ICICI Securities downgrades BSE after shares deliver 3x returns in 12 months

• The key reason for this sharp rise has been what is happening to its derivative volumes.
• Volumes rise sharply after BSE lowers the ticket size of contracts and introduces Friday expiry.
• Going ahead, the brokerage expects BSE’s options turnover to increase 9% every month in H2FY24.
  

Shares of Asia’s oldest stock exchange have risen three times from a year ago. Share prices of Bombay Stock Exchange are up from Rs 611 in October last year to Rs 1804 this year. The key reason for this sharp rise has been what is happening to its derivative volumes. BSE is consolidating its position in the equity index options segment, with significant growth in volume and improved pricing. The company is expected to witness further traction in new products and distribution channels. However, potential risks associated with adverse regulatory changes should be considered, claim equity strategists. ICICI Securities has downgraded the stock and revised target price for BSE Limited stands at Rs 1,799/share.

In April 2023, BSE made some changes to its index derivatives product, which included lowering the ticket size and introduction of Friday expiry. Thanks to these changes, BSE options volumes, which were non-existent between January and May, have risen above Rs 26 trillion (ADTV on notional basis) in September. In September this year, BSE options average daily trading volume was around 8% of NSE’s while on 13 October, BSE’s options volumes were higher than NSE’s volume for the first time. From 1 November, BSE has revised its transaction charges from Rs 50/mn to Rs 260/mn (weighted basis) leading to a likely increase in revenue.

Improved Pricing and Revenue Potential

BSE has also seen a substantial improvement in pricing. Transaction charges for index options have increased from Rs 50/mn to approximately Rs 260/mn on a weighted basis since 1 November. This increase in pricing is expected to contribute to higher revenue for BSE. Based on the projected growth in options turnover, it is estimated that BSE's option revenue will reach Rs 120 crore in FY24 and Rs 580 crore in FY25.

Consolidation and Future Prospects

BSE is expected to consolidate its position in the equity index options segment. The company may witness further traction in new products, such as Bankex, and new distribution channels, as large brokerages are likely to add BSE's product offerings. These developments indicate the establishment of BSE's right to win in the large equity derivative market of India. However, it is important to note that any adverse regulatory changes pose a key risk to the company's growth prospects.

Steady Performance in Core Business

Apart from the options segment, BSE's core business remains steady. Cash volumes stood at Rs 5900 crore in September this year, and it is projected to reach Rs 5400 crore in FY24 and Rs 6200 crore in FY25. The revenue from the cash segment is expected to be Rs 220 crore in FY24 and Rs 250 crore in FY25. The currency futures turnover has been declining, and it is expected to remain flattish in FY24 and FY25 says ICICI Securities.

Financial Outlook

Considering the estimated revenue from different segments, BSE's EBITDA (earnings before interest, taxes, depreciation, and amortisation) is projected to be Rs 430 crore in FY24 and Rs 400 crore in FY25, excluding options.