3QFY18 Result Update January 23, 2018 CMP* (Rs) 360 IN Market Cap. (Rs bn) 38 Free Float (%) 76 Shares O/S (mn) 104.5 Stellar Performance; Fundamentals Remain Intact Central Depository Services () has reported another impressive financial performance in 3QFY18. Surpassing our estimates by 9%, its revenue rose by a healthy 36.1% YoY to Rs511mn, led by robust growth in key verticals, including Transaction Charges (+67% YoY), IPO/Corporate Action Charges (+122%) and KYC/Online Data Charges (+74%). From a segmental perspective, while revenue from Depository Services rose by 31.1% YoY to Rs395mn, revenue from Data Processing surged by a robust 58.1% YoY to Rs109mn. This impressive performance on revenue front can be attributed to good health of capital markets, with the key indices hitting all-time highs, robust primary market with new issuers coming in at a rapid rate and strong number of new demat account openings. Notably, its EBITDA margin expanded by a whopping 785bps YoY to 61.1%, which in absolute terms grew by 56.2% YoY to Rs312mn owing to operating leverage and eective cost control measures. However, its reported PAT rose at a slower pace than EBITDA albeit still at a healthy pace by 25.3% YoY to Rs254mn owing to 38.4% YoY decline in lower other income led by higher yields on investments, which led to falling bond prices. Share price (%) 1 mth 3 mth 12 mth Absolute performance (2.1) (4.1) N.A. Relative to Nifty (7.3) (12.7) N.A. Shareholding Pattern (%) Sep'17 Dec'17 Promoter 24.0 24.0 Public 76.0 76.0 1 Year Stock Price Performance 450 430 410 390 370 350 Revenue Growth, Margins Impress 330 310 Aided by all-round growth in both Depository and Data Processing segments, s revenue 290 grew by an impressive 36.1% YoY to Rs511mn. Its revenue from Depository Services rose by 270 250 31.1% YoY (9.6% QoQ) to Rs395mn, aided by healthy capital markets, strong primary market Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 and growth in DP accounts due to increasing investor interest. Further, its revenue from Data Processing surged by a robust 58.1% YoY (7.7% QoQ) to Rs109mn aided by healthy state of capital Note: * CMP as on January 22, 2018 markets and strong downstream revenue relating to KYC services led by new demat account openings. EBIT margin from Depository segment expanded by a strong 769bps YoY, while segmental EBIT surged by 53.9% YoY to Rs205mn. On the other hand, EBIT margin from Data Processing segment rose by 313bps YoY, while segmental EBIT rose by 64.6% YoY to Rs87mn. Thus, its consolidated EBIT margin rose by 673bps YoY to 57.5%, while consolidated EBIT surged by 54.2% YoY. Outlook & Valuation We continue to believe s stock is a good long-term investment in light of its highly predictable revenue model, good health of capital markets, market leadership based on incremental BO accounts, sustainable cash flow and newer business initiatives. At CMP, the stock trades at a PE of 29.3x/25.5x FY19E/FY20E EPS, respectively. Rolling over our estimates to FY20E, we maintain our recommendation on the stock with a revised Target Price of Rs450 (from Rs435 earlier). Key Financials (Rs mn) FY17 FY18E FY19E FY20E Net Sales 1,460 1,949 2,441 2,832 EBITDA 794 1,169 1,483 1,742 RPAT 858 1,049 1,283 1,476 Diluted EPS (Rs) 8.2 10.0 12.3 14.1 P/E (x) 43.9 35.9 29.3 25.5 Research Analyst: Harit Shah EV / EBITDA (x) 43.9 29.2 22.5 18.6 Contact: 022 33201276 RoE (%) 16.9 18.5 20.0 20.2 Email: harit.shah@relianceada.com 1
