what do you make of what seems to be a rollback on the txn rate @ starmf? last qtr it was ~10 but on a blended basis for h1 it is ~8.3.
The management’s central message w.r.t. to StAR MF has been consistent: we save a lot more for the MF industry that what we charge. As long as this holds true, I believe revenues will see an increasing trend.
This does ring true, given the facts: As late as 2017, Mr. Chauhan was saying that fund houses were not keen on paying for the facility. AMFI, in fact, was advising its members not to pay! And here we are, in FY20, looking at revenues of around 45 Cr.
TBH, I have no clue as to how this blended cost is levied on the fund houses. It seems to include a per transaction cost and some cost recovery for the tech platform – that, sadly, is the limit of my understanding.
I would prefer to track the following:
- No. of total registered members, IFAs and investors
- Market share (vs. NSE NMF II and AMFI MFU)
- Market share as a percentage of ALL MF transactions – online + offline, via intermediary vs. directly with a particular fund house etc.
thanks! i agree with the uptrend argument and 45 crs is not at all bad. but, if this is a rollback (as opposed to some one off adjustment) shows lack of pricing power. and i do hope someone presses this point during the call to get more clarity. without pricing the potential revenue does change a fair bit.
how/where do you get data for “Market share as a percentage of ALL MF transactions – online + offline, via intermediary vs. directly with a particular fund house etc.”
Mr. Chauhan has offered his estimates in a couple of post-results concalls. Will try to post the relevant transcript.
I think the results are not that bad.
BSE still earns most of its money through listing fees, service to corporates and transaction charges. It has stable revenue streams in the first two which is not dependent on market share. And I personally believe going lower from 7% market share even after interoperability for equity cash segment has low probability. It might not gain market share but most of the revenue will be stable. BSE won’t die in equity cash segment and companies will continue to be listed at BSE, no matter how low the volumes are.
BSE has still not started charging fees completely for most StarMF, IFSC , commodity and currency derivatives. It has a good market share in such segments. Thus will lead to diversified revenue streams. Management has been very proactive in diversifying itself.
I think people are not realising that the management of BSE is the best that they have had in many decades. From being a pawn of some powerful entities and run by group of brokers in 80’s-90s, the company has changed drastically.
Management is building market share at the cost of revenue. I believe it is a smart thing to do. Investors want immediate returns but BSE is building assets that can provide decades of good returns and building such assets requires time. Chauhan is also pursuing various ventures like insurance, power, etc and building market share in other segments at the cost of revenue. He knows he has lost the equity war as liquidity will never arrive at BSE and day traders will always throng to NSE. But he is not making decisions keeping next quarter in mind. And market share and volumes in IFSC, StarMF and commodity/currency derivatives is proof that the management is executing it nicely. It has great potential to earn big bucks. It also holds a good chunk of CDSL.
The tanking of price has changed the perception of the company among investors. I believe the story is still the same with a few headwinds in the short term and great potential in the long term.
It is a company with high regulatory moat, multiple earnings streams, zero debt, high cash, great future earning potential and good management. It is available at cheap valuations and from a 10 year perspective, it seems like a great bet in which as Pabrai says “Heads I win, tails I don’t lose much.”
Disclosure: Invested
14 Likes
A new big development in favour of BSE. On 8th November, SEBI issued a circular which has allowed cross exchange margin position for trading in correlated instruments like Nifty 50 and Sensex. I think this is a big positive for BSE and will increase the trading volume in BSE. How you see it, your views are welcome.
Disclosure: invested
1 Like
From recent EBIX ConCall: Does anyone have a clue to which insurance distributor IPO is EBIX referring? Is it policy bazaar?
Incidentally, we netted 40% plus margins in this business area. Today, 70% of our revenues in this business come from the Middle East, Europe, Africa and Asia. However, the real big opportunity in insurance is ahead of us in India in the form of our Bombay Stock Exchange, BSE Ebix insurance exchange venture. Recently, we announced that we have secured approval from the insurance regulators for the BSE Ebix venture to be deployed in India. This is possibly going to be one of our biggest ventures ever from my perspective. The BSE Ebix venture is targeting to handle insurance distribution and back-end insurance processing in a manner and scale that has never been attempted in India.
