BSE (Bombay Stock Exchange)- Bet on Financialization?


(Sreekanth) #1

Established in 1875, BSE Ltd is the oldest stock exchange in Asia and operates the BSE exchange platform (formerly Bombay Stock Exchange). As of September 2017, the BSE is the world’s largest exchange by number of listed companies (5000 companies), and India’s largest and the world’s 9th largest exchange by market capitalization of listed companies at USD 2.1 trillion. With a trading speed of 6 micro seconds it is the fastest stock exchange in the world as established by the company.

Key Business Drivers:
BSE through its standalone and subsidiaries derives its revenues from the following sources:

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a) Market-Linked Revenue (~27% of FY17 Income)

  1. Transaction Charges, which relates to the income of purchase and sale of listed securities.
  2. Treasury Income on Clearing and Settlement Funds, Linked to interest rates and market activity since that would lead to more margin being deposited by members.
  3. Income from Depository Services, Includes recurring annual charges as well as custodian services, which are to an extent linked to market activity (~this revenue is now shown as part of associate income due to decline in shareholding in CDSL to ~24%).
    b) Recurring Revenues (~73% of Income)
  4. Securities Services primarily consists of charges recovered from members for network connectivity.
  5. Listing Charges, derives listing income that is not impacted by market activity and Dependent on number of listed entities and hence is a recurring revenue stream. Potential for increase if amount charged is increased.
  6. Data Dissemination Fees, which consists of the sale and licensing of information products, Providing IT services and solutions, licensing index products such as the S&P BSE SENSEX and Providing financial and capital markets training through BSE Institute Ltd.
  7. Income From Investments and Deposits and rental income, Linked to investment yields.

Investment thesis:

a) With NSE Listing still far away (and also NSE being plagued with its own set of problems), BSE benefits from being the only listed stock exchange in India.
b) Price hikes to result in improvement in transaction charges: Considering that ~2500 stocks are listed exclusively on BSE, in January 2016 the exchange increased transaction charges in this segment from Rs 27.5/mn to Rs 1000/mn which led to steep increase of 122.7% in transaction charges revenue. Besides this in order to attract bulk deals from NSE it changed pricing structure in non-exclusive segment from ad-valorem basis (Rs 27.5/mn) to a flat fee structure that was Rs 0.3-1 per trade w.e.f April 3, 2017, which was increased to Rs 0.5-1.5 per trade w.e.f August 1, 2017.
c) SME Platform – Next Engine of Growth BSE launched SME platform in December 2012 to facilitate capital raising by SMEs and startup companies and provide easy exit options for angel investors, VC, PEs etc. At present the current tariff is Rs 27.5/mn turnover for trading on SME platform. Besides, this platform also contributes to listing revenues. At present 158 companies are listed on SME index which have a total market capitalization of Rs 105.7bn.
d) Recently commenced trading operations in INX to provide improvement in valuations: With an aim to attract derivative volumes from much bigger global markets and exchanges, BSE launched India’s first international exchange (INX) in GIFT city, Gujarat on January 16, 2017, through its wholly owned subsidiaries – India International Exchange (IFSC) Ltd and India International Clearing Corporation (IFSC) Ltd.
Following are key competitive advantages vis-à-vis NSE or other domestic/global exchanges –
(1) All asset classes i.e index/stock/commodity/currency derivatives will be available on a single platform.
(2) Tax free status for first 5 years i.e no STT, CTT, long term capital gain tax and income tax will keep transaction costs lower.
(3) 22 hours of trading.
(4) Trading speed of 4 microseconds.

