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Strong business momentum from macro tailwinds as well as executions

BSE Limited (BSE) is on a strong business momentum from market share and overall volumes in equities as well as new segments like commodity options and GIFT city. The value of CDSL has also increased substantially, in-line with momentum in capital market activity, which also increases BSE’s valuation.

We do an SoTP-based valuation of BSE as follows: (1) ~20x multiple to core earnings (excluding other income), (2) BSE’s 20% stake in CDSL at our target price (Rs1,164 per share) post a holding company discount of 20%, and (3) free cash of Rs20bn (Rs456/share) to arrive at a target price of Rs1,200 (earlier: Rs577). Recommend HOLD.

* Q1FY22 exhibited positive all-round performance, BSE StAR MF reported lower revenue growth due to decline in realisations: Q1FY22 transaction charges grew at robust pace of 93% led by strong growth in volumes. Equity cash ADTV / revenue grew 52% / 179% on account of revision in transaction charges. Interoperability aided improvement in cash market share for BSE. Introduction of weekly options with Monday expiry has helped BSE gain market share in equity derivatives segment.

Revenue from currency derivatives segment grew 8% QoQ. BSE StAR MF platform transactions grew 90% while revenue declined 30% YoY due to lower realisations. Commodity options clocked strong revenue growth; however, BSE has abstained itself to charge in this segment. Charging in this segment will be growth optionalities going forward.

* Expect core revenue to clock 13% CAGR between FY21-23 leading to Rs2.2bn PAT in FY23: We expect total transaction charges to grow 39% / 25% led by higher revision in equity cash transaction charges. We expect revenue from BSE StAR MF to grow ~50% CAGR, in-line with growth in number of transactions.

We expect EBITDA margin (ex -investment income) to grow from 14% in FY21 to 20.5% and 22% in FY22 and FY23. This will translate to PAT of Rs1.8bn / Rs2.2bn in FY22/23. Core PAT is expected to be Rs808mn / Rs1bn in FY22/23 compared to Rs305mn/Rs667mn in Q1FY21/FY21, respectively.

* There is an overall macro tailwind and also turnaround signs in exchange business. Core valuations have reflected that. The absolute levels of cash/derivative volume (in ADTV terms) of BSE was Rs42bn/1.4trn in FY21 compared to Rs26.8bn/10.6bn in FY20 and Rs31.3bn/91mn in FY19. Q1FY22 run rate of Rs57bn/3.2trn will itself lead to 35/123% YoY growth in cash/derivative volumes in FY22.

Additionally, the equity cash/derivative market share of BSE has improved from 6.8%/0.1% in FY20 and 6.4%/5.2% in FY21 to 7.2%/6.5% in Q1FY22. The commodity options volumes (ADTV terms) have reached to Rs33bn in Q1FY22 compared to Rs28bn in FY21. The volumes in GIFT city (ADTV terms) have been US$12bn in Q1FY22 with market share of 100% (on bonds trading platform) vs US$7bn in FY21. Accordingly, the core valuations of BSE (ex-cash and CDSL) turned positive in FY22 after being negative from mid FY20 to FY21. (Refer chart 1 below for details).

Valuation

We do an SoTP-based valuation of BSE as follows: (1) ~20x multiple to core earnings (excluding other income), (2) BSE’s 20% stake in CDSL at our target price (Rs1,164 per share) post a holding company discount of 20%, and (3) free cash of Rs20bn (Rs456/share) to arrive at a target price of Rs1,200(earlier: Rs577).

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