With 300,000 BSE terminals across who’s who of India’s financial institutions and 320,000 EbixCash franchises across the length and breadth of India, we are attempting to take insurance sales to the last mile in every nook and corner of the country into rural areas, last mile street, across all cities, banks, agents, stock brokers, wealth management advisors etc. The BSE Ebix business model on the distribution of insurance will focus on a pure commission-based model, since that is the most lucrative financially, while selling life, property and casualty, equipment, travel and health insurance, etc to the prospective 1.3 billion population of the country.
The BSE Ebix venture will also sell back-end insurance products and associated services to the insurance B2B industry on an on-demand basis on a transaction and subscription basis. We will not only be powering back-end insurance, but also providing the insurers access to a marketplace because of our distribution reach. No one has attempted any of this besides the sheer scale of what we are setting out to do in India.
Recently a mid-sized insurance distributor in India with approximate revenues of $60 million decided to launched its IPO in India and got valued at $1.5 billion. The valuation was based on the opportunity ahead of this distributor. We believe that what we are attempting with BSE is way larger and expansive than this distributor. Besides, we have India’s most trusted and oldest financial institution by our side [Phonetic] in the form of Bombay Stock Exchange. More on this later.
Now having said that, but when you have to face the reality of a country like India or for that matter, the reality of an Asian region country, today, the reality of the country is, that take an area like cabs in India. The cab market in spite of the fact that the Ubers and the Olas are already here, the digital market is 4% today, 96% of cabs in India are getting booked, somebody is walking into a physical location and asking for a cab, that’s the reality of India.
The same goal, what is the single biggest block today in selling insurance across the country? There are players who are trying to – their reach isn’t there. The distribution reach isn’t there. India is such a large country, 70% of the country resides in villages. Nobody is able to reach these villages, so what is happening is, if we expect a villager to go digital, that’s not happening in my lifetime because the literacy levels aren’t there in the villages.
So should we leave 70% of the country behind? Obviously that is not correct. So how do you get there? You get there by deploying physical locations in all these – the rural areas and having those physical locations actually become a conduit for that village to go digital having that one center within a village, for example, wherein you can make – have your birth tracker, you can report a birth, you can have your death tracker, you can virtually buy insurance, you can open a new bank account, you can do your crop insurance, you can get a prepaid card, all of that today, if you don’t set up a physical place in that village, you’re going to be basically leaving that village out of the digital revolution. So there is a stepwise plan. Your first step is to engage people, to reach out into the areas where digital technology isn’t reaching today because of literacy issue.
So, you have to come up with a plan, which embraces digital is a given, but then you need to face the realities of the Indian market and really embrace that vision by providing digital to everybody who is digital, who is computer savvy, so provide them all the younger, youth in the cities who are more computer savvy and are willing to go digital, we are absolutely available for them in a digital format.
But on the other side, you – and then you go through to reach out to the same consumer through our B2B channel, through our corporate channel because we have thousands of corporates working as a – who are today our client and there are tens of thousands of employees that these corporates have. So, we reach them without spending marketing money, we are reaching out to each of these consumers.
And then you go out to the physical locations, wherein our job is to make each physical location digital, be it a B-grade city, be it a C-grade city, be it a rural area, let me make this remark that the real revolution, the real numbers in India don’t lie in A-plus cities, don’t lie in the big metropolitan, which is the big focus of some of the larger players, who have come from abroad, the real money lies in the C-grade cities, the B-grade cities and the D-grade cities and the rural areas of the country.
