BSE Ltd. share price target

BSE Limited (BSE) is an India-based stock exchange company. BSE provides a transparent market for trading in equity, debt instruments, derivatives and mutual funds. The Company consists of two business segments: Stock Exchange activity and Depository activity. Stock exchange activity is engaged in facilitating the trading of securities and the activities incidental thereto, and Depository activity provides depository-related services. It also has a platform for trading in equities of small and medium enterprises (SME). BSE also provides various services to capital market participants, including risk management, clearing, settlement, market data services and education. The Company's subsidiaries include Marketplace Technologies Private Limited, Central Depository Services (India) Limited (CDSL), Indian...

Maintain BUY with SoTP of Rs 758 by assigning 25x to Dec-20E core PAT (ex-CDSL), Rs 120/share for the CDSL stake plus net cash. BSE reported weak 3QFY19, with revenue down 9.1% QoQ to Rs 1.05bn. There is visible weakness in core business streams (across listing fees, cash equity and even currencies, where BSE was dominant). BSE continues to lose equity cash market share (-43 bps QoQ to 8.3%), while its grip on currency derivatives also loosened this quarter (-326bps QoQ to 44.0% share). Drop in revenues and ongoing investments in new initiatives led to steep fall in EBITDA margin, (adjusted margin stood at 1% down 796bps QoQ).

Maintain BUY with SoTP of Rs 871 at assign 25x (vs. 30x earlier) on Sep-20E core PAT (ex-CDSL), Rs 129/sh for the CDSL stake plus cash. BSE stumbled in 2QFY19, with revenue crawling up 0.3% QoQ to Rs 1.15bn. There is visible weakness in core business streams (across listing fees, cash equity and even currencies, where BSE is dominant). BSE continues to lose equity cash market share (-117 bps QoQ to 8.7%), while its grip on currency derivatives also loosened this quarter (-469bps QoQ to 47.3% share).

2 November 2018 consolidated operating revenues grew 1.2% YoY to INR1.12b, below our estimate of INR1.2b. The miss was on account of lower other revenues which includes Rent, Training, Recovery charges, etc. Operating revenues exclude Treasury Income from Clearing Corporation. EBITDA at INR93m was below our estimate of INR167m, but included one-time charges totaling INR74m from [1] provision for investment in IL&FS;, and [2] provision for bad debts. Adjusted for the same, EBITDA would have been in line. PAT was INR459m (-31% YoY), 12% miss, which again would have been in line adjusted for the one-offs. revenue grew 1% YoY, revenues from equity cash transactions fell 33% YoY to INR218m, owing to prevailing market conditions. The same is the case for Book Building services too, down 28% YoY to INR72m. Annual listing fees, an annuity in nature, grew 10% YoY to INR472m.

We still see value based on (1) Huge net cash of Rs 26bn (~Rs 509/sh, ~62% of MCap), (2) Increased contribution from new growth engines, and (3) High dividend yield of 4.4%. We maintain BUY on BSE, and our SoTP for BSE factors in Rs 126/sh for CDSL, assigns 30x to FY20E core PAT (ex-CDSL) and add back net cash, which works out to Rs 1,090 (32% upside). BSE posted lower-than-expected numbers in 1QFY19 both on the revenue and margin fronts. Revenue was down 19.2% QoQ to Rs 1.17bn (our est. was Rs 1.38bn), led by 42.2% QoQ fall in transaction revenue (23% of rev) and 9.7% QoQ fall in services to corporate (48% of rev). Exclusive cash segment ADTV slipped 50% QoQ due to weak market conditions and ASM while currency derivative ADTV was up 45.7% QoQ.

We maintain BUY on BSE, and our SoTP for BSE factors in Rs 137/sh for CDSL, assigns 30x to FY20E core PAT (ex-CDSL) and add back net cash, which works out to Rs 1,190 (45% upside). BSE posted better-than-expected numbers in 4QFY18 both on the revenue and margin fronts. Revenue was up 8.6% QoQ to Rs 1.37bn (our est. was Rs 1.27bn), led by 8.2% QoQ rise in transaction revenue (35% of rev) and 7.4% QoQ rise in services to corporate (45% of rev). Exclusive cash segment/Currency Derivative ADTV was up 23/40% YoY in FY18. Margin improved 133bps QoQ to 28.1% (ex one-off) vs. our expectation of 25.0%, led by non-linearity. Margin improvement in FY18 was impressive, +1671 bps YoY to 21.0%.

BSE's 4QFY18 consol. revenue grew 25% YoY to INR1.39b (excl. investment income), above our estimate of INR1.2b, led by continued growth in Services to corporates (+30% YoY). However, EBITDA margin of 20.1% missed our estimate by 130bp due to a surge in other expenses (incl. regulatory fees, CSR and one-time repairs to the building). PAT of INR622m was above our estimate of INR577m, mainly led by better revenues and higher other income. FY18 revenues grew 29%, EBITDA was up almost 5x and adj. PAT rose 30%

BSE has started charging 32 of the 37 asset management companies (AMCs) for services through its mutual fund (MF) platform. This could be an INR150m-200mrevenue opportunity in the next fiscal; however,being the first year, we are currently modeling INR100m revenues from the segment. With ~50% of equity transaction revenues from exclusive segments, dependence one quity transactions where BSE is a distant second to NSE, is <15%. BSE cited that volumes in the exclusively-listed segment are inelastic to transaction charges, and hence, it does not feel the need to reduce the current fee. We note that BSE should be paying out 85%+ of its non-exceptional profits as dividends. And any buybacks like the one currently underway will be over and above the dividends. The combination will keep yields attractive (currently ~5%)

We maintain BUY on BSE, and our SoTP for BSE factors in Rs 148/share for CDSL and assigns 25x to Dec-19 earnings (ex-CDSL), which works out to Rs 1,210 (+43% upside). Bombay Stock Exchange Ltd (BSE) posted better-than-expected numbers in 3QFY18, on both the revenue and margin fronts. Revenue was up 12.7% QoQ to Rs 1.26bn (our est. was Rs 1.15bn), led by 24.8% QoQ rise in transaction revenue (35% of rev) and 8.9% QoQ rise in services to corporate (46% of rev). Change in transaction charges to Rs 1.5/trade and robust growth in exclusive listed shares volume (+51% QoQ) led to a rise in transaction revenue. Margin improvement was sharp (+281bps QoQ to 26.8% vs. our est. of 24.2%), led by non-linearity.

Transaction revenue from exclusively listed stocks BSE has a monopoly with 12001500 actively traded exclusively listed stocks. Taking advantage of this monopoly, BSE took a steep price hike in FY16 from `125/10mn to `10000/10mn. This led to a sharp jump in the illiquid cash equity revenue which now constitute 50% of total cash equity transaction...