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Strong performance; better outlook

* BSE reported strong operational revenue growth of 48% YoY in 1QFY22. Growth was led by a 180% YoY increase in equity transaction charges – on account of strong volumes and an increase in transaction pricing (by 10%). This was partially offset by revenue decline in Star MF on moderation in realization on the platform on a YoY basis. The robust increase in margins was the function of operating leverage in the business.

* Revenue from the Star MF platform declined 30% YoY due to a meaningful reduction in pricing, while overall volumes (number of orders) increased 90% YoY. With pricing headwinds now behind, a strong sequential increase in volumes led to a 106% increase in revenue for Star MF sequentially.

* BSE witnessed an increase in market share in both the Cash Equity and Derivatives segments, led by interoperability and best price execution implemented by some of the brokers. With the expectation of a further increase in interoperability penetration, we can expect a gradual increase in BSE’s market share, which would drive equity volumes for the company.

* Cross-subsidization by the competition presents limited monetization opportunities for BSE in the INX and Commodity Derivatives segments in the near term. While the announced additional income streams may be small currently, some of these have the potential to present meaningful opportunity over the long term.

* We continue to see BSE as a tactical play that is a combination of the core business and the potential value from revenue scale-up in new segments (Star MF, Commodities, and INX). Increased margins would further add to the bottom line on account of high operating leverage. Reiterate Buy.

Operations largely in-line

* BSE reported revenue growth of 48% YoY (largely in line with expectations). The EBITDA margin stood at 30.4% (above expectations) v/s -1.6% in 1QFY21. PAT stood at INR534m, implying margins of 28%.

* Income from transactions stood at INR584m (up 93% YoY), despite income from Star MF declining (on a YoY basis), on account of revisions in charges in FY21.

* On a sequential basis, transaction revenue from Star MF increased 106% to INR99m, led by higher volumes on the platform.

* Services to corporates also rose 41% YoY to INR586m, led by higher market activity.

* Premiums collected in the Ebix Insurance Broking segment surged 447% YoY in 1QFY22.

* The higher EBITDA margin was largely attributable to positive operating leverage in the business.

* Companies’ PAT increased 64.6% YoY to INR534m (in line with estimates).

Key highlights from management commentary

* BSE’s market share has increased to 7.2% (from 6.3% earlier). This is attributable to increasing interoperability and higher participation from HFTs. BSE has also increased its transaction charges to match those of the competition.

* It is the largest mutual fund distribution platform, and total transactions have grown 90% YoY. BSE’s Star MF platform continues to see new peaks in transactions every month and consistent equity inflow.

* Treasury income has declined given that NAV has declined, and the management expects a lot of volatility going forward as well.

Valuation and view – play on optionality, yield, and valuations

* Our ‘Buy’ stance on BSE is centered on option value from new segments (Star MF, Commodities, and INX) over and above the SOTP value of its businesses. The consistently high payout by the company remains a positive for the stock.

* Our SOTP fair valuation of BSE ascribes value to (i) core operations, excl. cash income (INR383/share), (ii) BSE cash per share (INR301/share), (iii) the float of encumbered cash (INR270/share), and (iv) implied value from CDSL’s market price at a Holdco discount (INR471/share). Our TP of INR1,430 implies a 17% upside.

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