2QFY18 Result Update October 31, 2017 CMP* (Rs) 371 Market Cap. (Rs bn) 39 Free Float (%) 76 Shares O/S (mn) 104.5 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 8.4 9.3 N.A. Relative to Nifty 2.8 6.7 N.A. Shareholding Pattern (%) Jul 17 Sep'17 Promoter 24.0 24.0 Public 76.0 76.0 1 Year Stock Price Performance 500 450 400 350 300 250 200 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 639 794 1,074 1,274 RPAT 910 858 1,049 1,222 Diluted EPS (Rs) 8.7 8.2 10.0 11.7 P/E (x) 42.7 45.2 37.0 31.8 EV / EBITDA (x) 56.2 45.4 32.9 27.2 RoE (%) 20.3 16.9 18.5 19.1 Research Analyst: Harit Shah Contact: 022 33201276 Email: harit.shah@relianceada.com 1
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 Rs650-700mn 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 472 386 22.4 405 16.5 Employee Expenses 66 54 23.1 70 (6.1) Other Operating Expenses 106 96 11.1 106 0.8 EBITDA 300 237 26.8 230 30.7 Depreciation 14 9 52.8 10 33.6 EBIT 286 227 25.8 219 30.5 Other Income 91 110 (17.6) 98 (7.2) PBT 377 337 11.6 317 18.9 Minority Interest and associate profits 1 4 (64.9) 2 (24.5) Tax 108 92 17.5 62 74.0 APAT 267 242 10.5 253 5.6 E/o (adj for tax) 0 0-0 - RPAT 267 242 10.5 253 5.6 2
Exhibit 2: Margin Break Up Particulars (%) 2QFY18 2QFY17 YoY (bps) 1QFY18 QoQ (bps) Employee Expenses % Net Revenues 14.0 13.9 9 17.4 (337) Other Expenses % Net Revenues 22.5 24.8 (230) 26.0 (351) EBITDA Margin (%) 63.5 61.3 221 56.6 688 EBIT Margin (%) 60.5 58.9 162 54.0 650 Tax Rate (%) 28.7 27.3 145 19.6 910 APAT Margin (%) 56.6 62.6 (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 1,074 3.6 1,236 1,274 3.1 EBITDA margin (%) 55.5 58.5 300 bps 56.5 59.3 275 bps EPS (Rs) 10.5 10.0 (4.1) 12.2 11.7 (3.9) Source: RSec Research Exhibit 4: Segment-wise contribution (% of gross revenue) 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Depository Activity 75.2 76.1 78.5 79.7 76.9 73.0 75.9 Data Processing Services 22.5 21.7 19.4 18.4 21.7 23.9 21.4 Others 2.3 2.1 2.1 1.8 1.4 3.1 2.7 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Exhibit 5: Segment-wise growth (YoY, %) 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Depository Activity N.A. 42.0 42.0 (2.3) 19.0 23.1 18.2 Data Processing Services N.A. 9.8 10.2 21.4 12.1 41.4 35.2 Others N.A. 11.5 3.5 11.7 (26.5) 87.1 56.0 Total N.A. 33.0 32.8 1.6 15.8 28.6 22.4 Exhibit 6: Segment-wise EBIT margins (% of revenue) 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Depository Activity 32.4 41.2 52.6 43.9 39.4 43.5 56.2 Data Processing Services 77.6 79.7 81.9 78.5 78.2 82.6 76.2 Others 73.8 63.0 69.3 70.5 (29.9) 72.1 47.8 Total 43.5 50.3 58.9 50.8 47.1 54.0 60.5 Exhibit 7: Segment-wise EBIT contribution (% of gross EBIT) 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 Depository Activity 56.0 62.7 70.5 69.0 64.7 59.1 70.8 Data Processing Services 40.2 34.6 27.1 28.5 36.2 36.7 27.1 Others 3.8 2.7 2.5 2.5 (0.9) 4.2 2.1 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 3
