Central Depository Services Ltd. (CDSL) reported its financial results for the January-March quarter (Q4FY24) over the weekend, and the numbers have revealed a significant decline across key financial parameters. Investors and analysts are likely to closely monitor the market reaction on Monday, May 5, especially considering the stock had risen 15% in the last one month in anticipation of the results.

Profit Slumps on Lower Core Revenue

The highlight of the earnings report was a 23% year-on-year decline in net profit, which came in at ₹100 crore. This fall was primarily driven by a drop in the company’s core depository services revenue, which forms the backbone of CDSL’s operations. Despite an increase in other income, it could not offset the fall in operating revenue.

Revenue and Margins Take a Hit

Total revenue for the quarter stood at ₹224.4 crore, down 19.3% quarter-on-quarter. This marks the second straight quarter of declining revenue for the company. The depository activity business, which generates a significant portion of revenue, saw an 18% drop QoQ, signalling weakening transaction volumes and activity in the market.

The decline in revenue directly impacted the company’s profitability margins. EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortisation) fell by a steep 32% QoQ to ₹109.35 crore. Consequently, EBITDA margins narrowed to 48.73%, compared to 57.79% in the December quarter — a drop of nearly 10 percentage points, which is significant in this context.

Sluggish Demat Account Growth

A worrying trend has emerged in CDSL’s demat account opening activity, a critical metric for gauging retail investor participation. In Q4FY24, the company added only 64 lakh net new demat accounts, a decline of 30% from the 92 lakh accounts opened in Q3FY24. This fall comes after a 22% decline in new accounts in the December quarter, indicating a continued slowdown in investor onboarding.

This dip in account openings could be attributed to reduced retail trading activity, market volatility, or shifting investor sentiments towards other asset classes. It’s a sign that the overall participation in equity markets is moderating, which has a direct impact on CDSL’s transaction-based revenue streams.

Demat Custody Value Declines

Another major negative in the earnings report was the fall in demat custody value, which refers to the total value of securities held in electronic form by CDSL. The value stood at ₹71 lakh crore at the end of the March quarter, down from ₹75 lakh crore in the December quarter. This decline marks the second consecutive quarter of reduced custody values, further underlining the pressure on capital market activity.

Dividend Announcement Provides Relief

Despite the underwhelming performance, CDSL’s board has declared a dividend of ₹12.5 per share. While this may provide temporary support to the stock, it could also be viewed as a signal that the company is trying to balance weak operational results with shareholder payouts to maintain confidence among investors.

Stock Performance and Market Sentiment

Shares of CDSL closed 0.4% higher at ₹1,324 last Friday. The stock remains 33% below its all-time high of ₹1,989, reflecting long-term underperformance. However, a 15% rally in the past one month suggested that the market had anticipated a stronger set of results. With the reported figures disappointing on multiple fronts, the rally might fizzle out if investor sentiment turns negative in response to the earnings.

Comparative Industry Performance

CDSL’s rival NSDL (National Securities Depository Ltd) has also faced headwinds, but not to the same extent. The slowdown in demat growth is being seen industry-wide, though CDSL, which has a larger share in retail demat accounts, is more sensitive to retail investor sentiment and market activity.

The broader capital markets have witnessed fluctuations in trading volumes and IPO activity, both of which significantly influence depository revenues. Unless there is a pick-up in new listings or retail investor activity, CDSL might continue to face pressure in the coming quarters.

What Investors Should Watch For

Looking ahead, CDSL’s performance will depend on a few key triggers:

• Recovery in demat account additions, which is closely linked to retail market participation.

• Stabilisation of transaction volumes, which drive a large part of its revenue.

• Uptick in new IPOs and mutual fund activity, which bring fresh inflows to the depository.

• Cost management and margin preservation, which will be important if revenue continues to fall.

Investors should also monitor regulatory changes, SEBI policy updates, and the trajectory of the broader equity market for cues on how CDSL might fare in the next few quarters.

Conclusion

CDSL’s Q4FY24 results signal a clear slowdown in its core operations, with declines in profit, revenue, margins, and key growth indicators like account additions and demat custody. While the ₹12.5 dividend payout may offer some cushion to shareholders, the company needs to address structural challenges and work towards reigniting growth in the depository ecosystem.

As the capital markets continue to evolve, investor participation and transaction volumes will remain the critical metrics to watch. Stakeholders should brace for continued volatility in CDSL’s performance unless there’s a broader market recovery and resurgence in retail interest.

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