDA margin powered ahead by 221bps YoY to 63.5%, and by 26.8% YoY in absolute terms to Rs300mn. However, owing to lower other income (-17.6% YoY) and a higher eective tax rate, reported PAT rose at a slower pace than EBITDA, by 10.5% YoY to Rs267mn. Revenue Growth, Margins Impress s revenue grew by an impressive 22.4% YoY, aided by all-round growth in both Depository segment and the Data Processing segment. Depository revenue rose by a healthy 18.2% YoY to Rs360mn, aided by healthy capital markets and strong growth in depository accounts due to increasing investor interest. On the other hand, Data Processing revenue rose by a robust 35.2% YoY to Rs102mn aided by healthy state of capital markets and strong downstream revenue related to KYC services led by new demat account openings. On a sequential basis, Depository revenue rose by a robust 21.1%, while Data Processing revenue rose by 4.3%. On EBIT margin front, Depository segment saw a strong 362bps YoY increase, with EBIT in absolute terms surging by 26.4% YoY to Rs202mn. On the other hand, the Data Processing segment recorded a 569bps YoY dip in EBIT margin, even as EBIT in absolute terms rose by 25.8% YoY to Rs77mn. Sequentially, Depository segment EBIT margin surged by 1,266bps (EBIT up 56.4% QoQ), while Data Processing EBIT margin declined by 635bps (EBIT down 3.6% QoQ). Share price (%) 1 mth 3 mth 12 mth Absolute performance N.A. Relative to Nifty N.A. Shareholding Pattern (%) Jul 17 Sep'17 Promoter Public Year Stock Price Performance Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Note: * CMP as on October 31, 2017 Outlook & Valuation In light of highly predictable revenue model, good health of capital markets, market leadership based on incremental BO accounts, high profitability and cash flow, and newer business initiatives, we believe the stock is a very good long-term investment. At the CMP, the stock trades at a PE of 31.8x FY19E EPS. Trimming down our EPS estimates by 4%, we maintain our recommendation on the stock with a revised Target Price of Rs435 (from Rs450 earlier). Key Financials (Rs mn) FY16 FY17 FY18E FY19E Net Sales 1,229 1,460 1,836 2,149 EBITDA ,074 1,274 RPAT ,049 1,222 Diluted EPS (Rs) P/E (x) EV / EBITDA (x) RoE (%) Research Analyst: Harit Shah Contact: harit.shah@relianceada.com 1

2 Conference Call Key Takeaways continues to remain the leader in demat segment in terms of incremental market share of 62% and also it remains the market leader in e-voting business. The company has inaugurated Commodity Repository (CCR), where warehouse receipts can be safely stored in demat form, against which financing can be made. s promoter company, Bombay Stock Exchange (BSE) along with Multi Commodity Exchange (MCX) have expressed interest in taking a stake in CCR, and the company will conduct a postal ballot for obtaining shareholders approval for this. The company earned lower other income owing to Rs mn being invested towards property, which reduced investible surplus, apart from lower debt yields due to falling interest rates. s National Academic Depository (NAD) is undergoing decent traction with >160 universities and academic institutions having signed up. Risks to the View Emergence of new technologies like Blockchain, which are being tested by SEBI, could potentially eat into some parts of s business. Increasing competition with entry of a possible 3rd player into the depository space and fierce price competition from key competitor, NSDL. Any eventual downturn in equity markets could adversely impact growth in BO accounts and lead to slower growth or even de-growth in transaction revenue. Appointment of CERSAI as central KYC registration agency could impact Ventures KYC business. Generic risks typically faced by electronic online systems such as cyber-attacks. Exhibit 1: Quarterly Performance (Consolidated) Particulars (Rs mn) 2QFY18 2QFY17 YoY (%) 1QFY18 QoQ (%) Net Revenues Employee Expenses (6.1) Other Operating Expenses EBITDA Depreciation EBIT Other Income (17.6) 98 (7.2) PBT Minority Interest and associate profits 1 4 (64.9) 2 (24.5) Tax APAT E/o (adj for tax) RPAT

