BSE Ltd Research Report By HDFC Securities

Investing for the future

We maintain BUY on BSE based on in-line revenue and better margins. Increasing revenue contribution from StAR MF platform and rise in listing fee (exclusively listed) are positives. Buyback of Rs 4.6bn will be completed and tax applicable is only Rs 0.12bn (~3%). We arrive at a SoTP of Rs 655 at 25x core FY21E PAT plus Rs 134/share for stake in CDSL plus net-cash (ex-buyback and with 20% discount).

HIGHLIGHTS OF THE QUARTER

 Revenue is down 3.1% QoQ to Rs 1.12bn (vs. est. of Rs 1.15) led by 7.7% fall in services to corporate offset by 21.3% QoQ rise in transaction revenue.
 StAR MF revenue stood at Rs 119mn (+43.4% QoQ) led by price hike (+25%, Rs 9.8/transaction) and higher volumes (+14.1% QoQ). BSE’s investment in StAR MF platform is yielding results. There is pricing power and it operates at a higher margin (~50%).

 BSE is struggling to maintain its equity cash market share, down 114/248 bps QoQ/YoY to 7.4%. However, interoperability of clearing corporations (effective July-19) might help in gaining some share (still a hope).

 EBITDA margin improved to 4.9% (est. 1.2%) vs. 2.1% last quarter, led by growth in higher-margin StAR MF. Investments in new initiatives and a drop in revenue led to steep fall in margins YoY (1060bps).

 BSE has taken ~20% hike in annual listing fees for exclusively listed companies which will boost the annuity revenue stream (~40% of rev).

 INX is currently in investment mode (burning ~Rs 0.32bn annually). INX ADTV stood at USD 1.9bn (+9% QoQ) and number of daily trades was 44K (+79% QoQ). Revenue from INX will start contributing from FY21E.

 Near-term outlook: Transaction revenue will grow fueled by StAR MF. EBITDA margin will recover gradually with growth and cost control.

STANCE: Traditional channel under stress, value emerging

BSE has been investing in future growth drivers like INX, Insurance distribution, SME and StAR MF. Out of these only StAR MF has started generating revenue while the rest would need more time. Incremental revenue from StAR MF, volume revival and higher listing fee should lead to revenue growth of 11.1/11.8% in FY20/21E. We expect some operating leverage to play out with growth (EBITDA margin of 11.4/15.8% for FY20/21E).

The stock is down 23% in the last 3M due to stress in the tradition revenue stream, continued investments despite slowdown and buyback tax. Value is emerging with net cash of Rs 20bn (~80% of MCap) and a dividend yield of ~7%. Risks include a rise in competition, loss of market share and an increase in investments.

Valuation and outlook

 We expect BSE’s revenue to increase at a CAGR of 11% over FY19-21E. The EBITDA margin will expand from 6.5% in FY19 to 15.8% in FY21E due to revenue growth and operating leverage.

 RoE for the business is only 7.1%, owing to high cash levels on the books (Rs 24bn ex-SGF and clearing and settlement cash). The buyback of Rs 4.6bnwill boost return ratio by ~100bps for FY20E.

 BSE has been constantly innovating and investing in technology and is building future platforms for growth. BSE has huge net cash of Rs 20bn (~Rs 440/sh, ~79% of MCap) which is excluding SGF, earmarked funds, and the buyback amount. The current dividend yield of ~7% is attractive. BSE currently trades at 11.1/9.7x FY20/21E EPS (steep discount to MCX valuations).

 We have valued BSE on SOTP basis by assigning a TP of Rs 320 to CDSL and 25x to BSE’s core earnings (ex-CDSL) and adding back net-cash of Rs 15.8bn (excluding buyback amount and for buyback tax). We maintain BUY on BSE, with a TP of Rs 655 (36% upside from CMP), which includes the core BSE value at Rs 169/sh, Net Cash of Rs 351/sh and CDSL stake value of Rs 134/sh.