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Modest operational performance

* BSE reported a PAT of INR294m in 2QFY23, down 48% YoY and 42% below our estimates. While revenues were broadly in line, opex came in 7% higher than estimates, led by technology-related costs. PAT was adversely impacted by INR363m contribution to Settlement Guarantee Fund (SGF) during the quarter, which was offset by a sharp increase in ‘other income’.

* The core business continues to see sluggish growth as cash volumes fail to see any major momentum. Launch of electronic gold receipts (EGR), scale of MF revenues, and possibility of charging in other segments such as equity derivatives can add to long-term revenue growth.

* We adjust our earnings to factor in the earnings miss in 2QFY23, but we raise our future other income and subsidiary PAT assumptions. Overall, while EBIDTA (including SGF contribution) estimates have been cut 27%/16%/16% for FY23/FY24/FY25, respectively, PAT estimates have been cut 3% for FY23 and raised 1% for FY24/FY25, led by increase in estimates for ‘other income’. We reiterate our Neutral rating with a SoTP-based, oneyear TP of INR620.

Higher opex partially offset by strong investment income

* Operating revenue grew 4% QoQ to INR 1.8b in 2QFY23, but was flat on a YoY basis, in-line with our estimates. Transaction charges were down 6% YoY but jumped 19% QoQ. While services to corporates was down 12% YoY, Star MF revenues was up 57% YoY.

* Opex was 7% higher than estimates, mainly led by 29% YoY increase in technology-related costs. EBIDTA margins declined 655bp YoY and 430bp QoQ to 23.2% in 2QFY23.

* Investment income was at INR594m (vs estimated INR284m), led by significant improvement in yield on assets.

* PAT declined 48% YoY and 27% QoQ to INR294m (v/s our estimate of INR502m). This was on the back of INR363m contribution to SGF during the quarter. Removing the impact of post-tax SGF/LES, PAT was at INR636m.

* Income from associates (primarily CDSL) came in at INR150m v/s our estimate of INR136m

* For 1HFY23, BSE reported revenue/EBIDTA/PAT of INR3,535m/893m/694m, which was a change of +6%/-11%/-36%, respectively.

Key takeaways from the management commentary

* BSE launched Electronic Gold Receipts (EGRs) on Diwali day with products of 10gms and 100gms in 995 and 999 grade. The transaction charges were levied from day 1 at Rs3.45/b of the turnover (same as equity segment).

* BSE has to reduce its stake in CDSL to 15% by October 2023 from its current 20%.

Higher investment income estimate offsets the negative impact of SGF; Reiterate Neutral BSE has multiple levers for growth in revenue and earnings over the medium term such as: 1) continued momentum in the Star MF business, 2) levy of charges on equity derivatives, 3) levy of charges on the INX platform, 4) possibility of levying a fee for listing of debt securities, 5) start of operations at its Power Exchange, and 6) commencement of revenue from its Gold Spot exchange. On the core business front, while we expect some challenges in book building fees, cash segment volumes can normalize as the impact of new margin norms is now in the base. We have cut our EBIDTA assumptions for BSE based on high contribution to SGF, but the same does not percolate to PAT as investment income assumptions have been increased to factor in better yields. PAT estimates have been cut 3% for FY23 and raised 1% for FY24/FY25, led by an increase in estimates of ‘other income’. We reiterate our ‘Neutral’ rating with a SoTP-based, one-year TP of INR620.

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