Limited scope for further rerating
BSE reported a strong quarter, with 31% QoQ revenue growth and healthy margins. The robust performance was on account of higher transaction revenue, supported by scale-up in derivatives volume and strong cash volumes. Post the regulatory setback, BSE had to take an immediate price hike of ~35% to offset the impact of higher regulatory costs. The price hike which was an optionality became a necessity. The shift from premium to notional will cost BSE a regulatory fee of ~INR 2.8/3.6bn in FY25.26E, which is ~12% of revenue. We believe the price hike will decelerate the pace of market share gain. Also, BSE pricing is now comparable to NSE, but options profitability is inferior due to lower premium realisation. In April 2024, BSE had a notional/premium market share of 19/8.6%, which we believe will gradually reach 25/12% in FY26E. BSE was commanding a higher multiple based on strong growth and pricing optionality, which we believe will moderate. We increase our revenue estimates by 16% due to the price hike but cut the margin estimate by 700bps to account for higher regulatory costs. The revenue/EPS CAGR of ~42/45% over FY24-26E are robust but already factored into BSE’s valuations. We thereby downgrade BSE to REDUCE, based on regulatory uncertainty, expected growth moderation in FY26E and rich valuations. Our target price of INR 2,860 is based on 35x (vs 40x earlier) core FY26E PAT + CDSL stake + net cash ex SGF.
▪ Q4FY24 highlights: Revenue stood at INR 4.88bn in Q4 (vs our estimate of INR 4.52bn), up 31.4/115.1% QoQ/YoY, led by 51.8/23.5% QoQ increase in transaction/listing revenue. The cash/StarMF revenue was up 30.6/28.4% and derivatives revenue was up 101% QoQ. The EBITDA margin expanded to 54.8%, led by growth and a drop in employee costs. BSE made a provision of INR 1.70bn for the higher regulatory cost following the SEBI letter in April 2024. The SGF contribution was nil for the quarter and INR 0.92bn for FY24. BSE launched a new derivative contract which is a monthly expiry stock futures contract with midmonth expiry. Active clients trading in the equity derivates segment stood at 3.1mn from 391 active members earlier. BSE reported a PAT of INR 1.07bn and adjusted for the provisions, the APAT stood at INR 2.36bn. The revenue/APAT for FY24 were up 70/117%. Net cash stood at INR 22.59bn, which is ~6% of the market cap and RoE/RoIC stood at 26%/24% for FY24.
▪ Derivatives revenue and profitability: The blended options pricing post the rate hike is ~INR 340/mn, the clearing and settlement cost is INR 150/mn, and the implied SEBI regulatory fee is INR 170/mn on options premium. The option EBITDA is INR360/mn, resulting in a margin of ~53%. NSE generates an EBITDA margin of ~80% on the derivatives revenue. BSE will generate revenue of INR 10.74/14.54bn in FY25/26E and EBITDA of INR 5.39/7.75bn, which is ~47/54% of BSE’s FY25/26E EBITDA.
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