And in those areas, you will have to have a multi-pronged approach, you need to be in the last mile, you need to have a physical location, which will be digital. So look, we are ready for both. That’s the simple reality, but it – having a physical location actually gives us a tremendous edge over our competition because, first of all, it saves us marketing money. We don’t have to really spend the kind of money that others have to spend, because they need reach. We already have these 320,000 locations all ready and as we get into more and more rural areas and we start working with governments in these rural areas, we will get an automatic reach without spending money and people will come to us to do a government service and in the process, possibly buy a travel insurance or a travel or a airline ticket or a hotel ticket, or whatever else, right. So I think that’s our vision with respect to physical versus digital. So we want to embrace both, but in an intelligent way.
Having said that, with respect to the upsell, look, that’s an ongoing – that’s an ongoing process. Everything we do, we are interfacing to each other. So today what is going on is that if you want to book, for example, let’s say, somebody in India wants to book a flight over to Rome, what EbixCash today does, we are one of the few players in the market, who will say to – who can provide that consumer everything ranging from a visa, getting them a visa for Italy, to handling their airline ticket, their travel ticket, their hotel, the local cabs, the rental cars, if they want any adventure sports or anything in Rome, whether they need foreign exchange, whether they need travel insurance, whether they need health insurance. So, you name it. We are – we handle that end-to-end transaction. And to us cross selling is natural because it’s a same consumer, who is going to travel or it’s the same institution or a corporate, who is going to make one of their employees travel. So that’s just an example of how we do cross selling today.
We’ve actually taken cross-selling to the next level. One of the examples I gave today – in today’s call is from our EbixCash division, who recently helped our insurance guys to sell a multi-million-dollar deal in Philippines with a large financial institution. This is the deal for Ebix Evolution wherein we already had this large institution as our client for wealth management and asset management. So it was natural for us to go in and promote insurance products to them. So we went in – our guys went in and promoted the insurance product, teamed up – both divisions teamed up and ultimately resulted in the customer accepting our proposition.
So, to us, cross-selling is a natural and that’s why we had this recent conference in India, wherein we brought everybody together purely to encourage cross-selling on a mass scale.
Jeff Van Rhee – Craig-Hallum – Analyst
Got it. And so two other brief questions for me. Then – with respect to – first let me hit the revenue question, then I want to hit the margins and expenses. But with respect to revenues, certainly the BSE approval was a challenging process. You’ve got it essentially there. Can you dial that in a little further, what’s a reasonable timeline for this to be live and any sort of framing of revenue potential impact? Just help us envision when this is going to hit the P&L in simple terms?
Robin Raina – Chairman of Board, President and Chief Executive Officer
So BSE approval, we got an in-principle approval. What that does is, they – the principle approval lays out 22 conditions for us to adhere to and that is a 30-day process that we are in the midst of right now, for both BSE and Ebix are working through that.
It’s more of a process of giving them some undertaking, some regulatory conditions, which we think we will fulfill over the next 30 days. Once that happens, we are basically in business. So, then it’s a matter of our leaching out and spreading out our marketing arrangement, putting our brand out in the market, establishing – we already have established a team to deploy the products. We have already in the background, while the regulation – regulatory approval took us almost a year, we use that time to interface our product with multiple carriers. We are already trying to carve out some specific custom deal with certain carriers. The big difference here in this BSE Ebix relationship versus the traditional way we’ve run exchanges in the US is, we are going to not just be a source of transaction money here. We are going to function like a distribution arm. We are going to function like a distribution agent.
We will be making pure commissions on the distribution side. We made that decision sitting with BSE because BSE has been very – BSE is very knowledgeable on that front. As they brought – they entered the mutual fund markets a few years back, and now own 26% of India’s mutual fund index – business. And so, we – BSE, for example, learnt from that experience that one of the key things to do is to make a lot more money through commissions, clearly commissions in some of the insurance groups tends to be way much higher than the traditional transaction fees. So we feel that, that should hold us in good light.
