Jefferies Downgrades BSE To 'Underperform', Sees 27% Downside

Jefferies, in a note issued on Tuesday, has downgraded its rating on BSE Ltd. to "underperform" and forecasts a potential decline of 27% in its stock.

The brokerage action comes despite the rally seen in BSE's shares following the new framework for futures and options trading announced by the Securities and Exchange Board of India.

The changes, which include limiting weekly derivatives contracts to one per exchange, are expected to increase BSE's market share. Jefferies is of the view that such expectations "appears stretched, fails to capture risks from higher impact on the overall market, and low spillover gains."

Jefferies has set its price target for BSE at Rs 3,500, which implies a downside of 27% against the current market price of Rs 4,752.25. However, the revised target is higher as compared to the price target of Rs 2,850 shared by the brokerage in August.

SEBI's new index derivatives framework should impact the industry volumes by around 25% over the second half of fiscal 2025, as per the note issued by Jefferies.

"While the discontinued weekly products make up ~40% of market premiums, the impact on the overall market can be lower (~25-30%) if there is a spillover of trades into the continuing weekly products," it said.

BSE's recent run-up—rising more than 100% year-to-date—is fuelled by the hopes of market share gains from spillover trades, the brokerage pointed out.

"At the current market price, BSE's valuation (at P/E of ~40x FY26E) implies its market share rising from ~13% in 2QFY25 to 30-35% (with 40-50% share in weekly contracts). This appears stretched and does not capture risks from higher impacts on the overall market," Jefferies said.

"We see near-term risk-reward unfavorable and downgrade to underperform," it added.

From Nov. 20 onwards, only one weekly derivatives contract will be allowed per exchange. This, claim analysts, is likely to benefit the BSE as rival NSE currently holds an edge with contracts on all days except Friday.

In accordance with the SEBI framework, NSE announced on Thursday that it will discontinue its weekly derivatives contracts on Bank Nifty, Nifty Midcap Select, and Nifty Financial Services, effective from Nov. 13, Nov. 18, and Nov. 19, respectively. This led to the BSE share price soaring by 8% to clock its highest-ever mark on Friday.

Notably, BSE has also announced the discontinuation of weekly derivatives contracts on Sensex 50 and Bankex from Nov. 14 and Nov. 18, respectively.

This means that weekly derivatives contracts will continue only on the frontline indices of BSE Sensex and NSE Nifty 50.

Shares of BSE, which are traded on the platform of rival NSE, closed 1.19% lower at Rs 4,725.25 apiece. In comparison, the Nifty 50 declined 0.28%.