BSE: STAYING AFLOAT DESPITE ROUGH WATERS

BSE’s commitment to innovation, customer experience, and operational efficiency, coupled with its strategic investments in India INX, indicates a potential for long-term growth, though navigating the regulatory landscape will be crucial. [EasyDNNnews:PaidContentStart]

The Indian derivatives and equity trading market is getting competitive between the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), with NSE’s shift to Monday expiries disrupting the landscape. This strategic move aims to capture options-trading, forcing BSE, with its Tuesday expiries, into a challenging position. BSE’s share price has significantly declined, reflecting market concerns beyond short-term volatility.

NSE’s change potentially draws traders seeking enhanced liquidity, impacting BSE’s derivatives market share, a crucial revenue source. Its strategic positioning is under test, prompting an analysis of its business and long-term vision. The recent share price drop, coupled with NSE’s move, needs deeper analysis. This article aims to understand the underlying factors affecting BSE’s market position – not just the fluctuations – and evaluate its potential for growth and recovery.

About the Company
Bombay Stock Exchange (BSE Limited), Asia’s oldest stock exchange, established in 1875 on Mumbai’s Dalal Street, provides a comprehensive trading platform for Indian investors. It facilitates the buying and selling of equities, fixed-income securities, currencies, debt instruments, derivatives, and mutual funds. A key component of BSE’s operations is its whollyowned subsidiary, Indian Clearing Corporation Ltd., which acts as a central counterparty, guaranteeing the settlement of all legitimate trades. Notably, BSE holds the distinction of being India's first listed stock exchange, achieving this milestone in 2017.

BSE is also known for its advanced technological capabilities and is the world’s largest stock exchange in terms of the number of companies listed. It boasts one of the fastest trading speeds globally, handling transactions in microseconds. Furthermore, the BSE SME platform stands as India’s largest, supporting the growth of small and medium-sized enterprises. Recently, BSE has also established India INX, an international exchange located at GIFT City IFSC in Ahmedabad, expanding its reach into the global markets.

Business Segments
Trading and Clearing
The company provides a platform for the trading of equity, debt, equity derivatives, currency derivatives, commodity derivatives, SME, SME start-ups, interest rate futures, and e-agricultural spot market. The equity derivatives segment has experienced explosive growth, with daily average values surging to ₹34,60,746.77 crore, driven by Sensex and Bankex contracts.Notably, BSE derivatives ranked second globally in trading volume. Moreover, the cash segment and daily average turnover also saw a significant rise. BSE’s initiatives in non-competitive bidding for government securities and its ETF listings have demonstrated expansion. Overall, BSE’s secondary market performance has displayed strong growth in equities and derivatives.

Distribution
BSE’s distribution business segment is growing significantly, with its BSE Star MF platform dominating the exchange-based mutual fund distribution market, holding over 85 per cent market share. In FY24, it processed 42 crore transactions, a 59 per cent increase from the previous year, and added over 2,100 new distributors, expanding its network to over 75,000. Moreover, new SIP registrations surged by 116 per cent, reaching 2.71 crore. The platform offers diverse connectivity options and supports various transaction types, including SIPs, SWPs, and STPs. BSE also facilitated the issuance of bonds and sovereign gold bonds (SGBs), where BSE has become a key platform for SGB retail bids, aggregating applications through its broker network. In FY 2023-24, BSE received applications for 52,227 kgs of gold, valued at ₹3,191 crore.

Services to Corporates
Under this business segment, BSE provides services for corporate entities seeking to raise capital. This includes facilitating equity listings, enabling companies to launch IPOs and follow-on offerings, thus accessing a wide investor base. BSE also provides a platform for listing debt securities like bonds and debentures. Furthermore, BSE supports mutual fund scheme listings, expanding AMCs’ distribution reach. It also handles commercial paper listings for short-term financing needs.

Other Services
Beyond its core trading and listing operations, BSE extends its services to include vital market support functions. These services significantly contribute to the efficiency and transparency of the financial ecosystem. BSE provides comprehensive data feed services, offering real-time and historical market data to investors and financial institutions. This ensures accurate and timely information for informed decision-making. Index services are also crucial, with BSE managing key indices like the Sensex, which serve as benchmarks for market performance.

Sector Overview
India’s capital market presents significant opportunities, fuelled by a rising era of financialisation and rapid digitisation. Stellar market returns are attracting retail investors. Strong economic fundamentals, favourable policies, and a stable outlook are boosting confidence. Digitisation is democratising access to financial instruments. Online platforms, mobile apps, and simplified KYC processes are enabling broader participation. The mutual fund industry’s 35 per cent AUM growth and expansion of its investor base highlight this trend. Increased financial literacy, coupled with rising disposable incomes, is driving households to diversify from traditional assets like gold and real estate toward equities and mutual funds.

The stable fixedincome market, driven by fiscal discipline and positive economic indicators, further enhances the investment landscape. As India’s financial ecosystem evolves, digitisation and increasing financial awareness are creating a powerful synergy, driving greater retail participation and deepening the capital markets. BSE benefits from this trend through its robust trading platform, with a mutual fund distribution infrastructure, and is well-positioned to capture this expanding retail investor base.

Recent Developments
Recent SEBI regulations, including the rationalisation of weekly index derivatives, increased lot sizes, and the removal of calendar spread treatment on expiry days, are impacting BSE’s trading volume. The management has said that these are still in early development, and its full impact is yet to be understood. Moreover, the management has also stated that the overall volumes in Bankex have significantly fallen down, by around 95 per cent. Sensex notional volumes have fallen down marginally, and premium volumes have almost remained stable for most of the part and are showing an increasing tendency because of the activities seen on non-expiry days owing to the change in the expiry day from Thursday to Tuesday.