Profit and Loss Statement Y/E March (Rs mn) FY16 FY17 FY18E FY19E Net Sales 1,229 1,460 1,836 2,149 Growth (%) 16.7 18.8 25.8 17.1 Employee Expenses 215 249 285 328 Other Expenses 374 417 477 548 EBITDA 639 794 1,074 1,274 EBITDA (%) 52.0 54.4 58.5 59.3 EBITDA Growth (%) 41.5 24.3 35.2 18.6 Depreciation & Amortisation 42 37 47 58 EBIT 597 757 1,027 1,216 EBIT (%) 48.6 51.9 56.0 56.6 EBIT Growth (%) 53.4 26.8 35.7 18.4 Other Income 385 408 420 480 PBT 982 1,166 1,448 1,696 PBT Margin (%) 79.9 79.8 78.9 78.9 PBT Growth (%) 24.1 18.7 24.2 17.2 Tax (incl deferred) 402 300 391 467 Minority Interest 1 8 8 8 Extraordinary Items 331 0 0 0 APAT 910 858 1,049 1,222 PAT Margin (%) 74.1 58.8 57.1 56.8 PAT Growth (%) 57.8 (5.7) 22.3 16.5 EPS 8.7 8.2 10.0 11.7 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 147 155 163 171 Long Term Provisions & Others 5 6 6 6 Deferred Tax Liabilities (Net) 29 7 7 7 Creditors 73 90 94 108 Other Current Liabilities & Provns 482 481 492 505 Total Current Liabilities 556 571 586 613 TOTAL SOURCES OF FUNDS 5,530 6,072 6,767 7,584 APPLICATION OF FUNDS Net Block 30 47 55 51 Goodwill & Other Intangible Assets 7 8 8 8 Investments 2,105 2,729 2,729 2,729 Deferred Tax Assets - 23 23 23 LT Loans & Advances, Others 297 228 228 228 Total Non Current Assets 2,439 3,035 3,043 3,039 Cash & Bank 404 483 1,126 1,899 Liquid Investments 2,470 2,300 2,300 2,300 Debtors 130 133 176 224 Loans & Advances and Others 88 122 122 122 Total Current Assets 3,091 3,038 3,724 4,545 TOTAL APPLICATION OF FUNDS 5,530 6,072 6,767 7,584 4
Cash Flow Statement Y/E March (Rs mn) FY16* FY17 FY18E FY19E PAT 248 858 1,094 1,272 Non-operating & EO items 0 0 (63) (73) Depreciation 42 37 47 58 Working Capital Change (360) (101) (28) (21) Cash Flow from Operations (a) (70) 794 1,049 1,235 Capex (18) (53) (55) (54) Investments 21 235 0 0 Cash Flow from Investing (b) 3 182 (55) (54) Debt Issuance/(Repaid) 0 0 0 0 Share capital Issuance 0 0 0 0 Dividend (277) (314) (315) (367) Cash Flow from Financing (c) (277) (314) (315) (367) NET CASH FLOW (a+b+c) (344) 662 679 815 EO items, others 365 (689) (600) (172) Closing Cash Balance 431 404 483 1,126 Free Cash Flow 404 483 1,126 1,899 Key Ratios Y/E March FY16 FY17 FY18E FY19E Profitability (%) EBITDA Margin 52.0 54.4 58.5 59.3 APAT Margin 74.1 58.8 57.1 56.8 RoE 20.3 16.9 18.5 19.1 RoIC or Core RoCE 64.5 101.2 128.0 139.1 RoCE 7.9 11.1 13.2 13.8 Eiciency Tax Rate (%) 40.9 25.7 27.0 27.5 Fixed Asset Turnover (x) 21.2 14.5 11.8 10.3 Payables (days) 45 49 45 45 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 8.7 8.2 10.0 11.7 CEPS 9.1 8.6 10.5 12.2 DPS 2.2 2.5 3.0 3.5 BV 45.9 51.0 57.5 64.9 Valuation P/E (x) 42.7 45.2 37.0 31.8 P/BV (x) 8.1 7.3 6.5 5.7 EV/EBITDA (x) 56.2 45.4 32.9 27.2 OCF/EV (%) (0.2) 2.2 3.0 3.6 FCF/EV (%) 1.1 1.3 3.2 5.5 FCFE/mkt cap (%) 1.0 1.2 2.9 4.9 Dividend Yield (%) 0.6 0.7 0.8 0.9 5
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