Gaining strength
BSE has attained a 20/7% notional/premium market share, largely driven by the rising popularity of its derivatives contracts. Among these, the SENSEX contract has matured, commanding ~40% of the market share, while the BANKEX is in its build phase, currently holding a 12% market share. We believe the derivative growth for BSE will continue to be led by (1) the scaling of the BANKEX contract, (2) the go-live of large discount brokers, (3) a higher volume of algo and proprietary traders, (4) an increase in active UCCs, and (5) greater participation of FPIs. In this note, we’ve also analysed the impact of higher SGF and settlement costs. The core SGF pool is increasing across exchanges, led by regulatory initiatives aimed at risk mitigation. In 9MFY24, the core SGF contribution has increased ~2.5x vs FY23. BSE core SGF pool is in line with the industry and will increase with the rise in volumes. The settlement costs for BSE are ~2.5x that of NSE, we expect these to come down gradually as economies of scale come into play. Assuming a premium market share of ~11% in FY26E and current pricing, derivatives will contribute 43% of BSE’s total revenue and 53% of EBITDA. We expect a revenue/EPS CAGR of ~34/42% over FY24-26E, led by a revival in transaction revenue. We maintain our BUY rating and assign a SoTP-based target price of INR 3,050, based on 40x core FY26E PAT + CDSL stake + net cash ex SGF.
Valuation and scenarios: The stock is up 86% in the last six months, led by market share gains, and it is currently trading at a P/E of 38/30x FY25/26E vs 5Y average 1Yfwd P/E ~21x. Our base case assumes an 11% premium market share, revenue/PAT CAGRs of 44/57% over FY23-26E and a core multiple of ~40x resulting in a ~24% upside. The bull case assumes a 15% premium market share, 52/67% revenue/PAT CAGRs over FY23-26E and 45x multiple, resulting in a ~66% upside from CMP.
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