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Multiple growth levers mostly factored into valuations

* The Indian Stock Exchanges saw an astounding growth over FY21-22, led by sharp swings in the Equity market and increased retail participation. BSE too clocked its best ever year in the past decade, with revenue/profit growing by ~48%/57% in FY22.

* The Equity Cash segment, which is one of the key revenue drivers for the company, has been under pressure over FY17-21 as the company lost 10% market share. On the back of favorable regulatory changes like: 1) best price execution and 2) introduction of the Interoperability framework, it managed to recoup 100bp market share at 7.5% in FY22. Change in margin norms, along with market share gains, led to a sharp jump (100%) in Equity Cash revenue.

* BSE had a very negligible presence in the Equity Derivatives segment prior to CY20. Later, the company undertook various initiatives like: 1) the launch of the Liquidity Enhancement Scheme, wherein it spends INR150- 160m annually to incentivize brokers and market participants to generate liquidity; 2) tie-ups with high frequency and foreign Algo traders; 3) launch of the Sensex 50 option contract; and 4) waiving off transaction fees, which resulted in a 2.5% (Mar’22) market share for the company.

* Improving market share in the Equity Derivatives and Commodities segment offers scope for significant revenue generation as the company currently levies only marginal charges within these segments. The Currency segment has started seeing a visible recovery, with ADTO/Currency transaction income growing by 28%/11% in FY22.

* StAR MF, BSE’s Mutual Fund distribution platform, has managed to gain 600bp market share over FY19-22 (stands at 85% in Mar’22). During the same period, the platform saw 73%/21% CAGR in the number of transactions processed/income. The management expects the leadership to sustain on back of difficulties in duplicating the user experience on the platform.

* The company is also leaving its mark in opportunistic business segments like: 1) India INX and INX Global Access; 2) Power exchange (expected to be operationalized by 1QFY23); 3) e-Gold receipts (received an in-principle approval); and 4) EBIX Insurance.

* BSE has multiple growth levers in the medium term. However, we see some challenges with: 1) growth in book-building fees and 2) any delays in the scaling up of a new business segment as none of them are expected to be a material revenue contributor in the near term. We have cut our PAT estimates by 5% each for FY23 and FY24 to factor in lower investment income. We expect a revenue/ PAT CAGR of 9%/19% over FY22-24. At 28.6x FY24E P/E, we find the valuations reasonable and assign a Neutral rating with a one-year TP of INR760/share. Price discovery for the StAR MF platform can provide an upside to valuations.

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