IGI Logo

Provision for SEBI regulatory fees mars profitability

* BSE reported a PAT of INR1.07b in 4QFY24, +21% YoY, and flat QoQ. PBT for the quarter rose 8% YoY to INR1.3b. Excluding provision for SEBI fees, PBT came in at INR3b, 26% higher than our estimate.

* After the re-launch, derivative contracts (Sensex and Bankex) are witnessing significant traction from market participants. BSE has increased derivatives transaction charges with effect from 13th May’24. Thus, the derivatives segment would see a strong revenue growth.

* We raise our EPS estimates by 6%/10% for FY25/FY26 to factor in: 1) a higherthan-expected growth in volumes; 2) a higher profitability in CDSL; and 3) a lower-than-expected clearing & settlement cost. Reiterate Neutral with a one-year TP of INR3,000 (based on 35x FY26E EPS).

Strong growth in transaction income

* Transaction charges surged 52% QoQ and 318% YoY to INR2.5b, while services to corporates increased 34% YoY.

* Transaction charges for the cash segment stood at INR905m (+171% YoY, 5% miss) and equity derivatives segment were INR1.13b (21% miss).

* Star MF recorded a jump of 55% YoY in the total number of transactions to 441m in FY24. Revenue from this segment grew 63% YoY to INR1.28b in FY24.

* Opex came in 22% higher than our estimates at INR3.9b. This was due to a provision for SEBI regulatory fees of INR1.7b. Hence, EBITDA margin declined to 20% vs. our expectations of 38% and 25.2% in 3QFY24.

* Excluding SEBI regulatory fees, overall opex came in 31% lower than our estimates as no contribution to SGF was made during the quarter.

* Investment income stood at INR600m, which increased 35% YoY (6% lower than our estimates)

* The holding company opted to shift to a new regime of taxation. Thus, the tax rate was higher in 4Q (adjustments of non-availability of accumulated MAT credit and deferred tax impact due to a change in tax rate)

* For FY24, revenue/PAT surged 70%/275% to INR14b/INR7.7b (Note - gain on sale of CDSL stake recorded in 1QFY24).

Key takeaways from the management commentary

* BSE to introduce a new fee structure on Sensex and Bankex derivatives from 13th May’24. BSE to launch new products to strengthen its offerings. Based on market demand, BSE would launch a stock derivatives product that shall have an expiry on second Thursday of the month.

* Institutional participants and high frequency traders typically trade longerterm contracts, as strategized by BSE. This should also improve the premium turnover-to-notional premium turnover ratio.

* Co-location services will play a major role in driving execution of longer tenure contracts. The initial 100 racks for co-location services have already been occupied and BSE has initiated the first phase of expansion (~100 new racks). These new racks are of 15kvp (first time introduced in India) and BSE shall only breakeven and recover both capex and opex from the same.

Valuation and view: Raise estimates, reiterate Neutral

* The re-launch of BSE derivatives products has proved to be a trend-changing measure. Increased member participation, new product launches (stock derivatives), rising awareness about products, and a shift in Bankex expiry would continue to drive market share gains for BSE. Currently, BSE has a ~18% market share in notional turnover and ~7% premium turnover market share in the equity derivatives segment. We expect BSE to scale up in these parameters going forward.

* Other levers that will support growth over the medium term include: 1) the repricing of derivatives contracts, 2) co-location 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) the commencement of revenue from its Gold Spot exchange.

* We raise our EPS estimates by 6%/10% for FY25/FY26 to factor in: 1) a higherthan-expected growth in volumes; 2) a higher profitability in CDSL; and 3) a lowerthan-expected clearing & settlement cost. Reiterate Neutral with a one-year TP of INR3,000 (based on 35x FY26E EPS).

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412