BSE, CDSL, KFin Tech: Rally in exchange-related stks may halt, say analysts

BSE, CAMS, CDSL, KFin Tech: With market buoyancy to keep up the pace, the long-term view remains robust, but there is likely not much upside in the medium-term after the recent gains, analysts said

Swift gains on Dalal Street this year have also led to a sharp surge in shares of equity market intermediaries like depositories, exchanges, and registrar and transfer Agents (RTAs).

The stock prices of BSE, CDSL, CAMS, and KFin Technologies are up 24-283 per cent so far in 2023 when compared to a 9 per cent rise in the benchmark Nifty index.

With the market buoyancy expected to keep up the pace, analysts believe these stocks are a good long-term bet despite the sharp rally, which can trigger an intermittent correction.

Sneha Poddar, associate vice president, retail research at Motilal Oswal (MOFSL) suggests investors book partial profits at the current levels and buy them on a dip from a long-term perspective.

“Post the recent rally, stocks are a little expensive and there is limited upside. The bullish trend may continue for a while, but in the medium term, these stocks are likely to consolidate or correct. It is better to partially book profits and re-enter at lower levels after the time correction is over,” Poddar said.

That said, regulatory issues amid lofty valuations of some of these stocks, according to Amit Kumar Gupta, founder of Fintrekk Capital could also keep the rally in check in the near term.

“There are regulatory pressures in the industry. With respect to RTAs, they have high revenue dependence on mutual funds (MF), some asset management companies (AMCs) have low bargaining power and any changes in the proposed total expense ratio (TER) structure may keep their operating margins range-bound in the short-term,” said Gupta.

RTAs such as CAMS and KFin Tech earn revenues through fees charged on the assets under management (AUMs) of their MF clients. 

CAMS and CDSL's price-to-equity ratio on FY23 earnings is 43 times. It is 87 times for BSE and 40 times for KFin Tech. 

Good long-term bet

From a long-term perspective, however, analysts are positive on the stocks as sustained growth of capital markets and increased investor participation will keep demand for investor solutions robust.

“These companies are proxies for the capital markets. When markets rise, they benefit as higher volumes directly lead to earnings growth. With this year’s rally, their earnings have also improved significantly. We are thus bullish as markets will remain buoyant in the next 5-10 years as the economy booms,” said Poddar of MOFSL.

After the Covid-19 pandemic, the demat tally in India has grown more than threefold reflecting increasing investor participation.

At the end of October, there were 131 million demat accounts. Nearly 70 per cent are registered with CDSL. The depository said on Wednesday it crossed the 100 million mark.

While the count of active clients (those who traded once in the past year) is lower on exchanges, it has tripled after the pandemic.

NSE’s total active clients, for instance, have risen from 11 million in FY20 to 33.4 million as of September end.

That said, analysts also like the low capital-requiring business models of the companies.

“These business models are such that growth does not require capital infusion as they are very tech-oriented and also continue to give cash back to investors,” said Gupta of Fintrekk Capital.

Among stocks, Podar of MOFSL likes CAMS as it operates in a duopoly with high entry barriers and has a low risk of market share loss.

Those at Sharekhan have a buy call on BSE with a target price of Rs 2,394, an upside of 12 per cent from current levels.

HDFC Securities, meanwhile, expects the derivative segment to contribute 10 per cent and 30 per cent of BSE’s FY24 and FY25 revenue, respectively. Its target price for the stock is Rs 2,490.