Upgrade to Buy BSE Ltd For Target Rs.4,000 by Motilal Oswal Financial Services Ltd
Earnings engine reignites!
* BSE’s F&O notional ADTO surged 85% in Oct’26MTD vs. the post-CAS reset in Aug’26 (-34% MoM). With the partial CAS reversal effective 7-Dec-26, the recovery has a regulatory catalyst beyond the current volatility-led spike. We expect FY27 ADTO of INR216t (+16% YoY), with upside potential if the recovery sustains.
* While BSE has achieved a 30%+ market share in premium turnover, further marketshare expansion remains possible. The premium-to-notional ratio has already climbed to ~14bp from 6–7bp in 2023–24, against 20bp+ for NSE. Further convergence, driven by institutional participation and longer-dated contracts, can deliver meaningful earnings upside over and above volume growth.
* Cash market share has improved from ~7% to ~9%, while NSE’s listing and the opening of its lock-in in Mar’27 offer a further catalyst for turnover. Improving smart-order routing and platform participation strengthen the case for a sustained step-up in cash-market activity with the FY26-28 ADTO CAGR expected at 30%.
* Star MF has scaled notably from 12m quarterly transactions in 1QFY20 to 245m in 2QFY27, generating INR800m+ in quarterly revenue. Co-location already contributes INR450-480m per quarter, with further capacity and pricing headroom. These businesses broaden BSE’s earnings drivers beyond trading activity alone.
* Every incremental rupee of revenue has the potential to deliver healthy profit growth. BSE’s EBITDA margin expanded to 65%+ in FY26 from 9% in FY21, demonstrating the scalability of its model. With margins expected to reach 70%, we forecast a ~27% FY26- 28 PAT CAGR on a 23% revenue CAGR. The variable nature of regulatory costs (55% of opex) provides a degree of insulation against volume slowdowns.
* We raise our revenue and PAT estimates by 8%/10% and 10%/12%, respectively, for FY27/FY28, supported by the strong volume run-rate, the likely benefit of the CAS reversal and the benefit of NSE listing on cash volumes. A sustained volume recovery combined with an improving premium-to-notional (P/N) ratio could drive a further ~20% increase in FY28E PAT. We upgrade the stock to BUY with a TP of INR4,000 (based on 40x FY28E P/E).
Volume reset over; growth path looks better ahead!
* Since BSE relaunched derivatives in 2023, the impact of most regulatory changes, including F&O 2.0 and the change in weekly expiry day, has been transient. BSE achieved ~50% market share in index options notional turnover within three years of the relaunch, while volumes continued to show strong momentum.
* However, the recent regulatory changes—stricter lending norms for proprietary traders (effective Jul’26) and CAS implementation (Aug’26)—led to a reset in the volume base, with BSE’s notional F&O ADTO falling 35% in Aug’26 compared with the Apr-Jul’26 average.
* Following the base reset in Aug’26, Sep’26 witnessed a modest recovery, with ADTO growing 6% MoM. However, aided by volatile markets, Oct’26 has seen a significant spurt in volumes, with ADTO up 49% MoM as of 20th Oct’26.
* Moreover, SEBI’s recent circular has partially reversed the CAS reforms, restoring last-30-minute VWAP settlement for index derivatives from 7th Dec’26 and addressing the expiry-day volatility that hit traders and HFTs in Aug’26.
* While the Oct’26 data has shown a strong recovery in volumes driven by market volatility, we believe that the CAS reversal would lead to volume normalization.
* Prop traders account for 48.9% of BSE derivatives turnover, down from 58.4% in Apr’25, reflecting diversification of participant mix and insulating BSE from the impact due to stricter lending norms, to a certain extent.
* BSE’s notional ADTO for YTDFY27 stands at INR 213t, and we expect FY27 ADTO to be INR 216t, aided by volume normalization following Dec’26. Heightened volatility during that period may lead to a further upgrade to our volume estimates
Valuation and view
* While CAS weighed on volumes in Aug’26, Sep’26 witnessed a recovery, and Oct’26 volumes have surged, supported by market volatility. With the partial reversal of CAS effective from Dec’26, derivatives activity should normalize faster, supporting top-line growth and, in turn, margin expansion through operating leverage.
* We expect BSE to witness a strong recovery in volume growth, aided by rising member participation an improving P/N ratio. An improved growth trajectory in the cash segment, robust demand for co-location, and the strong positioning of the Star MF platform will also contribute to the company’s performance.
* We raise our revenue and PAT estimates by 8%/10% and 10%/12%, respectively, for FY27/FY28, supported by the strong volume run-rate, the likely benefit of the CAS reversal and the benefit of NSE listing on cash volumes. A sustained volume recovery combined with an improving premium-to-notional (P/N) ratio could drive a further ~20% increase in FY28E PAT. We upgrade the stock to BUY with a TP of INR4,000 (based on 40x FY28E P/E).
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