BSE (Bombay Stock Exchange)- Bet on Financialization?

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Here is my analysis of BSE Limited

Stock Exchange Sector Analysis

Financialization theme - India is a developing country and the average age of Indian is 29 years. With literacy rates and per capita income increasing, the share of financial assets as a percentage of GDP is bound to increase.Stock exchange business is like a toll bridge for financial instruments like stocks, mutual funds, derivatives with relatively stable operating costs. Companies approach stock exchanges for benefits of listing. A listed company is trusted more as it has to abide to the norms set by SEBI – market regulator in India. Listing at a stock exchange will help in fund raising which subsequently helps in growing their business. Every developed/developing country encourages investments in stock markets so that it will indirectly improve the employment and tax revenues.
So, with a greater certainty, we can safely assume NSE and BSE will stay for long in India as these are the only two major stock exchanges with a significant entry barrier and closure of any of these two is practically impossible.

NSE market cap is hovering around(unlisted) 40,000 Cr and BSE market cap is around 2200 Cr. NSE is the market leader in Equity Cash and Derivatives segments and beats BSE by a significant margin.
The majority of revenues for NSE comes from derivatives segment which is nothing but – Futures and Options. NSE derivatives segment average daily turnover is at least 20 times bigger than NSE cash segment average daily turnover.Ideally, these should be used for hedging but most people use it for speculation.

Comparison with some international stock exchanges market capitalizations

Australian Stock Exchange – 16.15B AUD or ~86000 Cr (INR)

Hong Kong Exchanges and Clearing Ltd – 58.6B HKD or ~56000 Cr (INR)

Pros –

  1. Longevity – Been in the business from last 145 years and witnessed major shocks – 1992(Harshad Mehta), 2001(Ketan Parekh)
  2. Compliance – Mr. Ashish Chauhan promotes BSE as a trusted and compliance exchange. NSE on the other hand is tangled with co-location scam and SEBI is asking NSE to put this detail as part of its IPO DHRP

  1. Zero Debt & Cash rich

  2. Diversified revenue verticals

  3. Market value of investments Rs.2221.39 Cr. is more than the Market Cap Rs.2221.05 Cr. and Stock is trading at 0.92 times its book value as per screener.in

  4. Distribution platform à BSE understood that beating NSE in cash equity and derivatives segment is very difficult and so thought about the other options. Mr. Chauhan’s vision about BSE is to make it a distribution platform

    • BSE Star MF platform – BSE has edge here as per one distributor I spoke to and they are increasing their market share
    • BSE Ebix Insurance platform --The plan is to replicate BSE Star MF type functionality to insurance. It just started

  5. Subsidiaries

    • CDSL - Good business with deep moat
    • India INX - This is one thing which can turn BSE into a great stock. More on this later

  6. BSE is the world’s fastest stock exchange and it has the technology edge compared to other exchanges in India. BSE reacted quite fast to bring in the negative price feature for commodity derivatives compared to MCX

Cons –

  1. One man show all around. It is written all over – Ashish Kumar Chauhan. So, key personnel risk is there. I think some analyst should ask BSE during earnings concall whether they took key man insurance of Ashish Kumar Chauhan
  2. Liquidity Enhancement Scheme – The intention is to catch up NSE in terms of market share in derivatives. I think they are not doing things right here.

For example, HDFC Securities in battling discount brokers like Zerodha, removed brokerage for 3 months. I don’t know whether they were successful in getting more market share but they are all over the place in marketing it. Mails, SMS, HDFC Securities page, relationship manager calls etc.

  1. Less Focus on Marketing – BSE SENSEX 50 is almost a replica of NIFTY 50

With so many new speculators in the market, this is the time to promote their differentiator product even more effectively – Sensex 50 Weekly Contracts with Monday expiry. NSE Weekly Contracts have Thursday as expiry.

  1. No promoter for BSE. So, who is going to oversee the MD & CEO of BSE when things are not going alright or whether he really deserves a pay hike? Mr. Chauhan certainly is doing many things right though. I hardly hear about Chairman of BSE.
  2. Exchange business is a volume game and BSE is losing market share to NSE continuously in equity cash and derivatives. BSE is fighting it out though and SEBI is supporting it. Think if the default exchange is changed from NSE to “Best Price” in say HDFC Securities or ICICI direct.
  1. Regulatory risk from SEBI. Honestly speaking, SEBI is doing good work like MF reclassification etc

Mr. Chauhan certainly is operating BSE like a PE investment firm when we look at his enterprising foray into different verticals. Some investments click and some don’t.

A little background about Mr. Chauhan. He comes from a humble background from Gujarat and went on to complete his studies in IIT Bombay & IIM Calcutta. He played a major role in setting up of equities and derivatives while in NSE from 1993 to 2000.

He joined BSE in 2009 as deputy CEO and working as CEO from 2012.

Even though he talks about “understanding technology intuitively” in the above video, if you read between the lines, he has a solid understanding of how the world works and the ways of getting things done.

See how he is selling BSE Start-ups platform https://www.youtube.com/watch?v=IRCv5JDjv4U

His honesty about not promoting speculation/trading for the sake of it is really appreciable https://www.youtube.com/watch?v=41Koi-6ws2I

India INX

  1. Mr. Modi’s gift to Gujarat is GIFT City and the plan is to make it a true international financial hub like Dubai International financial centre
  2. India INX started as 100% subsidiary of BSE and sold a stake of 9.99% with ICICI in 2018 valuing India INX at close to 300 Cr market cap

It was inaugurated by Indian Prime Minister Narendra Modi on 9 January 2017. The trading operations began on 16 January 2017. It operates on EUREX T7, an advanced technology platform. It is the world’s fastest exchange, with a turn-around time of 4 microseconds.

It operates 22 hours a day, six days a week. These timings facilitate international investors and Non-Resident Indians to trade from anywhere across the globe at their preferred timings

  1. The turnover in India INX is increasing like anything and this time BSE is beating NSE in terms of volume game. Its market-share is more than 90% in IFSC GIFT city for June 2020
  1. SEBI now allows individuals to buy stakes in stock exchanges in IFSCs. Imagine if they sell 5% to some superstar broker like Mr. Ramesh Damani and 5% to some influential broker/financial institution who can bring some market to onshore currency derivative market to India
  1. Government wants to scale up IFSC and bring it on a par with popular jurisdictions such as Hong Kong, Dubai and Singapore

So how much should BSE Limited be valued? 2200 crore? I may be proved wrong but before BJP’s second term ends, India INX itself will be valued more than 2200 crores. This is more of a hope story and my thesis can go for a toss.

Apologies for lengthy mail.

Disclosure – Invested and biased. Started adding BSE on the day it was at 52 week low and bought on dips after reading more about it and currently holding with an average price of 407. My investment horizon is very long term.

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