Buy BSE Ltd For Target Rs.6,500 by Motilal Oswal Financial Services Ltd
Resilient growth in spite of tough regulations
F&O market share on the rise!
* BSE has successfully captured over ~29% of the notional options turnover (Dec’24), achieving a significant milestone in its competitive positioning against NSE, aided by product innovation, an increase in member participation, and lesser impact of regulatory changes compared to NSE.
* While the restriction on weekly expiry contracts per exchange w.e.f. Nov’24 has impacted industry volumes, BSE has witnessed improvement in premium ADTO (9% absolute growth in Dec’24), premium turnover market share (at 15% in Dec’24), and the premium-to-notional turnover ratio (at 10bp in Dec’24 vs. average of 7.3bp in the previous three months).
* Additionally, the decline in notional turnover will lower regulatory charges and clearing & settlement costs, boosting the company’s profitability. The change in Sensex expiry day from Friday to Tuesday will also boost BSE’s market share.
* The scale-up of co-location servers will bring in high-frequency traders and other institutions, leading to higher volumes in long-dated expiry products. This bodes well for realizations as well as costs.
* Star MF has delivered a stellar performance and BSE continuesto invest in growing this business, as it sees humongous opportunities to increase the revenue contribution from Star MF.
* We expect BSE to register a CAGR of 44%/74%/74% in revenue/EBITDA/PAT during FY24-27E, as we believe the improvement in the premium-to-notional turnover ratio will offset the decline in volumes. We reiterate BUY with a TP of INR6,500, based on 45x Sep’26E EPS.
BSE gaining from reduction in number of weekly expiries to one
* The significant part of the partial implementation of the new F&O regulation from Nov’24 was the reduction of weekly expiry contracts to one per exchange.
* The effect of this regulation is reflected in a 15%/33% decline in F&O notional ADTO and a 12%/11% decline in F&O premium ADTO for the industry (NSE+ BSE).
* BSE, being an emerging player in the derivatives space, had only two weekly expiry products – Sensex and Bankex, as compared to NSE’s four. After the regulation, BSE has continued with Sensex derivatives as its only weekly expiry contract, while Bankex and Sensex 50 contracts have been moved to a monthly expiry cycle.
* Compared to the decline in premium volumes for the industry, BSE witnessed 9% growth in premium ADTO in Dec’24, despite a 19% decline in notional ADTO, driven by an increase in trading of options on non-expiry days. Since revenue is linked to the premium turnover, the improvement in the premium-to-notional turnover ratio will boost revenue.
* We expect the notional turnover to decline 10% in FY26 and grow 16% in FY27. However, improvements in the premium-to-notional turnover ratio to 12bp/13bp (8bp in FY25E) will lead to 30%/26% growth in premium turnover and 34%/26% growth in transaction revenue from equity derivatives in FY26/FY27.
* Apart from revenue growth, the reduction in notional volumes and an increase in the lot size will also result in lower regulatory charges and clearing & settlement fees, improving the profitability.
Increasing derivatives market share; cash segment under pressure
* As of Dec’24, BSE’s options notional/premium market share has improved to 29.4%/14.6% (13.8%/4.8% in Dec’23), driven by: 1) NSE’s weekly expiry products reducing from four to one, 2) the launch of innovative monthly expiry products, 3) lower transaction fees vs. competition, and 4) aggressive outreach to brokers to enroll for BSE derivatives.
* BSE has shifted weekly expiry day of Sensex option contracts from Friday to Tuesday. This may boost BSE’s market share due to the gap between the existing weekly expiry day of Nifty contracts (Thursday) and the new expiry day of Sensex contracts.
* In the cash segment, BSE’s market share has been declining and was at 6% in Dec’24 (8.5% in Dec’23). Higher institutional participation will likely boost BSE’s market share in this segment.
Star MF platform to keep thriving
* Star MF, the mutual fund business of BSE, has seen phenomenal growth in the past couple of years and has delivered a stellar performance. On an average, Star MF processed ~50.6m transactions per month in 1HFY25 vs. ~30m in FY24.
* The platform will gain scale benefits and will contribute meaningfully to BSE’s total revenue and margin growth.
* To further strengthen its position, BSE will be launching Star MF 2.0 with improved scalability, functionality and order processing.
Co-location could be the next big revenue and profit driver
* When BSE relaunched its derivatives segment, it had 100 racks, which had been consumed. Management mentioned that as and when demand arises, BSE will build more colocation racks.
* The co-location facility attracts institutional investors, which will in turn drive volumes for long-dated options, leading to higher realizations as well as lower clearing and settlement costs.
* Earlier BSE was incurring in-house pocket expenses. After introducing new racks in the Phase I, it has started levying charges to recover the cost of racks and raised the rental in line with the industry.
* Currently, BSE is not charging for orders but may levy charges once volumes grow and utilization of the expanded co-location capacity surpasses optimal levels.
Valuation and View
* We expect the premium-to-notional turnover ratio to improve to 12bp/13bp in FY26/FY27, boosting BSE’s revenue. Lower regulatory and clearing costs will be profitability drivers. Additionally, stable momentum in Star MF platform and the scale-up of co-location services will help BSE sustain growth.
* We expect BSE to register a CAGR of 44%/74%/74% of revenue/EBITDA/PAT during FY24-27E, as we believe the improvement in the premium-to-notional turnover ratio will offset the volume decline. Reiterate BUY with a TP of INR6,500 (45x Sep’26E EPS).
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
