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Steady quarter; muted near-term outlook

* BSE reported an operating revenue of ~INR15.7b (in line), reflecting a growth of 63% YoY/flat QoQ. This was driven by 70% YoY growth in transaction charges, while revenue from services to corporates declined 4% YoY.

* Opex came in at INR4.9b, up 49% YoY/down 2% QoQ (in line), with employee costs growing 24% YoY, while other expenses/55% YoY. EBITDA stood at INR10.7b, growing 71% YoY (flat QoQ), leading to an EBITDA margin of 68.4% vs. our expectations of 70.2% and 65.3% in 1QFY26.

* Higher investment income was offset by SGF costs and lower-than-expected EBITDA, which led to in-line PAT performance at ~INR8.7b (+62% YoY).

* Approval has been received for two additional indices, which will be launched after Focused IT contracts gain traction. The company aims to achieve double-digit market share in cash volumes by CY27 on the back of better adoption of common contract note and higher listings.

* We have cut our earnings estimates by 9%/8% for FY27E/FY28E, factoring in higher opex trajectory and extrapolating the weak volume trajectory being witnessed in the past few months. However, we have not baked in any impact from the RBI regulations on proprietary trading. We reiterate our Neutral rating on the stock with a TP of INR3,900 (premised on 40x FY28E EPS)

Key takeaways from the management commentary

* Colocation order charges currently remain at ~20% of prevailing market rates, with management indicating that pricing could be revisited at an appropriate stage.

* The exchange plans to broaden its product ecosystem, with initiatives spanning corporate bonds, NPS, electronic gold receipts, market data services, and index offerings.

* Liquidity in contracts with one-week-forward expiries continues to improve, indicating increasing market depth

Valuation and view

* BSE continues to report new peaks in revenue and profitability, supported by improving institutional participation, derivative traction owing to market volatility, and structural expansion in STAR MF and index businesses. However, recent trends reflect a declining volume trajectory across cash and derivatives, with geopolitical conditions easing out as well as possible impact of RBI tightening on proprietary book lending.

* We have cut our earnings estimates by 9%/8% for FY27E/FY28E, factoring in higher opex trajectory and extrapolating the weak volume trajectory witnessed over the past few months. However, we have not baked in any impact from the RBI regulations on proprietary trading. We reiterate our Neutral rating on the stock with a TP of INR3,900 (premised on 40x FY28E EPS).

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