Rising to the Challenge
Quick Pointers
• Strong growth in index options to continue with steady contribution from cash/ diversified revenue streams
• Expect FY28E RoA/ RoE to sustain at 23%/ 41%
• We value BSE using the residual income framework with a TP of INR4,850 (50x FY28E P/E)
BSE has seen a rapid scale-up in its derivatives business over FY23-26 with premium market share expanding to ~28% in FY26 (vs. nil in FY23). We expect it to increase further with the introduction of new indices. Moreover, steady growth in cash equity/ StAR MF flows and diversification to high-margin segments like colocation, listing and data services are likely to lead to operating revenue CAGR of ~25% over FY26-28E. We expect BSE to maintain superior return metrics, with EBITDA margin/ core RoE of 71%/37% by FY28E, underpinned by strong operating leverage and disciplined capital management. We value BSE using the residual income framework to arrive at a TP of INR4,850 (FY28E P/E of 50x). Initiate with ‘BUY’.
Rapidly gaining market share in cash/ derivatives: BSE has emerged as a strong player in equity derivatives post the relaunch of Sensex/Bankex weekly contracts. During FY23-26, BSE saw a jump in operating revenue (80%+ CAGR) led by the ramping up of index options. Improved liquidity, expiry positioning, and higher participation translated into premium market share of 28% and premium-to-notional of ~10bps in FY26. Further, initiatives such as smart order routing (SOR) and common contract note (CCN) are likely to boost market share in the cash segment (~7%).
Diversifying revenue streams to improve earning profile: While transaction income contributes 79% of operating revenue (FY26), BSE is focusing on building a diversified mix with multiple recurring streams. BSE StAR MF (87% market share) continues to benefit from structural flows, while listing fees provide stable revenue linked to market capitalization. High-margin segments such as colocation, data dissemination and index licensing are in the nascent stage (<10% share) but offer strong growth visibility. We expect operating revenue to clock ~25% CAGR over FY26-28E, with continued traction in cash/ index options and growing contribution from new segments. Operating leverage to sustain margins at 71%: Operating leverage remains a key driver, with EBITDA margin expanding from ~29% in FY21 to 69%/ 71% in FY27E/FY28E (vs. 67% in FY26). PAT is expected to grow at ~27% CAGR over FY26-28E with FY28E RoE of ~41%, supported by a capital-light, high-margin business model. Key risk to our estimates would be a shift to fortnightly/ monthly expiry; our sensitivity analysis highlights a corresponding impact of 17%/ 27% on FY27E PAT, in case of a shift. However, we expect the hit on profitability to be temporary (as seen during the shift of expiry days in Sep’25). Initiate with BUY at a TP of INR4,850 (50x FY28E P/E): Over the past five years, BSE has undergone a continuous re-rating, supported by market share gains and improving profitability, trading at >49x 1-year forward P/E (BBG). We expect valuation to sustain at these levels, supported by structural factors such as (1) duopolistic market structure with high entry barriers (2) healthy profit growth (~27% CAGR over FY26-FY28E) and (3) optionality from new derivative products/ colocation revenues. We value BSE using a Residual Income framework, with a TP of INR4,850 (50x FY28E P/E).
