Analysts sound alarm: CDSL’s troubles far from over as market navigates challenges ahead

The Central Depository Services (India) Ltd (CDSL) stock has shed 29% in the past month. Significantly, the shares have fallen 16% since the company released its quarterly earnings report on 25 January, raising red flags among investors. Analysts said the stock’s slide may be far from over, with more challenges looming on the horizon.

The CDSL stock, which opened at ₹1,270 on Wednesday, trades at a price-to-earnings multiple of 48.28, significantly higher than its 10-year average of 36.46, Bloomberg data showed. Krishna Appala, senior research analyst at Capitalmind Research, said this indicates the stock may have more room to fall.

“A potential risk for CDSL lies in further valuation derating, coupled with a slowing growth trajectory,” Appala noted. He said the company’s performance remains closely linked to market trends, suggesting that the valuation correction may persist for the next couple of quarters as the market navigates challenges ahead.

HDFC Securities analyst Amit Chandra said the weakness in this segment is expected to slow growth in FY26 following two years of strong expansion because 70% of the company’s consolidated revenue is tied to market-linked activities.

“We have cut our revenue estimate by approximately 8% for FY26 and FY27, led by market weakness and EPS estimates by around 13-14% due to the margin drop,” he said.

CDSL, which facilitates the holding of securities in dematerialised form and enables securities transactions, struggled in the December quarter due to some key factors: fewer retail investors, rate cuts, a drop in new account openings, and lower-than-expected earnings from corporate actions and initial public offering charges. On top of that, higher technology costs added to the pressure.

Corrective phase

The number of net accounts opened in the December quarter was the lowest in four quarters. CDSL added a net 9.2 million accounts in Q3 of FY25 compared with 11.8 million added in the previous quarter, the company said in a presentation.

“Low retail participation (QoQ) during corrective phase of equity market (Q3: Nifty 50 down 8.3% and NSE ADTV at ₹1.04 trillion (+29.5 YoY/-19.3% QoQ)) and reduced charges i.e. ₹3.5/debit, from price range of ₹3.75–5, led transactions charges to drop 28.9% QoQ to ₹590 million,” Nuvama Institutional Equities said in a report dated 27 January.

Nuvama is of the view that continued lower retail activity will hurt transaction charges in Q4. With secondary market volumes remaining sluggish and primary market activity expected to take a hit, the brokerage has revised its estimates, lowering the CDSL target price to ₹1,510 from ₹1,740 earlier.

Queries sent to CDSL remained unanswered.

“Obviously, the transaction-making ability in a bull market is far higher as compared to our bear market,” Nehal Vora, managing director and chief executive officer of CDSL, had said on an earnings call with analysts.

He explained that weak market sentiment—driven by geopolitical tensions, a global slowdown, and regulatory changes in the options segment—led to muted participation. This downturn is evident across transaction volumes, delivery volumes, and, consequently, CDSL’s market-based delivery transaction income.

Steady path ahead?

Vora pointed out that during the surge in activity around the covid period and its aftermath, CDSL managed the increased demand thanks to its proactive investments in technology and the ability to scale up when volumes climbed.

He said the company has consistently prioritised technology spending without being overly concerned about the market quarter-on-quarter volumes because “when the spurt comes, the spurt comes also in -- very suddenly and you need to be very prepared for it.”

Appala of Capitalmind said that even though earnings growth in the near term appears constrained, the stock holds promise for long-term investors during the next market upcycle.

Additionally, CDSL’s move to standardise pricing at ₹3.50 per transaction aims to leverage its scale, promoting greater market accessibility and inclusion. While this change may moderate revenue growth in the short term, Appala said the reduced fee is expected to drive higher transaction volumes over time, supporting long-term growth potential.

Some analysts pointed out that the Insurance Regulatory and Development Authority of India’s decision to make dematerialisation of insurance policies mandatory is likely to offer a revenue opportunity for CDSL.

Insurance dematerialisation will be carried out through CDSL Insurance Repository Ltd, and the pricing is expected to be regularised, JM Financial Institutional Securities said in a report dated 27 January. The brokerage said “the scale of business is likely to increase significantly post-IRDAI’s policy announcement.”