The December quarter results reveal a company grappling with normalisation after the extraordinary growth witnessed in previous years. Net sales declined 4.56% sequentially to ₹304.36 crores, whilst maintaining a modest 9.43% year-on-year increase. The stock has been under significant pressure, trading 27.81% below its 52-week high of ₹1,828.90 and firmly entrenched in bearish technical territory since mid-January 2026.
What makes the current situation particularly concerning for investors is the divergence between the company's slowing operational momentum and its elevated valuation multiples. Trading at 58 times earnings and 15.83 times book value—well above most peers in the capital markets space—CDSL finds itself at a critical juncture where premium valuations demand consistent execution, yet the numbers tell a story of deceleration.
| Quarter | Net Sales (₹ Cr) | QoQ Change | Net Profit (₹ Cr) | QoQ Change | Operating Margin |
|---|---|---|---|---|---|
| Dec'25 | 304.36 | -4.56% | 133.33 | -4.91% | 52.91% |
| Sep'25 | 318.89 | +23.21% | 140.22 | +36.97% | 55.70% |
| Jun'25 | 258.81 | +15.31% | 102.37 | +2.05% | 50.40% |
| Mar'25 | 224.45 | -19.30% | 100.31 | -22.90% | 48.73% |
| Dec'24 | 278.13 | -13.69% | 130.10 | -19.71% | 57.76% |
| Sep'24 | 322.26 | +25.20% | 162.03 | +20.74% | 62.00% |
| Jun'24 | 257.39 | — | 134.20 | — | 60.00% |
Financial Performance: Margin Compression Signals Headwinds
The Q3 FY26 results paint a picture of a business facing multiple operational challenges. Operating profit (excluding other income) stood at ₹161.03 crores, down 9.34% sequentially, whilst the operating margin contracted sharply by 280 basis points from 55.70% in Q2 FY26 to 52.91% in Q3 FY26. This margin compression is particularly noteworthy given the company's historically robust profitability profile.
On a year-on-year basis, whilst net sales grew 9.43%, the operating margin declined significantly from 57.76% in Q3 FY25, indicating that revenue growth has not translated into proportional profit expansion. The PAT margin of 43.68% in Q3 FY26, though respectable in absolute terms, represents a deterioration from 46.67% in the corresponding quarter last year.
Employee costs rose to ₹40.31 crores in Q3 FY26 from ₹32.28 crores in Q3 FY25, representing a 24.88% year-on-year increase that has outpaced revenue growth. Depreciation charges climbed to ₹17.08 crores from ₹12.97 crores year-on-year, reflecting the company's ongoing capital expenditure programme. Other income provided some cushion at ₹29.25 crores, up 46.35% year-on-year, though this non-operating income cannot sustainably drive long-term earnings growth.
Operational Excellence: Strong Fundamentals Meet Cyclical Pressures
Despite the near-term challenges, CDSL continues to demonstrate the hallmarks of a fundamentally sound business. The company's return on equity of 28.67% places it amongst the more efficient capital allocators in the financial services sector, reflecting its ability to generate superior returns on shareholder capital. This high ROE stems from the company's asset-light business model and dominant market position as one of only two depositories in India.
The balance sheet remains fortress-like with zero debt across all reported periods, providing substantial financial flexibility. Shareholder funds stood at ₹1,760.34 crores as of March 2025, up from ₹1,463.34 crores a year earlier. The company holds investments of ₹569.64 crores and maintains a healthy current assets position of ₹1,102.31 crores, ensuring robust liquidity for operational requirements and strategic initiatives.
Cash flow generation remains strong, with cash flow from operations reaching ₹542.00 crores for FY25, demonstrating the business's ability to convert profits into actual cash. The company's five-year sales growth of 32.10% and EBIT growth of 27.99% underscore the structural tailwinds from India's deepening capital markets and expanding retail participation in equities.
⚠️ Key Concern: Normalisation After Extraordinary Growth
CDSL's current slowdown appears to reflect a normalisation phase following the exceptional growth witnessed during FY24 when net sales surged 46.30% year-on-year. The capital markets business is inherently cyclical, and the company's performance is closely tied to trading volumes, new demat account openings, and overall market activity. With equity market volatility increasing and retail participation potentially plateauing, the near-term growth trajectory remains uncertain.
Valuation Analysis: Premium Multiples Difficult to Justify
The most pressing challenge facing CDSL investors is the disconnect between current valuations and near-term growth prospects. At 58.33 times trailing twelve-month earnings, the stock trades at a significant premium not just to the broader market but also to several peers in the capital markets space. The price-to-book value of 15.83 times suggests the market has priced in substantial future growth that may prove difficult to deliver in the current environment.
The company's enterprise value to EBITDA multiple of 46.07 times and EV to sales ratio of 24.65 times further reinforce the premium nature of the valuation. Whilst the company's quality metrics—including its 28.67% ROE and debt-free balance sheet—warrant a premium, the current multiples leave little room for execution missteps or further growth deceleration.
