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BSE has gradually transformed itself into a diversified capital market play. The strategy is that of harbouring optionalities with minimum cash burn like commodity options, Gift City, power exchange, insurance broking, gold spot exchange, trade receivables exchange and agriculture market. However, considering the cyclical nature of transaction and book building revenue (65% of Q1FY23 revenues) and limited revenue traction of new initiatives, earnings momentum could be challenged hereon. Maintain HOLD with a revised target price of Rs640 (earlier: Rs690) based on SoTP valuation which is as follows: (1) ~20x multiple to FY24E core EPS of Rs15.1 (earlier FY23E core EPS of Rs15.9) (excluding other income and CDSL share of profits), (2) BSE’s 20% stake in CDSL at our target price of Rs1,240 translating into per share valuation of Rs153 (Rs180 earlier) post a holding company discount of 20%, and (3) free cash of Rs24.8bn (Rs184/share). Lower target price reflects in a decline in CDSL valuation.

* BSE reported 15% sequential decline in core EBITDA in Q1FY23. This was due to 9% drop in operating revenue sequentially offset by 5% lower cost. Drop in operating revenue was on account of 23% QoQ transaction charges, which were down due to a drop in cash volumes. Revenue from services to corporate grew 2% QoQ in Q1FY23.

* Expect EBITDA (ex-investment income) CAGR of 13% between FY22-FY24E. We expect BSE’s operating revenue to grow at 10% CAGR between FY22-FY24E driven by 7% CAGR in transaction revenue and 8% in listing and book-building charges. We expect total operating expenses to increase at 9% CAGR between FY22-FY24E. Core EBITDA margin is expected to dip from 33% in FY22 to 32% FY23 and increase to 35% in FY24. Core PAT is estimated at Rs1.54/2bn for FY23/24E. Volatile nature of market-linked revenue and lower market share of BSE limit growth estimates for FY23/24 on a high base of FY22. In the past, revenue growth has been (-)12%/28%/(-)10%/0.3%/14%/52% for BSE in FY17/18/19/20/21/22, respectively. Our estimates do not factor any revenue from new initiatives. The ability to charge in new segments will be key. Power exchange (started operations in Jul’22 and have garnered 20% market share in contingency contracts), India INX and increasing clearing and settlement income (Q1FY23 - Rs171mn, up 98% YoY) due to interoperability benefits and increasing traction in the EBIX platform (Insurance business) form the list of new segments.

* StAR MF platform continues with strong volume momentum but pricing remains disappointing: Number of orders processed increased 68% YoY in Q1FY23 while revenue increased 51% indicating pressure on yields yet again. StAR MF has a slab-wise rate structure and therefore, growth in orders will also have a fall in realisations. However, management indicated there are floors to arrest the fall in realisations going forward. Lower prices have helped BSE maintain a dominant 87.3% market share in terms of the number of orders received in Q1FY23. We factor 30% CAGR growth in orders for FY23E/FY24E with realisation of Rs2.5/2.6 per order in the respective years. Based on the management disclosure in concall, Q1FY23 realisation was Rs3.05.

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