Buy BSE Ltd For Target Rs. 4,850 by Prabhudas Liladhar Capital Ltd
Rising to the Challenge
Quick Pointers
• Strong growth in index options to continue with steady contribution from cash/ diversified revenue streams
• Expect FY28E RoA/ RoE to sustain at 23%/ 41%
• We value BSE using the residual income framework with a TP of INR4,850 (50x FY28E P/E)
BSE has seen a rapid scale-up in its derivatives business over FY23-26 with premium market share expanding to ~28% in FY26 (vs. nil in FY23). We expect it to increase further with the introduction of new indices. Moreover, steady growth in cash equity/ StAR MF flows and diversification to high-margin segments like colocation, listing and data services are likely to lead to operating revenue CAGR of ~25% over FY26-28E. We expect BSE to maintain superior return metrics, with EBITDA margin/ core RoE of 71%/37% by FY28E, underpinned by strong operating leverage and disciplined capital management. We value BSE using the residual income framework to arrive at a TP of INR4,850 (FY28E P/E of 50x). Initiate with ‘BUY’
Rapidly gaining market share in cash/ derivatives: BSE has emerged as a strong player in equity derivatives post the relaunch of Sensex/Bankex weekly contracts. During FY23-26, BSE saw a jump in operating revenue (80%+ CAGR) led by the ramping up of index options. Improved liquidity, expiry positioning, and higher participation translated into premium market share of 28% and premium-to-notional of ~10bps in FY26. Further, initiatives such as smart order routing (SOR) and common contract note (CCN) are likely to boost market share in the cash segment (~7%).
Diversifying revenue streams to improve earning profile: While transaction income contributes 79% of operating revenue (FY26), BSE is focusing on building a diversified mix with multiple recurring streams. BSE StAR MF (87% market share) continues to benefit from structural flows, while listing fees provide stable revenue linked to market capitalization. Highmargin segments such as colocation, data dissemination and index licensing are in the nascent stage (<10% share) but offer strong growth visibility. We expect operating revenue to clock ~25% CAGR over FY26-28E, with continued traction in cash/ index options and growing contribution from new segments.
Operating leverage to sustain margins at 71%: Operating leverage remains a key driver, with EBITDA margin expanding from ~29% in FY21 to 69%/ 71% in FY27E/FY28E (vs. 67% in FY26). PAT is expected to grow at ~27% CAGR over FY26-28E with FY28E RoE of ~41%, supported by a capital-light, high-margin business model. Key risk to our estimates would be a shift to fortnightly/ monthly expiry; our sensitivity analysis highlights a corresponding impact of 17%/ 27% on FY27E PAT, in case of a shift. However, we expect the hit on profitability to be temporary (as seen during the shift of expiry days in Sep’25).
Initiate with BUY at a TP of INR4,850 (50x FY28E P/E): Over the past five years, BSE has undergone a continuous re-rating, supported by market share gains and improving profitability, trading at >49x 1-year forward P/E (BBG). We expect valuation to sustain at these levels, supported by structural factors such as (1) duopolistic market structure with high entry barriers (2) healthy profit growth (~27% CAGR over FY26-FY28E) and (3) optionality from new derivative products/ colocation revenues. We value BSE using a Residual Income framework, with a TP of INR4,850 (50x FY28E P/E).
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