Capital Markets - Exchanges: Durability over predictability by Kotak Institutional Equities
Exchanges: Durability over predictability
ndian exchanges combine durable liquidity moats, strong operating leverage and superior growth with greater transaction and regulatory sensitivity. Regulation reinforces entry barriers and limits liquidity fragmentation but also constrains monetization and commerl flexibility. NSE offers the stronger, more diversified franchise with an improving revenue mix; we initiate with BUY and Rs2,200 FV. BSE offers faster near-term growth across select segments, with its Sensex options gaining durable market share; we initiate with ADD and Rs4,000 FV. Indian exchanges deserve a premium over global peers given their superior growth, margins and returns, but further rerating will depend on building broader transactional revenue sources and a higher share of recurring revenues.
Indian exchanges: Strong foundations; some global learnings
Indian exchanges combine some of the strongest competitive moats with a long runway for growth. Liquidity network effects, rising participation in capital markets and strong operating leverage make the underlying economics attractive. However, durability of growth comes at the expense of predictability, given the dependence on transaction revenues, leaving earnings sensitive to regulations and trading activity. The next leg of value creation should come from a combination of growth in existing liquidity pools, creation of new ones and greater monetization through data, indices, connectivity and adjacent services.
Global exchanges show that the strongest franchises combine deep, defensible liquidity pools with diversified monetization around them. Derivatives-led exchanges such as CME and Cboe derive powerful network effects from benchmark contracts, while ICE, LSEG, Nasdaq and Deutsche Börse have progressively expanded beyond trading into clearing, indices, data, analytics, connectivity and technology, creating a broader and more recurring revenue base. India compares favorably on underlying market growth and scalability; however, superior margins and return ratios versus most global peers partly reflect limited TAM beyond transactional revenues.
NSE: Initiate with BUY with Rs2,200 FV NSE
combines dominant liquidity, proprietary benchmarks, vertically integrated market infrastructure and scalable technology We value NSE using a DCF-based approach, implying ~38X December 2028E EPS. We expect near-mid-teens earnings growth, supported by healthy cash and derivatives volumes, stable transaction pricing and faster growth in adjacent revenue streams. Share of index options expected to decline to ~50% in the next 3-4 years from ~60% in FY2024. We expect EBITDA margins to recover and sustain at 76-77% over next few years, alongside attractive capital returns (~85% payout ratio; ~3% dividend yield).
BSE: Initiate with ADD with Rs4,000 FV BSE
has executed a strong turnaround in equity derivatives and continues to grow faster from a smaller base, supported by its expanding index-options franchise. We initiate coverage on BSE with an ADD rating and a DCF-based FV of Rs4,000. BSE’s volume growth beyond expiry days, alongside healthy growth in nontransaction revenues, should support approximately 17% revenue CAGR and ~20% PAT CAGR over FY2026-29E. However, sustained high share of index options in revenues is a potential risk.
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