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INX’s turnover has improved from $ 11mn in January 2017 to $3422mn in Sep 2017. Index, stock and commodity futures constitute ~44%/70%, 4%/5% and 50%/25% in value/volume terms respectively. Within commodities, gold futures contribute maximum. At present 5000 contracts are traded daily on an average and it will reach breakeven on reaching 50000 contracts per day. BSE is expected to monetize this platform in FY19E. BSE has set aside Rs 4bn for capital infusion in this venture over a period of 3 years, of which Rs 3bn is for international Clearing Corporation. Out of this, Rs1.15bn investment has already been made.

e) Improving Return Ratios:
Due to recent regulatory changes, As per sec. 33 of SECC regulations 2012, earlier BSE had to contribute 25% of its annual profits to Settlement Guarantee Fund (SGF) of ICCL which resulted in lower Net income. In Aug-16, SEBI amended Regulation 33 of SECC Regulations, 2012 to remove the provision that required a recognized stock exchange to transfer 25% of its profits to a SGF. As a result in FY17 financial statements, only the contribution of Rs 207.9mn that was made upto August 2016 and was deducted from profits which resulted in PBT growth of 43.7% YoY to Rs 3.1bn. Besides this earlier in FY16, BSE also discontinued Liquidity Enhancement Incentive Program Scheme (LEIPS) w.e.f April 1, 2016 which was deducted from its profits earlier. As a result of increased business, margins, recent regulatory changes and discontinuation of LEIPS, BSE’s RoAE (Return on Average Equity) improved from 5.4% in FY16 to 8.5% in FY17.

f) Improving Demography and Under penetration of equity as an Investment:

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• The long term outlook for India remains strong and as per multiple international agencies including USDA, IMF and World Bank, India is expected to emerge as the 3rd largest economy by 2030 with a GDP of $ 7 trillion.
• As compared to world and BRICS average Market Capitalization to GDP ratio of 99% and 88% respectively, India’s ratio is lower at ~73%, which signifies the potential for growth ahead.
• Unlike globally where free float is as high as 89% in Brazil and 90% in NASDAQ, in India its lower at 54%. So as promoters dilute some stake, it will increase free float thus leading to depth in markets and increased business opportunities for stock exchanges and other market participants.
• Indians comprise 17% of the global population and yet only 3% of the population is invested into capital markets.
• Equity as a percentage of total savings (financial + physical) is only at 5% as against 14% in China, 15% in Brazil, 20% in Indonesia and 42% in USA.
• 60% of India’s population is in working age category.
• Post demonetization the cash that has entered into formal system, is being invested in markets especially in mutual funds and ULIP products. Besides EPFO increasing equity % of its investments is also bound to improve transaction volumes.

Arguments against Investment:

a) Loss of Market Share to NSE which is a key competitor and BSE always playing second fiddle in equity cash segments:
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b) Risk of non-compliance by listed corporates leading to suspension/delisting of the stock. This impacts annual listing fees of stock exchanges. On BSE a stock gets suspended / delisted after 2 quarter / 7 years of non-compliance.
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c) Regulatory risk due to non-compliance with legal/regulatory obligations or change in regulations due to changing macro / sector specific environment.
d) Credit/liquidity/settlement/collateral risk in clearing and settlement business.

Conclusion:
With cash per share of nearly ~Rs.700 (includes restricted cash ~25%), there is adequate margin of safety. In addition, BSE is trading at lower multiples with respect to other listed peers:
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Views Invited…
Disclosure: Invested.


(Ampi) #2

Thank you for sharing the detailed analysis. While have been tracking this stock was unable to determine how to analyse this stock. Looking forward to contribution/ opinions of other experts.

My main reservation for BSE is where will the growth come from ? While there are lot of initiatives (Derivatives etc) how it actually transforms into future growth is to be seen. Until then considering this a defensive stock with stable & repeat income with high margin.

Disclosure: Invested.


(khushi) #3

BSE share is good only till NSE lists on the exchabge!

Sounds a bit harsh, but most of the equity business happens here only and it will grow much more faser than BSE.


#4

Kindly back your statement with data. Would like to understand how the listing of NSE will affect the business of BSE, as they both are fully functional and premier bourses of India.

Discl; No positions.


(khushi) #5

Very old data of 2005 -

BSE has under 12 per cent share across the cash and derivatives segments of equity markets, down from nearly 45 per cent in 2000 (source: Business Standard Research Bureau, BSRB). When BSE loses, the NSE gains.

“NSE’s liquidity is better. BSE is beyond repair,”

Current figures will be more worse i feel…


(Changu Mangu) #6

In reality, this is a true duopoly business. It is simple to buy BSE and also buy NSE when it lists. Whichever wins is going to compound all our lives even if one wins over the other. Else, they have no competition in the real sense and both will grow to to a certain degree together.