These changes, aimed at curbing excessive trading on expiry days from the Securities and Exchange Board of India (SEBI), have forced BSE to reduce its weekly expiry offerings and increase the contract sizes. While short-term volume reduction was anticipated, BSE expects some volume shift between contracts and increased activity on the remaining expiry days going ahead. Furthermore, BSE’s decision to shift Sensex and Bankex expiry to Tuesday, aimed at increasing market share, is now challenged by NSE’s move to Monday expiries.

Some brokerage firms have revised BSE’s price target downwards, citing concerns over potential market share loss and the impact of SEBI’s consultation paper on derivative exposure limits. Despite a recent increase in market share to 22.1 per cent, brokerage firms forecast a moderation to 18 per cent due to NSE’s change in expiry days. In Q3FY25, there was a decline in contract volumes and notional turnover post-expiry day change, but with stable premium turnover. However, the company is committed to improving market efficiency and rebuilding liquidity in Bankex contracts, while also upgrading trading systems to handle increased order volumes. BSE is also facing challenges in its single stock derivative segment.

Q3FY25 Performance
The revenue of the company stood at ₹773.54 crore which increased by 108.2 per cent on a YoY basis. The operating profit of the company stood at ₹298.41 crore, which increased by 96.72 per cent on a YoY basis. The PAT of the company stood at ₹198.73 crore, which jumped by 121.48 per cent on a YoY basis. The company’s EBITDA margin stood at 38.58 per cent with a decline of 5.51 per cent and the PAT margin stood at 25.69 per cent. BSE’s Q3FY25 saw strong growth in the primary markets, with ₹95,512 crore raised through 30 new listings.

The cash market turnover increased slightly, while the derivatives premium turnover hit a record ₹8,758 crore, despite a contract volume decline post-expiry day change. Mutual fund transactions surged 39 per cent to 17.99 crore, driving record revenues. The Asia index launched 15 new indices, and India INX introduced Sensex derivatives, aiming to attract global investors to GIFT City.

FY24 Performance
In the fiscal year 2024 (FY24), BSE delivered a significant increase in its revenue, which surged by 70.44 per cent to reach ₹1,390.03 crore compared to ₹815.53 crore in FY23. The net profit also experienced robust growth, rising by 347.41 per cent to ₹699.84 crore compared to ₹156.42 crore in FY23. The company demonstrated strong profitability with a PAT margin of 50.64 per cent (due to other income of ₹406 crore) and an EBITDA margin of 45.15 per cent for FY24. The earnings per share (EPS) for the full financial year stood at ₹57.51, marking a notable increase of 253 per cent over the previous year.

Key Risks
◼ Technological Vulnerabilities: Reliance on advanced systems exposes BSE to cyber threats and operational disruptions, demanding continuous investment in technology upgrades.

◼ Regulatory Changes: Evolving SEBI and RBI regulations require constant adaptation and compliance, impacting operations and costs.

◼ Competitive Pressure: Rivalry with NSE, particularly in derivatives, threatens market share and revenue.

Moreover, there always looms a threat of new players in the space.

Valuation and Outlook
BSE has demonstrated a strong financial performance in FY24, driven by a trending equity market, increased participation and derivatives trading. The company has been growing its revenue at a three-year CAGR of 36 per cent and profit at a three-year CAGR of 36 per cent. The shares of the company are currently trading at a TTM PE of 56.8x, which is higher when compared with the industry PE of 44.0x, suggesting a premium in valuation. Moreover, the company is currently available at an EV | EBITDA of 35.3x over its three-year median of 31.28x. The price-to-book value of the company is 14.3x, with the industry price-to-book value being 14.5x.

BSE’s outlook presents a mix of opportunities and challenges. Its Star MF platform’s strong growth and diverse revenue streams, including new indices and data services, position it well. The expansion of India INX at GIFT City, with increasing trading volumes and a focus on attracting global investors, further enhances its prospects. Currently, the reach of the stock market, mutual funds and derivatives trading is still at a budding pace as most of the Indian population has not yet joined the race, which represents an opportunity.

However, recent SEBI regulations, such as changes in expiry days and increased lot sizes, pose significant hurdles. These changes, aimed at curbing excessive trading, have led to volume reductions and market share concerns, particularly in the Bankex and Sensex segment. Moreover, the increased growth momentum in the BSE’s revenue and profit is likely to slow down given the changes in expiry day and recent SEBI moves.

Services to corporates, with its robust listing services, provide a stable, recurring revenue stream. Additionally, other services like data dissemination and index management offer further growth potential. The shift in expiry days, with NSE now offering Monday expiries, challenges BSE’s strategy to gain market share. While BSE is focusing on improving market efficiency, focusing on equity derivatives, the impact of SEBI’s regulations and NSE’s competitive moves remains uncertain.

Despite these challenges, BSE’s commitment to innovation, customer experience, and operational efficiency, coupled with its strategic investments in India INX, indicates a potential for long-term growth, though navigating the regulatory landscape will be crucial. Further, the current valuation of the company, which already is trading at a premium over its peers, and the recent sharp fall in the BSE share price suggests that investors should adopt a cautious approach. Moreover, the current market dynamics and the overly negative sentiment in the market have declined investor confidence, which is likely to hurt the trading activities.

In conclusion, keeping all the growth factors about the company in mind, we recommend HOLD.

[EasyDNNnews:PaidContentEnd] [EasyDNNnews:UnPaidContentStart]

[EasyDNNnews:UnPaidContentEnd]