Now on the back-end side, we are going to charge transaction fee like we traditionally do in the US, we’ll have the mix of subscription and transaction fees with respect to all the carriers, the brokers, and that will also open up because we have the market, we will be able to tell a carrier, look, if you want to be on this and you don’t have the tools, we’ll give you our underwriting tools, we’ll give you the technology to enable you to be on – to be in front of this market. And that by itself is very exciting for the carriers to get the – see, you’re basically providing the length and breadth of our reach to look a carrier. So – and that by itself is a big deal, I think, for any carrier.
So having said that, I think we are at least one quarter away from a time, wherein we would be starting to clock some revenue out of this. So, presently, we are working through the whole process of ensuring now that we have the regulatory approval that we put all our relationships – the business relationships in place because until you have the regulatory approval, you can’t really sign business agreements with some of these carriers. So now we’re going to spend our time signing these business agreements, carving out these commission deals and then it’s a matter of time of deploying all of these through the market.
9 Likes
I see that BSE has been making a lot of efforts in gaining momentum in various businesses. They seem to be trying their hands at a lot of things hoping a few will click.
At the moment, I see BSE on a sticky wicket and it a evident in the stock price.
Disc: invested and my opinion may be biased. This is not a buy/sell call.
True, that is why BSE is available at such cheap valuations. If there were everything perfect and certain, stock would have been priced at really high multiples. Being on a sticky wicket is sometimes what gives great bargains in the stock market. I think many people got influenced by short term factors rather than focusing on the long term. I believe this change in thinking of long term investors is due to the carnage in small/midcaps.
Last Quarter, revenue from equity cash came down. BSE usually earns a lot of their money in equity cash segment through small/micro cap stocks which are exclusively listed and IPO proceeds from such stocks. The past two years have not been kind to small/micro caps but I believe these scrips will come back in favour and when they do, BSE earnings in this segment is likely to shoot up or at least go to the levels as it was 2-3 years ago. Growth in Indian capital markets will also act favourably for the company.
Also, being successful even at a couple of new segments will improve return ratios as it is a fixed cost business with very minimal incremental capital required to increase earnings. So, margins will improve drastically and so will the bottom-line.
Some businesses become overvalued and stay overvalued for long periods of time. I believe this is a business which has potential to be overvalued and stay there if certain factors play out right because such businesses are really difficult to displace or compete with once they get market leadership.
I believe things are never certain in the stock market or the business world and I can be dead wrong on many aspects. But, this company seems a promising story with great margin of safety and runway for good growth.
7 Likes
BSE StarMF has launched IFA value aded services… IFAs will get their commission from BSE starMF platform. They dont have to deal with each AUM separately. Also this platform offers them to maintain their PF and AUM ( this is normally a paid service by other providers).
Now that BSE EBIX also got license for insurance distribution all IFAs are excited. I spoke to one IFA, he said all IFAs are very happy with StarMF and its professionally managed. Lets hope for the best.
As disclosed in my posts above, Im invested… My views are biased…
3 Likes
this is a head wind from the short term profit perspective.
the last time around, in 2012, when bse introduced LEP it was burning about 60+ crs annually on incentive fees.
this time around, just looking at the daily pools in their announcement so far, it adds up to about 5 lacs a day. so about 12 crs a year. i am not sure if i have captured all the incentive fees. so, it might be higher.
i hope this time its more successful. if anyone has any documents/articles describing why the marketshare gains were not persistent in 2012, please let me know. i realise that inter-op was a factor. but want to know what the other factors might be were. thanks!
They discussed this in the recent Q2FY20 CC. Sharing my notes and transcript of the same.
Q2FY20.pdf (1.2 MB)
SG&A and Other expenses have increased due to many one time provisions on ILFS exposure of 2.6cr. BSE Start MF receivable provision of 3 cr. CSR spend of 1 cr for full year. Provisions for listing fee 2 cr.
Power exchange license should be there in 2 months if no new conditions are brought by the regulator.
