EUR 120.00 For Business Accounts Only

MOSL: BSE (Buy)-Underperformance led by market volatility

BSE: Underperformance led by market volatility

(BSE IN, Mkt Cap USD0.3b, CMP INR541, TP INR750, 39% Upside, Buy)

• Muted performance due to lower transaction income: Operating revenue declined 3% YoY in 2QFY20, with the EBITDA margin crashing to -5.3% (-800bp QoQ) from the levels of >20% two years ago, given the operating leverage in the business and higher other expenses. PAT before the share of profits from CDSL declined 20% YoY to INR368m. The impact from lower operational income was partially offset by a lower tax rate. Transaction charges were down 16% YoY owing to lower income from small caps, while listing fees were also down due to reduced market activity. Operating EBITDA came in at -INR58m (our estimate: INR15m), mainly due to higher other expenses.
• Lower core; all hands on 'Star MF': The decline in the core business can be attributed to market volatility. BSE has traditionally been strong in the small-cap segment when it comes to transition fees. However, in the recent quarter, the share of small caps in transition income reduced to 10% from 40-50% three years ago. Moreover, due to muted market activity, listing fees went down significantly. In a good year, BSE generates INR600-700m from IPOs, but this has reduced to ~INR160m on an LTM basis. BSE has been expanding aggressively in the Star MF segment, despite the weakness in the MF business. Total income from this segment stood at INR88m (lower than the previous quarter due to one-time provisioning). Currently, over 15% of all transactions are being done via the BSE Star MF program, with BSE's market share at 70% in the segment. Overall, it is a fixed-cost model and thus any rise in revenue has a direct impact on profitability. This segment could turn out to be the primary revenue generator over the longer term.
• Valuation view: Our 'Buy' thesis on BSE is centered on the value play (a combination of dividend and buyback) at low valuations and option value from new segments (such as the MF platform, commodities and INX) over and above the SOTP value of its core segment. Our SOTP methodology for BSE ascribes value to (1) core operations ex-cash income (INR125/share), (2) implied value from CDSL's market price @20% holding company discount (INR100/share), (3) owned unencumbered cash (INR300/share) and (4) float income from encumbered/margin money (INR225/share). Our target price of INR750 implies a 39% upside.