IN Conference Call Key Takeaways continues to remain the leader in demat segment in terms of incremental market share, at 64%. The company had Rs5.3bn cash on its books as of 3QFY18-end. Other income declined by 38.4% YoY owing to higher yields on investments, which led to falling bond prices. earned 7.52% yield on its bond investments during 9MFY18 compared to 9.78% in the year-ago period. One of its new initiatives i.e. National Academic Depository (NAD) is witnessing good traction with new universities and academic institutions having signed ups. Though cannot charge the universities for 2 years, it can collect verification charges from academic institutions and testing agencies. However, as these institutions are typically slow in uploading data, it could take some time before is able to monetise this segment. Risks to the View Emergence of new technologies like Blockchain could aect s e-voting and KYC biz. Fierce price competition from key competitor i.e. NSDL. Any sustained downturn in equity markets. Appointment of CERSAI as central KYC registration agency could impact Ventures KYC business, which contributed 12.8% to s total revenue in FY17. Generic risks typically faced by electronic online systems such as cyber-attacks. Exhibit 1: Quarterly Performance (Consolidated) Particulars (Rs mn) 3QFY18 3QFY17 YoY (%) 2QFY18 QoQ (%) Net Revenues 511 376 36.1 472 8.2 Employee Expenses 71 61 15.8 66 7.5 Other Operating Expenses 128 114 11.9 106 20.0 EBITDA 312 200 56.2 300 4.2 Depreciation 18 9 97.3 14 31.8 EBIT 294 191 54.2 286 2.8 Other Income 59 96 (38.4) 91 (34.7) PBT 353 287 23.2 377 (6.2) Minority Interest and associate profits 0 1 (71.1) 1 (69.2) Tax 99 83 19.4 108 (8.3) APAT 254 202 25.3 267 (5.1) E/o (adj for tax) 0 0-0 - RPAT 254 202 25.3 267 (5.1) 2
IN Exhibit 2: Margin Break Up Particulars (%) 3QFY18 3QFY17 YoY (bps) 2QFY18 QoQ (bps) Employee Expenses % Net Revenues 13.9 16.4 (244) 14.0 (9) Other Expenses % Net Revenues 25.0 30.4 (540) 22.5 245 EBITDA Margin (%) 61.1 53.3 785 63.5 (236) EBIT Margin (%) 57.5 50.8 673 60.5 (301) Tax Rate (%) 28.1 29.0 (87) 28.7 (64) APAT Margin (%) 49.6 53.9 (428) 56.6 (694) Exhibit 3: Earlier, revised estimates Particulars Earlier estimates Revised estimates % change Earlier estimates Revised estimates % change FY19E FY20E Revenue (Rs mn) 2,149 2,441 13.6 2,427 2,832 16.7 EBITDA (Rs mn) 1,274 1,483 16.4 1,456 1,742 19.6 EBITDA margin (%) 59.3 60.8 150 bps 60.0 61.5 150 bps EPS (Rs) 11.7 12.3 5.0 13.2 14.1 7.0 Source: RSec Research Exhibit 4: Segment-wise contribution (% of gross revenue) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 Depository Activity 76.1 78.5 79.8 76.9 73.0 75.9 76.7 Data Processing Services 21.7 19.4 18.3 21.7 23.9 21.4 21.3 Others 2.1 2.1 1.8 1.4 3.1 2.7 2.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Exhibit 5: Segment-wise growth (YoY, %) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 Depository Activity 42.0 42.0 (1.7) 19.0 23.1 18.2 31.1 Data Processing Services 9.8 10.2 21.4 12.1 41.4 35.2 58.1 Others 11.5 3.5 14.1 (26.5) 87.1 56.0 47.8 Total 33.0 32.8 1.6 15.8 28.6 22.4 36.1 Exhibit 6: Segment-wise EBIT margins (% of revenue) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 Depository Activity 41.2 52.6 44.3 39.4 43.5 56.2 52.0 Data Processing Services 79.7 81.9 76.7 78.2 82.6 76.2 79.8 Others 63.0 69.3 61.4 (29.9) 72.1 47.8 14.0 Total 50.3 58.9 50.8 47.1 54.0 60.5 57.5 Exhibit 7: Segment-wise EBIT contribution (% of gross EBIT) 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 Depository Activity 62.7 70.5 69.9 64.7 59.1 70.8 69.8 Data Processing Services 34.6 27.1 27.8 36.2 36.7 27.1 29.7 Others 2.7 2.5 2.2 (0.9) 4.2 2.1 0.5 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 3
