The BSE stock has rallied ~2.5x in the last six months led by market share gains. It is still a good buy for 22% upside: HDFC Sec

The all-new BSE

BSE’s market share gain in the derivatives segment is quite impressive and the recent pricing reset improves revenue visibility with better profitability. The new BSE is well-placed to get a share of the large options market in India, powered by the new generation of option traders. The SENSEX contract has been quite successful and has reached a market share of 25% while the overall notional market share is at ~12%. The launch of the weekly BANKEX contract with Monday expiry will trigger the next phase of market share gain for BSE. We highlighted the need for an option price hike in our Oct-23 note and assumed a ~3x price hike but the pricing was hiked by ~5.2x. The current pricing is at ~26% discount to NSE, which leaves scope for further hikes when the contracts mature. The price hike is effective Nov-23 and there has been no impact on the volumes. The go-live of large discount brokers and increase in active UCCs (~1mn vs ~10mn for NSE) is driving volume for BSE. Assuming a premium market share of ~10% in FY26E and current pricing, derivatives will contribute ~40% of BSE’s total revenue, 53% of EBITDA and 70% of incremental growth. We expect a revenue/EPS CAGR of ~35/42% over FY23-26E, led by a revival in transaction revenue. We increase our EPS estimates by ~21/28% for FY25/26E and increase the core multiple to 40x (vs 33x). We maintain our BUY rating and assign a SoTP-based target price of INR 2,400, based on 40x core FY26E PAT + CDSL stake + net cash ex SGF.

▪ Derivatives market share gain continues: BSE has reached a notional market share of 12/15/28% in October (Week-4), considering weekly/major expiry day/NIFTY weekly volume. Exchanges now have a daily expiry model with minimal overlap thus NSE volumes have not come down in absolute terms despite scale-up in BSE volumes. ~94% of BSE’s weekly volume is on the day of expiry vs 60% for NIFTY. BANKEX has clocked a volume of INR 10tn in just two weeks post-launch, but it is still way below BankNifty volume (~ INR 350tn on expiry). We expect BSE derivative notional/premium ADTV to reach INR 77tn/61bn in FY26E with a volume/premium market share of 22/10%. BSE’s premium to notional is ~5bps vs ~17bps for NSE.

▪ Pricing reset higher than expectation: BSE hiked its options pricing by ~4- 7.5x for various slabs; on a blended basis the hike was ~5.2x. The pricing hike was inevitable as BSE was losing money on derivatives due to higher clearing charges, but the quantum of the hike was higher than expected. Currently, BSE is charging ~5.2bps on options premium and NSE charges ~7bps. The cost of clearing options is ~1.5bps for BSE and lower for NSE. The pricing is still at ~26% discount to NSE, and future price hikes cannot be ruled out as BSE has similar/premium pricing for all other segments.

▪ Valuation and scenarios: The stock has rallied ~2.5x in the last six months led by market share gains and is currently trading at a P/E of 37/30x FY25/26E vs 5Y average 1Y-fwd P/E ~21x. Our base case assumes a 10% premium market share, revenue/PAT CAGR of 35/42% and core multiple of ~40x resulting in ~22% upside. The bull case assumes a 15% premium market share, 43/52% revenue/PAT CAGR and 45x multiple, resulting in a ~70% upside from CMP.