3 Exhibit 2: Margin Break Up Particulars (%) 2QFY18 2QFY17 YoY (bps) 1QFY18 QoQ (bps) Employee Expenses % Net Revenues (337) Other Expenses % Net Revenues (230) 26.0 (351) EBITDA Margin (%) EBIT Margin (%) Tax Rate (%) APAT Margin (%) (608) 62.4 (584) Exhibit 3: Earlier, revised estimates Particulars Earlier estimates Revised estimates % change Earlier estimates Revised estimates % change FY18E FY19E Revenue (Rs mn) 1,868 1,836 (1.7) 2,187 2,149 (1.7) EBITDA (Rs mn) 1,037 1, ,236 1, EBITDA margin (%) bps bps EPS (Rs) (4.1) (3.9) Source: RSec Research Exhibit 4: Segment-wise contribution (% of gross revenue) 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Depository Activity Data Processing Services Others Total Exhibit 5: Segment-wise growth (YoY, %) 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Depository Activity N.A (2.3) Data Processing Services N.A Others N.A (26.5) Total N.A Exhibit 6: Segment-wise EBIT margins (% of revenue) 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Depository Activity Data Processing Services Others (29.9) Total Exhibit 7: Segment-wise EBIT contribution (% of gross EBIT) 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Depository Activity Data Processing Services Others (0.9) Total

4 Profit and Loss Statement Y/E March (Rs mn) FY16 FY17 FY18E FY19E Net Sales 1,229 1,460 1,836 2,149 Growth (%) Employee Expenses Other Expenses EBITDA ,074 1,274 EBITDA (%) EBITDA Growth (%) Depreciation & Amortisation EBIT ,027 1,216 EBIT (%) EBIT Growth (%) Other Income PBT 982 1,166 1,448 1,696 PBT Margin (%) PBT Growth (%) Tax (incl deferred) Minority Interest Extraordinary Items APAT ,049 1,222 PAT Margin (%) PAT Growth (%) 57.8 (5.7) EPS Balance Sheet Y/E March (Rs mn) FY16 FY17 FY18E FY19E SOURCES OF FUNDS Share Capital - Equity 1,045 1,045 1,045 1,045 Reserves 3,748 4,288 4,959 5,741 Total Shareholders' Funds 4,793 5,333 6,004 6,786 Minority Interest Long Term Provisions & Others Deferred Tax Liabilities (Net) Creditors Other Current Liabilities & Provns Total Current Liabilities TOTAL SOURCES OF FUNDS 5,530 6,072 6,767 7,584 APPLICATION OF FUNDS Net Block Goodwill & Other Intangible Assets Investments 2,105 2,729 2,729 2,729 Deferred Tax Assets LT Loans & Advances, Others Total Non Current Assets 2,439 3,035 3,043 3,039 Cash & Bank ,126 1,899 Liquid Investments 2,470 2,300 2,300 2,300 Debtors Loans & Advances and Others Total Current Assets 3,091 3,038 3,724 4,545 TOTAL APPLICATION OF FUNDS 5,530 6,072 6,767 7,584 4

5 Cash Flow Statement Y/E March (Rs mn) FY16* FY17 FY18E FY19E PAT ,094 1,272 Non-operating & EO items 0 0 (63) (73) Depreciation Working Capital Change (360) (101) (28) (21) Cash Flow from Operations (a) (70) 794 1,049 1,235 Capex (18) (53) (55) (54) Investments Cash Flow from Investing (b) (55) (54) Debt Issuance/(Repaid) Share capital Issuance Dividend (277) (314) (315) (367) Cash Flow from Financing (c) (277) (314) (315) (367) NET CASH FLOW (a+b+c) (344) EO items, others 365 (689) (600) (172) Closing Cash Balance ,126 Free Cash Flow ,126 1,899 Key Ratios Y/E March FY16 FY17 FY18E FY19E Profitability (%) EBITDA Margin APAT Margin RoE RoIC or Core RoCE RoCE Eiciency Tax Rate (%) Fixed Asset Turnover (x) Payables (days) Cash Conversion Cycle (days) (7) (16) (10) (7) Net Debt/EBITDA (x) (7.8) (6.9) (5.7) (5.4) Net Debt/Equity (x) (1.0) (1.0) (1.0) (1.0) Interest Coverage (x) N.A. N.A. N.A. N.A. Per Share Data (Rs) EPS CEPS DPS BV Valuation P/E (x) P/BV (x) EV/EBITDA (x) OCF/EV (%) (0.2) FCF/EV (%) FCFE/mkt cap (%) Dividend Yield (%)

