BSE is getting a boost from Derivatives. Buy for target price of Rs 1230 (35% upside): ICICI Direct

Derivatives boost

BSE has witnessed initial success in the much larger equity derivatives segment, currently dominated by NSE, driven by the launch of a weekly index options contract (SENSEX) in May 2023. Impressively, BSE market share in the equity derivatives segment reached 3.4% in August (vs. zero in April). BSE expiry day market share has reached ~11% without any liquidity enhancement scheme (LES). The derivatives volume is organic and is driven by 219 members (proprietary and retail) and the active UCCs on the BSE derivatives platform have reached 0.17mn, from nearly zero in three months. We expect BSE derivative market share to reach ~10% in Q4FY24E, driven by the on-boarding of large member brokers, the launch of new weekly index contracts, hedging activity and a continued increase in active traders. The increase in derivatives volume will boost cash volumes. The steps taken by the new management are yielding results and will boost growth and margin. We expect a revenue/EPS CAGR of ~19/25% over FY23-26E, led by a revival in transaction revenue. We increase our EPS estimates by ~7/11% for FY24/25E, increase core multiple to 28x (vs 25x), and upgrade rating to BUY. We assign a SoTP-based target price of INR 1,230, based on 28x core Sep-25E PAT + CDSL stake + net cash ex SGF.

 The derivatives market is large and growing: NSE derivative volume is ~30x larger than BSE and it has registered a 10Y volume CAGR of 62%. Index options account for ~99% of the derivatives volume (for both NSE and BSE) and there is a clear shift towards near-term expiry weekly contracts. NSE derives revenue of ~INR 100bn from index options and BSE is venturing into this huge market. ~1% market share of derivatives is ~INR 1bn but BSE options realisation is 1/7th of NSE; thus ~1% derivatives market share for BSE will result in revenue of INR 0.14bn, which is 1.7/5% of BSE’s FY23 revenue/EBITDA. We expect BSE derivative volume to reach ADTV of INR 42tn in FY25E with volume/premium market share of 10.6/4.4%.

 Scope for pricing reset: BSE tried various pricing mechanisms (steep discount/nil charges) in most of its segments to compete with NSE but was unable to garner market share. The new management has decided to match pricing with NSE as exchange transaction charges do not trigger volume shifts. BSE has increased cash transactions, currency futures and listing fees to match with NSE. BSE’s cash and listing charges are now at a premium to NSE. BSE index options pricing is INR 50/mn vs. INR 350/mn of NSE. There is enough scope for pricing revision in options; we have assumed stable pricing in our base case assumption.

 Valuation scenarios: The base case assumes a 10% derivative market share and core PAT CAGR of 37%. The bear case assumes ~4% derivatives market share and a decline in cash volume, slower revenue growth (14% CAGR), and a multiple of 20x, resulting in a downside of ~17% vs. CMP. The bull case assumes a 10% derivatives market share (similar to the base case) but higher options pricing, resulting in a 23% revenue CAGR and 30x multiple, indicating a ~70% upside.