(Arun S G) #7

Perfectly echoes my thinking. Duopolies and Oligopolies are the best space to invest in.
CRISIL and CARE and ICRA
Amara & Exide
Asian Paints and Berger
BSE and NSE.

One might provide better returns over the other, but both will provide rate of growth over and above the mean rate of growth of economy for next several years.


(Changu Mangu) #8

That’s a golden list of businesses with the perfect logic. Fabulous.


(ramanhp) #9

CDSL/NDSL are in a regulatory field and duopoly.


(Ashish) #10

It is no doubt a Duopoly business and has a long life ahead.

Only issue is that pre IPO shares are still locked in and will remain locked till first anniversary of listing (sometime in Feb 18). So when the lock-in gets lifted, a large qty will be suddenly released into the market and may see a temp blip in prices. In my view it could be better to wait till then.


(vivekbang) #11

(Mridul) #12

Mix of Capitaline and my notes from Q2 FY18 concall -

The company is taking various new initiatives. Recently, the company has signed a MoU with world’s largest insurance exchange Ebix Inc to set up a JV to develop a pioneering insurance distribution network in India.

India International Exchange has recorded volumes of US$ 48 million in the quarter ended September 2017. The company has 23 active members in the India International Exchange (up from 20 last qtr), while another 100 members are in the membership stages. With increasing capitalization, BSE expects member count to rise rapidly.

The SME trading platform of the company has reached 200 companies with a listing of another 14 companies in the quarter ended September 2017. The company enjoys 71% market share in SME trading.

Bond trading platform - BSE has completed 103 issues amounting to Rs 44,450 cr in Q2FY18. Since 1st July 2016, the company has conducted debt issues of over Rs 3.1 trillion. Haven’t commented on plans as to how they will monetize this large opportunity.

Equity - 3900 companies. While the company recorded 14% growth in equity trading volume (overall share vis a vis NSE has reduced in % terms), while the currency derivatives trading volume expanded 37% in the quarter ended September 2017. The exchange has gained market share in currency derivatives trading 44% end September 2017 from 37% end September 2016. The company is planning to strengthen its derivative platform to gains share in the cash equity market trading segment. I don;t think they will be able to fetch any market share from NSE in equity (cash and derivatives). Volumes are rising on an absolute basis due to bull market.

The company has recorded 10% growth in its consolidated revenues to Rs 169 crore, while its net profit moved up 30% to Rs 67 crore in the quarter ended September 2017. The cash balances of the companies stood at Rs 1345 crore on standalone basis end September 2017. Investment income will be more or less steady unless yields changes significantly.

The company do not expect significant capex, while expect operating cost to remain steady, going forward.

The company has introduced liquidity management scheme of Rs 8 crore for the IEX from 1st Nov 2017. As per the company, it needs to provide capital support of Rs 400 crore over next 3 years to India International Exchange, in the absence of getting any new partner. Currently, IEX is encountering ~5 cr loss per qtr (28 cr yearly). The company expects this to break-even and recover infra costs in 5 years. As per the company, its proposal to launch Rupee/Dollar contract, which is in a huge demand, would supports its revenue growth (though gettign approval for the same depends on the regulator).

Their MF platform is doing well but MFs are reluctant to pay a fees. BSE tried for that but failed in past. They will try again to monetize this good platform.

Overall, BSE is a safe investment bet with lots of opportunities where NSE is not present/looking. Mgmt at helm is also very good and is proactive in bringing new products and segments. Question is on monetisation of such platforms (like IEX, Insurance, Currency Derivatives, BONDs, Mutual Funds).

Disclaimer: Invested. No transaction in last 3 months.


(Nityanand) #13

@Mridul
Please find the points which I think missed one from your concall details. They may be from the last concall or from June Qrtr Concall.

  1. For IEX they are not charging any transaction fees right now. they will start charging the same after one year.
  2. The transaction fees will be approx 12 cents per transaction
  3. For Mutual funds they are not taking any transaction fees and they are in discussion with AMFI to start the transaction fees

I am still trying to evaluate what products they will be able to sell through their JV with Ebix.

