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Contribution to SGF reduces profitability

BSE reported a PAT of INR1.06b in 3QFY24 (23% below our estimate), up 124% YoY but down 10% QoQ, mainly owing to its contribution of INR917m to SGF for the currency derivatives segment.

Operating revenue grew 18% QoQ and 82% YoY to INR3.7b, broadly in line with our estimate.

After the relaunch, derivative contracts (Sensex and Bankex) are witnessing significant traction from market participants. BSE has increased transaction charges on Sensex options (only on near expiry), with effect from 1st Nov’23. Thus, the derivative segment would see strong revenue growth.

We have upgraded our EPS estimates by 7%/6% for FY25/FY26 to factor in the higher volume trajectory for its equity derivatives segment. Reiterate our Neutral rating with a one-year TP of INR 2,725 (based on 35x FY26E EPS).

Strong growth in transaction income

Transaction charges surged 69% QoQ and 163% YoY to INR1.66b, while services to corporates increased 20% YoY.

Transaction charges for the cash segment (INR693m, +77% YoY) and the equity derivatives segment (INR567m) were in line with our expectations. Revenue from the StAR MF platform jumped 55.5% YoY to INR328m.

Treasury income from clearing and settlement funds surged 115% YoY to INR469m in 3QFY24 (18% below our expectation). Investment income stood at INR598m, up 46% YoY and 14% QoQ.

Opex came in 27% higher than our estimates at INR2.8b, due to a higher contribution to SGF for the currency derivatives segment. Hence, EBIDTA margins declined to 25.2% vs. our expectation of 42.7% and 31.8% in 3QFY23. Excluding the SGF contribution, EBIDTA margins came in at 49.9%.

3QFY24 PAT stood at INR1.06b, a 124% jump YoY but down 10% QoQ.

For 9MFY24, revenue/Adj PAT grew by 53%/70% to INR9b/INR3.2b (Note - gain on sale of CDSL stake recorded in 1QFY24).

Key takeaways from the management commentary

BSE is developing a colocation facility - a strategic investment in the short term that will benefit in the long term. 2024 will be a transformational year as BSE is committed to growing in new areas such as expansion of data centers, new MF platform, improving clearing & settlement services, and enhancing index and data services.

Two factors impacted profitability: 1) Core SGF of INR917m, ~67% higher than previous year; 2) Clearing and settlement charges of INR638m in standalone financial statements vs. INR438m in consolidated financials. In order to further reduce clearing and settlement costs, the exchange is trying to review the contract terms with NSCL and increase its institutional presence, for which it is closely working with FPIs as DIIs do not have a lot of scope to increase activity.

Valuation and view: Raise estimates; reiterate Neutral

The relaunch of BSE derivatives products has proved to be a trend-changing measure. Increased member participation, rising awareness about products, and a shift in Bankex expiry would continue to drive market share gains for BSE. Currently, BSE has a 13% market share in the notional turnover and 5% premium turnover market share in the equity derivatives segment. We expect BSE to scale up in these parameters going ahead.

Other levers that will support growth over the medium term include: 1) repricing of derivatives contracts, 2) colocation revenues, 3) continued momentum in the StAR MF business, 4) growth in cash segment, 5) possibility of levying a fee for listing of debt securities, 6) start of operations at its Power Exchange, and 7) commencement of revenue from its Gold Spot exchange.

We have upgraded our EPS estimates by 7%/6% for FY25/FY26 to factor in the higher volume trajectory for equity derivatives segment. Reiterate our Neutral rating with a one-year TP of INR 2,725 (based on 35x FY26E EPS).

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