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Strong operations led by increased market activity

* BSE reported operational revenue growth of 24% YoY in 4QFY21. Growth was led by a 117% YoY increase in equity transaction charges; this was partially offset by revenue decline in Star MF on moderation in realization on the platform. Overall strong market activity led to an 86%/17% YoY increase in transaction charges / services to corporates. A robust increase in margins was the function of operating leverage in the business.

* The management’s decision to explore options to unlock value from its Star MF segment is encouraging; however, no bids have been accepted thus far.

* 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 of 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 above estimates

* BSE reported revenue growth of 23.8% YoY (above expectations). The EBITDA margin stood at 28.4% v/s +3.8% in 4QFY20.

* FY21 revenue increased 11.1% YoY and EBITDA margins were up to 15% visà-vis breakeven in FY20. PAT stood at INR1.4b (up 26% YoY).

* Income from transactions stood at INR465m (up 86% YoY), within which equity traction income increased 117% YoY. However, income from star MF declined on account of price negotiation with AMFI.

* Services to corporates also rose 17% YoY to INR665m, led by increased market activity.

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

* PAT stood at INR326m, implying a PAT margin of 18%.

Key highlights from management commentary

* In FY21, transactions grew 63% and market share at the year-end stood at ~82%. The BSE Star platform had net equity inflow v/s net outflow in the industry in FY21. BSE has given ICICI Securities the mandate to search for a buyer for Star MF.

* BSE has been using open source architecture for its systems/network, which has led to a reduction in its technology cost. As a result, the management is confident of advancing into newer areas and continues to expand in the traditional areas.

* Most brokers had earlier not diversified to other exchanges. Since the occurrence in February 2021 (halt in NSE trading), brokers have realized the importance of diversifying, which has benefitted BSE.

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. A 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 (INR138/share), (ii) BSE operations, including cash and margin money income (INR301/share), (iii) the floating of encumbered cash (INR270/share), and (iv) the implied value from CDSL’s market price at a Holdco discount (INR266/share). Our TP of INR970 implies a 32% upside.

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