Disc: Tracking


(sougataG) #14

I have some confusion regarding the PE of the stock:
On screener it appears: 6.92

on MarketMojo App it appears: 24.24
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On StockEdge App it appears:7.46
Money control is not showing PE of this one
In the AR for Year ended 31 March 2017

As per Independent Auditors Report:

EPS:
On: PAGE-176: Basic and Diluted EPS after exceptional items: 40.41
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on: PAGE-249: Basic and Diluted EPS after exceptional items: 36.39
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So PE should around: 972/40.41 = 24.05 if earning is 40.41 or 972/36.39= 26.71

So my question is which earnings is correct one? And which PE is correct one? And why is there such variance between the differnt sources, wrt PE.

I am new to the forum, not very advanced as an investor (still got lots to learn), so I hope seniors can clear my confusion. This is my first post kindly pardon me if this is a stupid question.


(Mridul) #15

Add last 4 qtrs consolidated pat n put it in denominator with mkt cap as numerator. As simple as that. You may remove one time cdsl sale amount from pat in this exercise to remove one off component.


(Contrarian) #16

NSE has dominated the cash and derivative markets. It commands strong market share of ~100% in the
derivatives segment, and ~84% in the cash segment. BSE has been losing market share in the cash
segment to NSE since 2006, but this has now stabilised in the last 3-4 years.
In FY17, BSE had ~16% market share in the cash market (stable at this level for the last four years). BSE
has revamped its technology to become the fastest exchange in the world. Management increased focus
on generating ways to increase transaction income. BSE has also terminated its efforts to develop the F&O
market, where NSE commands a dominant position.


(Contrarian) #17

Hello All,
I have a question to people who are invested in this stock, I am finding it hard to value it.

Do you see it as a undervalued stock ? or its a growth stock ? and what are your growth expectation from the stock ?

I came across this amazing research report from HDFC
BSE.pdf (626.6 KB)

They claim EPS FY 20 to be around 50 , which seems to be fair estimate -

and if you believe this business should trade around 25 times earings then FY 20 one should expect it to trade around 1250 /- , Which is roughly 30% up from todays price of 960.

and even in the report they are saying buy with target of 1200 /- in 4 quarters ( i am sceptical about this happening in 4 quarters or 8 quarters that depends on market mood. )

So, to me this seems like fairly valued today and could be a 10-15% compounder for next three years after that revenue from their international exchange will start contributing which might add more value to the company.

one near term sentimental positive could be listing of NSE, then markets could price is as per 25 times FY20 earnins in advance.

Net net as a investor you can expect 30% return with in a year ( then no return or very low return till 2020) or at worse 10% CAGR till 2020 ( as per near term visibility)

Also, one more negative is ROEs are more or less high single digit range.

Which i don’t find very attractive , Of Course this seems to be a better bet than putting money into liquid fund.

Thanks,
Dhruva


(Mridul) #18

Bullish divergence on the charts…


(Sreekanth) #19

Hi Dhruva

ROE’s are suppressed due to large accumulated cash reserves…if we adjust for the same…then ROE from core business looks very decent considering its a duopoly regulated business…

The cash buffer definitely makes me comfortable considering the valuations we are heading to in market today…ROE’s are bound to improve as and when they commercialize newer products…

https://economictimes.indiatimes.com/markets/stocks/news/bse-to-auction-investment-limits-for-rs-8300-crore-corporate-bonds/articleshow/61764938.cms

https://economictimes.indiatimes.com/mf/mf-news/bse-mf-platform-contributes-90-subscription-for-bharat-22-etf/articleshow/61748773.cms


(kv) #20

Looking at the P&L it seems most of the profit is really investment income? There is about 238 Cr of investment income and another 45 Cr of other income. This leaves a operating income for FY 17 of 50-95 Cr depending on whether we count the other income as operating income or not. Trying to separate the true economics (ROE) of the business from the distortion due to the large cash they hold. If you could elaborate your thoughts on these two parts separately and how you are valuing these, that would be great.

Also, has management said something about their plans with the excess cash?