Buy National Stock Exchange Ltd for the Target Rs.2,050 by Emkay Global Financial Services Ltd
We initiate coverage on NSE with BUY and SEP-27E TP of Rs2,050 (~15% upside), implying Sep-28E PER of 38x. Our positive view on NSE is underpinned by three factors:
1) India’s capital market development and growth story has a long runway as wealth creation and financialization gain momentum in India’s journey of per capita GDP from ~$3k to ~$10k over coming decades
2) NSE has demonstrated its resilient leadership position over decades across the business segments of capital markets, and the business model has enough levers to adjust amid changing regulatory and macroeconomic landscapes and deliver profitable growth
3) strong profitability and cash generation by MIIs, such as stock exchanges, enable them to globally command higher valuation multiples versus other capital market players that are more fragmented and susceptible to competition. We forecast NSE to deliver ~13% EPS CAGR over FY27-29E, on the back of strong ~19% CAGR over FY22-26 as regulatory changes drive consolidation in market activities. Given its strong brand, dominant leadership position, profitability, and cash generation, we see a strong case for NSE shares to be part of every India-focused equity portfolio
Leading liquidity flywheel secures leadership
NSE commands uncontested leadership across cash and derivatives, driven by a selfreinforcing liquidity flywheel. In the cash segment, NSE holds ~93% market share while retaining near-monopoly in the equity futures and stock options segment. While BSE has captured market share following its derivatives relaunch, we believe index options are transitioning to a phase of stabilization following several regulatory rejigs. Supported by secular domestic financialization and under-penetration, NSE possesses a multi-year structural runway, as rising household savings, record SIP flows, and capital formation continue to compound.
Enough levers in business model to drive profitable growth
Market volatility, regulatory evolution, and technological disruptions are part and parcel of this business. NSE, over decades, has demonstrated that its profitable growth journey can withstand all of these, as its business model is built to operate amid these factors by leveraging its network effect and diversifying revenue streams. Despite concerns over derivatives turnover, Indian (and NSE) derivatives’ turnover growth in recent years has been similar to that of the US. In the global context, NSE’s non-transaction revenues are relatively smaller; hence, in a scenario of moderation in transaction volumes, nontransaction revenue growth, along with tweaking in transaction charges, can support profitable growth.
We initiate coverage on NSE with BUY and Sep-27E TP of Rs2,050
NSE has delivered ~24%/26% revenue/PAT CAGR over FY21-26, driven by strong growth in the derivatives segment. We expect NSE to clock ~12% revenue CAGR over FY27-29E, translating to ~13% EBITDA and PAT CAGR. As India’s premier market infra institution, NSE commands a leadership position in the structural financialization of savings. We initiate coverage with BUY and Sep-27E TP of Rs2,050, implying Sep-28E PER of 38x
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