Revenue degrowth - small stocks used to be the mainstay of our revenues. used to be 50% in 2016-17 now it is 10%. Due to market going down. Value of these have gone down by 80%. And new sebi rules have reduced MF exposure to these stocks. Whenever markets pickup the revenue will comeback. 2nd, IPOs BSE is much larger than others and we used to earn 50-70 cr revenue. IPO market is down for past 2 years. Corporate restructuring and rights etc have also reduced.
international exchange is in a loss as we are not charging yet. we do about 2 bn per day. competition is not charging. RBI is giving approval for USDINR contracts. We will see more volumes. Current loss for H1 was 17.2 cr for INX and ICCL. Includes LES.
EBIX - CAPEX is 25 cr our investment is 10 cr. Should be live in 2 months. We have 10 companies tied up, 5 in life, 4 in general and 1 in health. We have been testing the software for an year now.
We are more involved with the client than policybazaar which only gives comparisons, we will conclude the sale, which doesnt happen at PB. We will do post sale service also like advising and claim processing in case required. We will get commissions from the insurance cos. We will pass on some of that to sub brokers. It is a sub broker distribution platform.
Will continue to have LES in equtiy derivative and INX. In ED we are doing 150-170 cr a day, on STT basis people are spending 5-7x more than what our incentives are.
Our revenues are cyclical or variable with markets, while our costs are fixed. When market does well it will all goto the bottomline and when they dont it suffers. But this time MF platform has helped and compensated for the fall. It may compensate even more.
The MF receivable provisions is precautionary and due to us consolidating our position and we get requests of renegotiating the terms. We have reduced the 3 cr provisions from this Q revenue. So it is 8.8cr income vs 11.9 cr last q.
We will take a quarter to start if we get power exchange license, we should start generating revenue immediately as the business is non-discount based.
In commodity our job is to provide better regulations, lesser defaults, better technology and risk management. Results will come when people appreciate our offering. They come from unexpected areas. We expected from gold and crude we got from guar and cotton.
We will relaunch crude with ICE collaboration, with no additional cost.
New change in SCRA to allow options in spot market. Till now options in futures were allowed with minimum liquidity requirements and we couldn’t launch those options.
BSE Star MF - So basically, the way I look at it is today, we have become 15% of all the funds going into mutual funds, including the past SIPs and whatever. We do around 46 lakh transactions a month. Even if the market doesn’t grow, which it does not over last four, five months because market is being bad, the mutual funds also didn’t grow so well. But we have been, in a sense, a large provider of new orders to the mutual fund industry in last five, six months. And over a period, if the mutual fund market grows from say, 3 crore transactions a month to 6 crore transactions a month then if we become 50% of that, then we basically will grow almost six, seven times of current and in terms of volumes and value might be probably again 50% to 100% larger. So that’s how I would put it that there is enough and more scope for growth of this platform. And it has sort of helped us conceptualize a new, completely new, platform in the insurance because this has come like a breath of fresh air not only for us but also for the distributors that they were searching for something like this. There was nothing which was available and now suddenly it is so much more popular that we have like 54,000 or 57,000 people officially there on the platform, right, which is large.
3 Likes
You raised a fair question. Only difference big difference is the interoperability as you mentioned. Other small difference is BSE has better latency compared to NSE. of course this will only come to picture once there is enough liquidity.
Im also confused why BSE chose to divest 4% of its stake in CDSL.
1 Like
If the CDSL stake sale happens at a discount of 10% from today’s share price, the cash flow post tax to BSE will be about 75 Crore. This will bring down the BSE’s share holding in CDSL to 20% which is the minimum share holding required to call CDSL an associate.
Really not sure of the reason for this divestment, considering BSE has adequate cash to fund for its business growth and investments. Also note that CDSL is a cash cow and still has significant potential to grow its business.
CDSL share price has not really reacted to this news - its just 1% down today.