6 Rating Guides Rating Expected absolute returns (%) over 12 months >10% HOLD -5% to 10% REDUCE >-5% Reliance Securities Limited (RSL), the broking arm of Reliance Capital is one of the India s leading retail broking houses. Reliance Capital is amongst India s leading and most valuable financial services companies in the private sector. Reliance Capital has interests in asset management and mutual funds, life and general insurance, commercial finance, equities and commodities broking, wealth management services, distribution of financial products, private equity, asset reconstruction, proprietary investments and other activities in financial services. The list of associates of RSL is available on the website RSL is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014 General Disclaimers: This Research Report (hereinafter called Report ) is prepared and distributed by RSL for information purposes only. The recommendations, if any, made herein are expression of views and/or opinions and should not be deemed or construed to be neither advice for the purpose of purchase or sale of any security, derivatives or any other security through RSL nor any solicitation or oering of any investment /trading opportunity on behalf of the issuer(s) of the respective security(ies) referred to herein. These information / opinions / views are not meant to serve as a professional investment guide for the readers. No action is solicited based upon the information provided herein. Recipients of this Report should rely on information/data arising out of their own investigations. Readers are advised to seek independent professional advice and arrive at an informed trading/investment decision before executing any trades or making any investments. This Report has been prepared on the basis of publicly available information, internally developed data and other sources believed by RSL to be reliable. RSL or its directors, employees, ailiates or representatives do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information / opinions / views. While due care has been taken to ensure that the disclosures and opinions given are fair and reasonable, none of the directors, employees, ailiates or representatives of RSL shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information / opinions / views contained in this Report. Risks: Trading and investment in securities are subject to market risks. There are no assurances or guarantees that the objectives of any of trading / investment in securities will be achieved. The trades/ investments referred to herein may not be suitable to all categories of traders/investors. The names of securities mentioned herein do not in any manner indicate their prospects or returns. The value of securities referred to herein may be adversely aected by the performance or otherwise of the respective issuer companies, changes in the market conditions, micro and macro factors and forces aecting capital markets like interest rate risk, credit risk, liquidity risk and reinvestment risk. Derivative products may also be aected by various risks including but not limited to counter party risk, market risk, valuation risk, liquidity risk and other risks. Besides the price of the underlying asset, volatility, tenor and interest rates may aect the pricing of derivatives. Disclaimers in respect of jurisdiction: The possession, circulation and/or distribution of this Report may be restricted or regulated in certain jurisdictions by appropriate laws. No action has been or will be taken by RSL in any jurisdiction (other than India), where any action for such purpose(s) is required. Accordingly, this Report shall not be possessed, circulated and/ or distributed in any such country or jurisdiction unless such action is in compliance with all applicable laws and regulations of such country or jurisdiction. RSL requires such recipient to inform himself about and to observe any restrictions at his own expense, without any liability to RSL. Any dispute arising out of this Report shall be subject to the exclusive jurisdiction of the Courts in India. Disclosure of Interest: The research analysts who have prepared this Report hereby certify that the views /opinions expressed in this Report are their personal independent views/ opinions in respect of the securities and their respective issuers. None of RSL, research analysts, or their relatives had any known direct /indirect material conflict of interest including any long/short position(s) in any specific security on which views/opinions have been made in this Report, during its preparation. RSL s Associates may have other potential/material conflict of interest with respect to any recommendation and related information and opinions at the time of publication of research report. RSL, its Associates, the research analysts, or their relatives might have financial interest in the issuer company(ies) of the said securities. RSL or its Associates may have received a compensation from the said issuer company(ies) in last 12 months for the brokerage or non brokerage services.rsl, its Associates, the research analysts or their relatives have not received any compensation or other benefits directly or indirectly from the said issuer company(ies) or any third party in last 12 months in any respect whatsoever for preparation of this report. The research analysts has served as an oicer, director or employee of the said issuer company(ies)?: No RSL, its Associates, the research analysts or their relatives holds ownership of 1% or more, in respect of the said issuer company(ies).?: No Copyright: The copyright in this Report belongs exclusively to RSL. This Report shall only be read by those persons to whom it has been delivered. No reprinting, reproduction, copying, distribution of this Report in any manner whatsoever, in whole or in part, is permitted without the prior express written consent of RSL. RSL s activities were neither suspended nor have defaulted with any stock exchange with whom RSL is registered. Further, there does not exist any material adverse order/judgments/ strictures assessed by any regulatory, government or public authority or agency or any law enforcing agency in last three years. Further, there does not exist any material enquiry of whatsoever nature instituted or pending against RSL as on the date of this Report. Important These disclaimers, risks and other disclosures must be read in conjunction with the information / opinions / views of which they form part of. RSL CIN: U65990MH2005PLC SEBI registration no. ( Stock Brokers: NSE - INB / INF / INE ; BSE - INB / INF / INE , Depository Participants: -DP IN-DP-NSDL , Research Analyst: INH ); AMFI ARN No