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Strong operating performance boosts PAT growth

* BSE reported a strong performance in 2QFY25 as PAT jumped 192% YoY and 31% QoQ to INR3.46b (20% beat), driven by strong revenue growth and better-than-expected operational efficiency. For 1HFY25, PAT surged 177% YoY to INR6.1b.

* Operating revenue grew 137% YoY to ~INR7.5b (5% beat), driven by 284%/38% YoY growth in transaction charges/services to corporates and strong volume growth across segments. For 1HFY25, revenue grew 155% YoY to INR13.5b.

* Star MF continued to report a strong performance, with a 100% YoY jump in revenue to INR587m. On average, the number of transactions processed per month grew 1.7x YoY to 50.6m in 1HFY25.

* EBIDTA grew to INR3.9b (+192% YoY and 21% beat). For 1HFY25, it grew 231% YoY to INR6.7b. EBITDA margins expanded to 52.1% in 2Q vs. our est. of 45.2% and 46.7% in 1QFY25.

* Factoring in strong growth in transaction income and lower-than-expected operating expenses, we raise our earnings estimates by 6%/9%/10% for FY25/FY26/FY27. Considering the uncertainty about the quantum of the F&O regulation impact, we maintain our Neutral rating on the stock with a TP of INR4,500 (premised on 40x Sept’26E EPS).

Strong growth in transaction income

* Transaction charges surged 284% YoY to INR5.1b, while services to corporates increased by 38% YoY to INR1.2m.

* Transaction charges for the cash segment were INR983m, up 62% YoY, (16% beat), while for the equity derivatives segment, they were INR3.5b (6% beat).

* Star MF recorded a jump of 100% YoY in revenue to INR587m, contributing to overall revenue growth. BSE will continue to invest in this platform.

* Opex was INR3.6b, up 97% YoY but 8% below our estimate due to lower employee costs, regulatory costs, clearing house expenses and other expenses.

* BSE has achieved the milestone of crossing the 50% operating margin threshold for the first time, which stood at 52% in 2Q.

* Investment income stood at INR725m, up 9% QoQ (11% beat).

* SGF contributions stood at INR1.1b for the equity derivatives segment and INR10b overall.

* Under the true-to-label charges regulation, BSE has increased the transaction fee to INR3,250 per crore for the index derivatives options contract from Oct’24. However, for the equity cash segment, the transaction charge remains unchanged as it is charged on a flat basis since Dec’22.

* For 2HFY25, we expect revenue/EBITDA/PAT to grow 64%/276%/197% YoY to INR14b/INR7.1/INR6.3b

Key takeaways from the management commentary

* BSE will continue with Sensex derivatives as the sole weekly expiry w.e.f. 18th Nov’24, while it will move the Bankex and Sensex 50 weekly contracts to monthly contracts.

* The company is facing challenges related to differential regulatory fees and clearing & settlement charges. It has requested the regulators to reconsider the differential regulatory fees and the reply is still awaited. Any relief would benefit BSE.

* It has increased the lot sizes to 20 for Sensex, 30 for Bankex and 60 for Sensex 50.

Valuation and view: Reiterate Neutral

* The relaunch of BSE derivatives products has proved to be a trend-changing measure for BSE’s revenue and profitability. Increased member participation, new product launches (stock derivatives), rising awareness about products, and a recent launch of stock derivatives should continue to drive market share gains for BSE.

* Factoring in strong growth in transaction income and better-than-expected operational efficiency, we raise our earnings estimates by 6%/9%10% for FY25/FY26/FY27. While we expect a decline in option volumes in the short-term after the implementation of new regulations, the quantum of the impact and the pace of recovery remain uncertain. We maintain our Neutral rating on the stock with a TP of INR4,500 (premised on 40x EPS Sept’26).

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