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MOSL: BSE (Upgrading to Buy): Going anti-tide, pro-value

BSE: Going anti-tide, pro-value; Upgrading to Buy

(BSE IN, Mkt Cap USD0.9b, CMP INR788, TP INR1070, 36% Upside, Buy)

 

• 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-200m revenue 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 on equity 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%).
• Apart from the boost of Star MF monetization, and lowering risk from bridging equities gap to NSE, we see option value in BSE from multiple potential triggers: [1] monetization of INX, where volume ramp-up continues, [2] interoperability of clearing corporations – while this brings down overall margin requirements for traders, it could still benefit the challenging exchanges and hurt exchanges with monopolistic market share, and [3] new / smaller segments such as commodity derivatives, currency derivatives, bond issuance platform, interest rate derivatives, SME platform.