Buy BSE Ltd For Target Rs.6,900 by Motilal Oswal Financial Services Ltd
High SGF contribution hits PAT; Robust outlook ahead
* BSE reported operating revenue of ~INR7.7b (in-line), reflecting 108% YoY growth, driven by 208%/72% YoY growth in transaction charges/services to corporates. For 9MFY25, revenue grew 136% YoY.
* Operating expenses grew 21% YoY to INR3.4b (in-line), driven by 11%/33%/85% YoY growth in employee expenses/ technology expenses/clearing house expenses. Regulatory costs declined 9% YoY.
* EBITDA grew ~4x YoY to INR4.4b (+12% QoQ; in-line), driven by strong growth in revenue and stable costs. EBITDA margins grew to 56.3% vs. our expectations of 55.4% and 49.1% in 3QFY24.
* SGF contribution of INR2b resulted in a 41% miss on PAT at INR2.2b (+108% YoY). Excluding SGF impact, PAT was in line with our estimates at INR3.7b (+245% YoY). For 9MFY25, adjusted PAT grew 199% YoY.
* Factors such as an improvement in premium turnover quality, a reduction in settlement fees due to a decline in contracts, higher participation in longterm contracts, and the introduction of colocation racks will drive growth in the medium term.
* Factoring in the impact of SGF contribution, we have cut our PAT estimates for FY25E by 11%. We raise our earnings estimates by 3% each for FY26/FY27, considering the maintained momentum in premium turnover. We reiterate our BUY rating on the stock with a TP of INR6,900 (premised on 45x Sept’26E EPS).
Sequential boost from corporate services to top-line
* Transaction charges surged 208% YoY (+1% QoQ) to INR5.1b, driven by 11%/513%/94% YoY growth in cash/derivatives/Star MF. The flattish sequential performance was largely due to the impact of F&O regulations and a volatile market environment, while Star MF maintained its momentum.
* Cash ADTO grew 3% YoY to INR68b, despite a challenging market environment, while premium ADTO was the highest-ever at INR88b in 3QFY25. Star MF continued to achieve new highs, witnessing the highestever orders of 61.5m in Dec’24 (180m orders in 3QFY25).
* Revenue from services to corporates grew 72% YoY (+26% QoQ) to INR1.5b, driven by 37%/199% YoY growth in listing fees/book building fees. 3QFY25 saw 30 new listings with INR955b raised (+261% YoY), and the pipeline remains robust.
* Investment income grew 3% YoY to INR619m (-15% QoQ; 8% miss).
* The enhanced methodology for calculating the minimum corpus required by SEBI and the revised stress test models led to a significant rise in SGF contribution to INR2b, impacting 3QFY25 profitability. However, this was a one-time reset of the SGF contribution. Future SGF contributions will depend on the market share in clearing and settlement.
Key takeaways from the management commentary
* Core SGF computation depends on multiple factors, including volatility and price shocks, making the future trajectory difficult to predict. The significant increase in contribution is due to the use of the enhanced version.
* BSE is monetizing its colocation facility through rent, and a small token charge has been introduced for order rates, which will be increased at the right time. Currently, the company has 200-220 racks and is working towards expanding additional colocation space to accommodate the large waiting list. The growth of retail algo trading will lead to an increased demand for colocation facilities.
* Sensex contracts continue to scale up, but Bankex and single-stock derivative volumes have yet to pick up, as members are still developing connectivity.
Valuation and view: Reiterate BUY
* The impact of five out of the six new F&O regulations has been seen on notional volumes, while premium turnover has started to improve. Strong listing activity has boosted BSE’s revenue and profitability, though this has been offset by the increase in SGF contribution. Increased member participation, colocation monetization, and sustained momentum in premium turnover will be key growth drivers for BSE.
* Factoring in the impact of SGF contribution, we have cut our PAT estimates for FY25E by 11%. We raise our earnings estimates by 3% each for FY26/FY27, considering the maintained momentum in premium turnover. We reiterate our BUY rating on the stock with a TP of INR6,900 (premised on 45x Sept’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