IN Profit and Loss Statement Y/E March (Rs mn) FY17 FY18E FY19E FY20E Net Sales 1,460 1,949 2,441 2,832 Growth (%) 18.8 33.5 25.2 16.0 Employee Expenses 249 292 360 411 Other Expenses 417 487 598 680 EBITDA 794 1,169 1,483 1,742 EBITDA (%) 54.4 60.0 60.8 61.5 EBITDA Growth (%) 24.3 47.2 26.8 17.5 Depreciation & Amortisation 37 64 66 69 EBIT 757 1,106 1,417 1,673 EBIT (%) 51.9 56.7 58.0 59.1 EBIT Growth (%) 26.8 46.1 28.1 18.1 Other Income 408 342 365 389 PBT Margin (%) 79.8 74.3 73.0 72.8 PBT Growth (%) 18.7 24.3 23.0 15.7 Tax (incl deferred) 300 391 490 577 Minority Interest 8 8 8 8 Extraordinary Items 0 0 0 0 APAT 858 1,049 1,283 1,476 PAT Margin (%) 58.8 53.8 52.6 52.1 PAT Growth (%) (5.7) 22.3 22.3 15.0 EPS (Rs) 8.2 10.0 12.3 14.1 EPS Growth (%) (5.7) 22.3 22.3 15.0 Balance Sheet Y/E March (Rs mn) FY17 FY18E FY19E FY20E SOURCES OF FUNDS Share Capital - Equity 1,045 1,045 1,045 1,045 Reserves 4,288 4,960 5,781 6,726 Total Shareholders' Funds 5,333 6,005 6,826 7,771 Minority Interest 155 163 171 179 Long Term Provisions & Others 6 6 6 6 Deferred Tax Liabilities (Net) 7 7 7 7 Creditors 90 96 118 134 Other Current Liabilities & Provns 481 494 514 529 Total Current Liabilities 571 590 632 663 TOTAL SOURCES OF FUNDS 6,072 6,771 7,643 8,627 APPLICATION OF FUNDS Net Block 47 41 37 24 Goodwill & Other Intangible Assets 8 8 8 8 Investments 2,729 2,729 2,729 2,729 Deferred Tax Assets 23 23 23 23 LT Loans & Advances, Others 228 228 228 228 Total Non Current Assets 3,035 3,030 3,025 3,012 Cash & Bank 483 1,133 1,942 2,883 Liquid Investments 2,300 2,300 2,300 2,300 Debtors 133 187 254 310 Loans & Advances and Others 122 122 122 122 Total Current Assets 3,038 3,742 4,618 5,615 TOTAL APPLICATION OF FUNDS 6,072 6,771 7,643 8,627 4
IN Cash Flow Statement Y/E March (Rs mn) FY17 FY18E FY19E FY20E PAT 858 1,094 1,272 1,419 Non-operating & EO items 0 (63) (77) (89) Depreciation 37 64 66 69 Working Capital Change (101) (35) (25) (24) Cash Flow from Operations (a) 794 1,059 1,236 1,375 Capex (53) (58) (61) (57) Investments 235 0 0 0 Cash Flow from Investing (b) 182 (58) (61) (57) Debt Issuance/(Repaid) 0 0 0 0 Share capital Issuance 0 0 0 0 Dividend (314) (315) (385) (443) Cash Flow from Financing (c) (314) (315) (385) (443) NET CASH FLOW (a+b+c) 662 686 790 875 EO items, others (609) (37) 20 65 Closing Cash Balance 483 1,133 1,942 2,883 Free Cash Flow 742 1,001 1,175 1,318 Key Ratios Y/E March FY17 FY18E FY19E FY20E Profitability (%) EBITDA Margin 54.4 60.0 60.8 57.0 APAT Margin 58.8 53.8 52.6 57.4 RoE 16.9 18.5 20.0 20.2 RoIC or Core RoCE 101.2 138.0 160.4 173.8 RoCE 11.1 14.2 16.0 16.5 Eiciency Tax Rate (%) 25.7 27.0 27.5 28.0 Fixed Asset Turnover (x) 14.5 12.3 11.1 10.2 Payables (days) 49 45 45 45 Cash Conversion Cycle (days) (16) (10) (7) (5) Net Debt/EBITDA (x) (6.9) (5.3) (4.7) (4.5) 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 8.2 10.0 12.3 13.6 CEPS 8.6 10.6 12.9 14.8 DPS 2.5 3.0 3.7 4.2 BV 51.0 57.5 65.3 74.4 Valuation P/E (x) 43.9 35.9 29.3 25.5 P/BV (x) 7.1 6.3 5.5 4.8 EV/EBITDA (x) 43.9 29.2 22.5 18.6 OCF/EV (%) 2.3 3.1 3.7 4.3 FCF/EV (%) 2.1 2.9 3.5 8.9 FCFE/mkt cap (%) 2.0 2.7 3.1 7.7 Dividend Yield (%) 0.7 0.8 1.0 1.2 5
IN 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 www.reliancecapital.co.in. 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. 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