The dividend yield of just 0.95% provides minimal income support for investors, making the investment case heavily dependent on capital appreciation driven by earnings growth. With the stock already rated as "Very Expensive" by valuation metrics and having declined 27.81% from its 52-week high, the risk-reward profile appears unfavourable at current levels.
Industry Leadership: How CDSL Compares to Peers
A comparative analysis with peers in the capital markets sector reveals CDSL's positioning within the industry ecosystem. Whilst the company maintains a healthy ROE of 28.67%—higher than several peers—its valuation multiples command attention.
| Company | P/E Ratio | P/BV Ratio | ROE (%) | Div Yield (%) | Debt/Equity |
|---|---|---|---|---|---|
| CDSL | 58.33 | 15.83 | 28.67 | 0.95 | 0.00 |
| Multi Commodity Exchange | 68.70 | 30.85 | 16.92 | 0.24 | 0.00 |
| Nippon Life India | 38.45 | 12.66 | 26.06 | 2.18 | 0.02 |
| 360 ONE | 38.95 | 4.90 | 19.24 | 1.04 | 1.47 |
| Motilal Oswal Financial | 22.42 | 3.53 | 22.76 | 1.45 | 1.22 |
| CRISIL | 45.54 | 12.11 | 29.44 | 1.26 | -0.28 |
CDSL's P/E ratio of 58.33 times positions it at the higher end of the peer group, though below Multi Commodity Exchange's 68.70 times. The company's ROE of 28.67% is competitive, trailing only CRISIL's 29.44% amongst the peer set. However, the P/BV ratio of 15.83 times, whilst lower than MCX's 30.85 times, remains substantially above most other peers, suggesting the market has priced in significant growth expectations.
The debt-free balance sheet matches MCX but contrasts with leveraged peers like 360 ONE and Motilal Oswal Financial. The minimal dividend yield of 0.95% lags behind all peers except MCX, making the stock less attractive for income-oriented investors.
Shareholding: Institutional Confidence Shows Mixed Signals
The shareholding pattern reveals interesting dynamics in institutional investor behaviour. Promoter holding has remained stable at 15.00% across the last five quarters, with BSE Limited maintaining its strategic stake. This low promoter holding is a structural characteristic of CDSL, given its public infrastructure role in India's capital markets.
| Category | Dec'25 | Sep'25 | Jun'25 | QoQ Change |
|---|---|---|---|---|
| Promoter | 15.00% | 15.00% | 15.00% | 0.00% |
| FII | 12.40% | 11.54% | 12.90% | +0.86% |
| Mutual Funds | 7.38% | 6.22% | 6.20% | +1.16% |
| Insurance | 7.33% | 7.42% | 7.49% | -0.09% |
| Other DII | 0.40% | 0.54% | 0.55% | -0.14% |
| Non-Institutional | 57.49% | 59.28% | 57.87% | -1.79% |
Foreign institutional investors increased their stake by 0.86 percentage points sequentially to 12.40% in Q3 FY26, reversing the previous quarter's decline. Mutual fund holdings also rose by 1.16 percentage points to 7.38%, suggesting some renewed interest from domestic institutional investors. However, these holdings remain significantly below the peak levels seen in December 2024 when FII holding stood at 17.15% and mutual fund ownership at 11.21%.
The substantial decline in institutional holdings from December 2024 to March 2025—with FIIs reducing exposure from 17.15% to 11.34% and mutual funds from 11.21% to 7.18%—indicates that sophisticated investors booked profits at higher levels. The recent marginal increases may reflect tactical positioning rather than conviction-driven accumulation.
Stock Performance: Bearish Technicals Compound Valuation Concerns
The stock's price performance tells a sobering tale for recent investors. Trading at ₹1,320.20 as of January 30, 2026, CDSL has declined 0.21% in the most recent session and sits 27.81% below its 52-week high of ₹1,828.90 achieved earlier in the fiscal year. The technical picture has deteriorated significantly, with the stock entering bearish territory on January 16, 2026.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | -0.46% | +0.90% | -1.36% |
| 1 Month | -7.93% | -2.84% | -5.09% |
| 3 Month | -18.24% | -2.53% | -15.71% |
| 6 Month | -12.73% | +0.97% | -13.70% |
| YTD | -8.55% | -3.46% | -5.09% |
| 1 Year | +3.89% | +7.18% | -3.29% |
| 2 Years | +51.31% | +15.65% | +35.66% |
| 3 Years | +159.91% | +38.27% | +121.64% |
The near-term performance has been particularly concerning, with the stock underperforming the Sensex across all timeframes from one week to one year. The three-month decline of 18.24% against the Sensex's 2.53% fall translates to a negative alpha of 15.71 percentage points, indicating significant relative weakness. The stock also underperformed its capital markets sector peers, which delivered a 20.22% return over the past year compared to CDSL's 3.89%.
