BSE Gets A New 'Buy' As Jefferies Expects Earnings Surge

BSE Ltd.'s earnings may jump 150% in the ongoing fiscal and and double over two years through March 2026 on strong growth and higher margins, according to Jefferies.

The research firm initiated its coverage on Asia's oldest exchange with a 'buy' and target price of Rs 2,700, implying an upside potential of 24%.

Indian stock exchanges are benefiting from healthy GDP growth, rising market capitalisation/GDP ratio (India at 100% against 130-200% for peers), financialisation of savings and rising equity market participation, Jefferies said in a Nov. 27 note. "Moreover, exchanges are insulated from the risks of compression in fees, unlike the debate between active and passive AMCs as well as discount and full-service brokers."

Over the past five years, a surge in investor participation and sachetisation has lifted derivatives volumes by 10 times, the research firm said.

While NSE has been dominating the segment with a 100% market share, BSE's recent relaunch of options has found success as it addressed the market gaps for sachet derivatives. Within six months, that lifted its turnover market share to 14% from less than 0.5%.

"Under the new management, BSE has seen strong back-end execution of new products, and we believe the company's changing profile with higher market share can drive network effects in other products and open up newer monetisation avenues," the note said.

"Over FY23–26E, we expect BSE to deliver a revenue CAGR of 45% and, aided by margin expansion, a higher earnings CAGR of more than 70%."

After the Covid-19 pandemic, the number of active investors on the National Stock Exchange has increased significantly. The overall investor base has grown fourfold to over 11 million. In the derivatives market, the count has surged 10-fold to 4 million. The drivers of this huge onboarding have been the digital discount brokers, whose investor base has become 5–6 times larger than traditional brokers, Jefferies said.

BSE's tech integration with brokers and members was a large enabler of the option volume ramp-up, according to Jefferies. Cost-saving initiatives like the winding down of the legacy 'liquidity enhancement scheme' have been margin-accretive.

Going ahead, the improved volume throughput will open up newer monetisation avenues for BSE like co-location services, it said.

"With steady growth in cash equities (20% of revenue mix) and mutual fund processing (10% of mix) and recurring fee income in corporate services (35% of revenues), the ramp-up in the derivatives segment will lead to an improved long-term growth outlook for BSE," Jefferies said.

Jefferies said operating leverage and a changing revenue mix will place BSE's operating margins—40% currently versus 69% for market leader NSE—on a multi-year expansion path.

The key risk will be higher competition from the NSE as it can reduce or reverse market share gains and may drag product margins, Jefferies said.

On the regulatory side, according to the brokerage, recent actions include raising cash margin requirements to 50%, an in increase transaction tax by 25%, and enhanced risk disclosures.

Of the seven analysts tracking the company, four maintain a 'buy' and three recommend a 'hold', according to Bloomberg data. The average 12-month consensus price target implies an upside of 11.3%