Best regards,
AJ
1 Like
Hi, recently started studying BSE. What is the free cash & equivalents on the balance sheet as on Sept 30 which can be used for growth / dividends? As I understand from the annual report a portion of the reported cash is earmarked as margin money or for the SGF… Also does BSE have to hold a min stake in CDSL by law or can we consider the balance 20% held post stake sale potentially translating into cash in the future? Thanks.
My thoughts on a couple of recent initiatives and on the CDSL disinvestment…
I would view BSE as private equity firm with a peculiar set of attributes - a. the extraordinary regulatory moat that comes with being a universal exchange, b. the renown that comes with being a facilitator in the BFSI space, thanks to a track record of more than a century – even in less regulated / fairly open fields (MF is a good example) and c. an inherent cyclicality in revenues and profits, with each cycle lasting 5 / 7 / 10 years.
A majority of investments a PE firm makes will turn out to be duds; the many attempts that BSE has made to gain market share in equity cash & equity derivatives over the last decade are good examples. In the same vein, if you happen to be a successful disrupter adding value to the entire ecosystem, the quick turnaround and rapid scale-up can be rewarding; StAR MF is the ideal example. For eight years, from 2009 to 2017, the platform would have been burning cash and earning zero revenues. For the first few years, only BSE brokers were allowed to transact on the platform; it was only in 2013 that SEBI permitted all ARN holders to board and to transact on behalf of their clients; we all know where it stands today.
Adding value to the entire ecosystem – two examples
I believe BSE must be a trustworthy facilitator of transactions in the real world – and NOT a casino – if we (investors in BSE) are to be rewarded in the long run.
BSE Ebix has received in-principle approval from IRDAI, the regulator. Thanks to the recent Ebix and BSE concalls we have plenty of information wrt to the venture. While there a few online portals offering insurance related services, BSE Ebix seems poised to add a lot more value to all players concerned – insurers, TPAs, agents and consumers. We are likely to learn a lot more in the year ahead.
Agri-commodities is another interesting space. Agriculture constitutes a significant component of our economy. However, the farmer earns a miniscule percentage of what the consumer pays for the produce. This represents extraordinary inefficiency – and NCDEX, with its focus on farmer collectives, does not seem to have improved things significantly.
BSE seems to have adopted a slightly different approach – it is attempting to work with the respective trade bodies and tailors its contracts to suit their needs. BSE also has a 24% stake in CCRL – thus establishing a seamless connect across the entire value chain and ensuring the integrity of the system. Mr. Chauhan’s reference to “the business of trust” in the recent concall emphasizes this point.
No doubt agriculture is a sensitive subject, with a variety of structural impediments over which BSE has zero influence or control. It is attempting to present an alternate approach to the agri trade; whether it will succeed and be profitable is too early to tell. However, if it manages to bring even a small improvement in the efficiency of the intermediation process, it is likely to expand the scale and scope of agri-exchanges exponentially.
In this regard, what IEX has achieved in the (short term) power market over the last decade gives me hope – after all, electricity is another sensitive subject, and the market was riddled with inefficiency, with no meaningful mechanism for price-discovery. Even today, the medium-term & long-term PPAs are steeped in opacity and unsavory practices.
Any regulated entity (those coming under the purview of SEBI / RBI / CERC / IRDAI / WDRA etc) will need to “set aside” cash – regulatory capital, SGF, a clearing corporation at arm’s length etc. – depending on the nature of the entity. This is “encumbered” cash – it cannot be touched.
I would view the CDSL stake sale keeping a few factors in mind a. the recent, substantial buyback, b. a number of “growth” investments – India INX, Pranurja, BSE Ebix, commodities, equity derivatives etc and c. we are nowhere near the peak of the cycle in terms of revenues and profits of the core exchange business.
CDSL is a mature and profitable BSE investment; BSE’s stake is unencumbered and liquid. It is possible that a regulator is pushing for a further reduction in its stake; it is equally likely that BSE needs the cash for deployment elsewhere - hence the proposed sale. BSE will still continue to hold 20% of CDSL. I would not read too much into this.
Disc: Invested; views biased.
4 Likes