From a technical perspective, the stock trades below all key moving averages—5-day, 20-day, 50-day, 100-day, and 200-day—a configuration that typically indicates strong downward momentum. The immediate resistance zone lies at ₹1,397.03 (20-day moving average), whilst support rests at the 52-week low of ₹1,047.45. With a beta of 1.35, the stock exhibits higher volatility than the broader market, amplifying both gains and losses.
Investment Thesis: Quality Business, Questionable Entry Point
CDSL represents a high-quality franchise with structural advantages stemming from its duopoly position in India's securities depository infrastructure. The company's debt-free balance sheet, robust return on equity of 28.67%, and strong cash generation capabilities underscore its fundamental strength. The long-term growth opportunity remains intact, driven by India's expanding capital markets, increasing retail participation, and ongoing financialisation of household savings.
However, the current investment proposition is challenged by multiple headwinds. The proprietary Mojo Score of 37 out of 100 reflects a "SELL" rating, down from a "HOLD" rating in mid-January 2026. This deterioration stems from the confluence of flat quarterly financial performance, bearish technical indicators, and stretched valuations that leave minimal margin of safety.
Key Strengths & Risk Factors
KEY STRENGTHS
- Duopoly Market Structure: One of only two depositories in India, providing structural competitive advantage and pricing power
- Superior Capital Efficiency: ROE of 28.67% demonstrates excellent returns on shareholder capital, amongst the best in the sector
- Fortress Balance Sheet: Zero debt across all periods with substantial cash and investments providing financial flexibility
- Strong Cash Generation: Operating cash flow of ₹542 crores in FY25 reflects robust cash conversion from profits
- Secular Growth Drivers: Beneficiary of India's deepening capital markets and increasing retail equity participation
- Asset-Light Model: Low capital intensity and high operating leverage drive strong profitability metrics
- Institutional Backing: 27.51% institutional holding with 229 FIIs and 31 mutual funds providing liquidity
KEY CONCERNS
- Valuation Disconnect: Trading at 58x P/E and 15.8x P/BV with minimal room for disappointment or multiple compression
- Margin Compression: Operating margin declined 480 bps YoY to 52.91%, indicating rising cost pressures
- Growth Deceleration: Net profit growth of just 2.48% YoY signals normalisation after extraordinary FY24 performance
- Technical Weakness: Bearish trend since January 16, 2026, trading below all key moving averages
- Cyclical Exposure: Performance closely tied to market volumes and trading activity, both showing signs of moderation
- Institutional Exodus: FII and MF holdings declined sharply from December 2024 peaks, suggesting profit booking
- Minimal Dividend Support: Yield of 0.95% provides negligible income cushion during price corrections
Outlook: What to Watch
POSITIVE CATALYSTS
- Revival in equity market volumes and sustained retail participation driving account additions
- Margin stabilisation and operating leverage benefits from scale efficiencies
- New product launches or service offerings expanding revenue streams
- Technical reversal above ₹1,397 (20-DMA) signalling trend change
- Renewed institutional buying interest from domestic and foreign investors
RED FLAGS
- Further margin compression below 50% indicating structural cost pressures
- Sequential profit decline continuing into Q4 FY26 confirming negative momentum
- Break below ₹1,300 psychological support accelerating technical selling
- Continued institutional selling pressure expanding supply overhang
- Broader market correction impacting trading volumes and transaction revenues
The near-term trajectory for CDSL will largely depend on two factors: the sustainability of equity market activity levels and the company's ability to arrest margin compression. Any revival in trading volumes or acceleration in demat account openings could provide relief, but the current environment suggests these catalysts may take time to materialise. Conversely, if the stock breaks below the ₹1,300 level decisively, it could trigger further technical selling towards the ₹1,200-1,250 support zone.
The Verdict: Quality Franchise, Poor Entry Point
Score: 37/100
For Fresh Investors: Avoid initiating positions at current levels. The combination of premium valuations (58x P/E, 15.8x P/BV), decelerating growth (2.48% YoY profit growth), margin compression (480 bps YoY decline), and bearish technical setup creates an unfavourable risk-reward profile. Wait for either a significant correction towards ₹1,100-1,150 levels or clear evidence of earnings momentum revival before considering entry.
For Existing Holders: Consider reducing exposure on any technical bounce towards ₹1,400-1,450 levels. Whilst the long-term franchise value remains intact, the near-term outlook appears challenging with multiple headwinds converging. Those with significant gains from lower levels should book partial profits and reassess after the Q4 FY26 results provide clarity on whether the current slowdown is temporary or structural. Only long-term investors with multi-year horizons and high risk tolerance should consider holding through this period of uncertainty.
Fair Value Estimate: ₹1,150-1,200 (13% downside risk from current levels)
Note— ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results. The views expressed are those of the author and do not constitute recommendations to buy, sell, or hold any securities mentioned.
