BSE one of the oldest exchanges in Asia has survived through intense competition among many regional exchanges. Though it has steadily lost market share to NSE over the last two decades, it has been able to draw strong brand recall by innovating new products and platform, seamless technology adaption and retaining strong member relationship. We believe, BSE will continue to adopt new innovative platforms, put up strong tie-ups globally and retain its brand recall. Exchange platforms in India will remain a steady cash flow business on back of strong economic growth and improving capital market penetration. At the upper band of Rs806, the exchange would trade at 35.3x FY16 Consol EPS of Rs22.8 and 1.8x BV and we recommend to Subscribe for long term gains.
- Steady cash flow business, but treasury income high: Despite losing market share in high turnover segments like equity both in cash as well as derivatives, it has been able to steadily grow its revenue stream through annuity based fees and treasury operations. 65% of business is derived from securities related fees and corporate fees. Depository income contributes better part of income while turnover based transaction fees have improved in last few years. Exchange also charges listing fees to corporate and AMCs for using various exchange platforms based on various slabs (exhibit 24). Treasury income contributes 12% of revenue stream apart from investment income, which is derived from overnight settlement income in CDSL and cash kept as deposits from members.
-Innovation is the key to sustain market share:With capital market facing headwinds in last few years, turnover has been volatile especially in equity market and hence increasing innovative products are key to improve turnover and increase market share. BSE has been able to manage to introduce new products on its platform like derivatives especially in currency & interest rate, new exchange indices like the Shariah, IIEX in GIFT City and global tie-ups.
-Operating metrics remain strong:BSE's EBITDA margins of +40% remain best in class on back of steady revenue momentum and better management of treasury. Even excluding the investment income EBITDA margins are at 22% in H1FY17. It also has been gracious in dividend payout which stands at 80% of profits. BSE derives most of value in its investments made in subsidiaries like CDSL, IIEL among others. BSE on consolidated basis at upper band of issue prices trades at 35x FY16 EPS, 23x CEPS & 1.8x BV which is fairly valued in our view and hence we recommend to Subscribe for long term gains.
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