IPO NOTE
BSE
January 23, 2017
Subscribe
Background
Established in 1875, BSE is Asia's first stock exchange and one of the most
recognizable brand names in India. The S&P BSE SENSEX is India's most widely
tracked stock market benchmark index. More than 5900 companies are listed
on BSE making it world's No. 1 exchange in terms of listed companies. BSE is
the world's largest exchange by number of listed companies, and India's
largest and the world's 11th largest exchange by market capitalization, with
US$ 1.7 trillion in total market capitalization of listed companies.
Business
The stock exchange business in India provides huge scope for growth due to
faster economic growth, large size of the economy, huge foreign portfolio
inflows, rising disposable income, increasing internet penetration and
migration of savings to financial assets. But, despite being Asia’s first stock
exchange, BSE has gradually lost out its business to rival NSE, which began
operations in 1994. As at the end of March 2016, market share of BSE in
Equity Cash Segment is only 15% and just 6% in Equity Derivatives Segment.
Interestingly, the Equity Derivatives Segment accounts for 85% of volume
traded in our Exchanges. In the emerging segments of Currency and Interest
Rate Derivatives, BSE is holding decent market share of 36% and 17%
respectively, but not a market leader in any.
New Initiative
BSE has commenced operations of India’s first ever International Stock
Exchange (INX) at Gujarat International Financial Tec (GIFT) City. INX will
allow trades for 22 hours in a day. INX will start when trading at Japanese
exchange starts, and will end when U S exchanges stop. It will be world’s
fastest exchange in terms of response time, with median trade speed of 4
micro-seconds. INX will help BSE compete with other international financial
centres such as Dubai, Singapore, Hong Kong, New York and London.
According to BSE Managing Director, the exchange will reclaim some lost
market share to equity-futures in Singapore, currency derivatives in Dubai and
structured products in Hong Kong.
Issue Details
Offer Period
: Jan 23-25
Price band
: Rs. 805-806
Face Value
: Rs. 2/-
Issue Size
: 1,240 Crores
(Offer for sale of 1.54 crore shares by
existing investors)
No. of shares
(Post Issue)
: 5.46 crore shares
Market Cap
: 4,400 Crores
(at upper band)
Financial Snapshot
Rs. Crores
Consolidated
FY 2016
Total Income
658.00
Total Expenditure
359.00
PBIDT
299.00
OPM%
45.44
PAT before minority interest
PATM(%)
Minority Interest
PAT after minority interest
EPS
Valuation
At the issue price of Rs.806 per share the IPO is priced at 36 times FY2016
earnings. Total Market Cap works out to Rs.4,400 crores. BSE has huge cash
and investments in its books, at Rs.450 per share, which provides some
downside protection to investors.
Our View
This IPO is more suitable for investors who take contrarian approach to
investing. Core business is not robust now and re-gaining market share is not
easy either. BSE is taking lot of new initiatives for future growth. Apart from
that prudent utilization of cash in books will be key to shareholder returns
Investors with a medium term horizon can subscribe to the issue.
159.00
24.16
36.00
122.00
22.35
Net Worth
2449.28
Total Debt
2.53
Non Current Investments
1525.00
Current Investments
537.00
Cash and Bank balance
401.00
(Net of deposits & C.liabilities)
ROCE(%)
6.40
RONW(%)
5.43
Stock Exchange Business in India
Though BSE is the oldest exchange in our country, rival NSE controls a lion’s share of the total turnover in almost all the
business segments. In Equity Derivatives Segments, which contribute to 85% of total turnover in the exchange, NSE is a
monopoly. Globally too, only 1–2 players dominate the exchange business for an asset class in a market with other
players, if any, staying insignificant. New entrants in the market have not been able to establish significant market share.
Thus liquidity in exchanges is sticky and it is difficult to move market shares unless driven by radical changes (technology,
participation, policies), such as the NSE in 1994, the only such example.
Opportunity for Stock Exchanges in India
A fast growing economy, reasonable valuation (market capitalization to GDP ratio), huge foreign inflow, high internet
penetration and significant migration to financial savings place the stock exchange business in a sweet spot in India.
Apart from being the fastest growing economy, India is a very large economy also with a huge young population. Percapita disposable income has been growing at 15% and savings at 10% respectively, for the last 10 years. But, the
savings in financial assets is significantly low compared to developed economies.
Recent developments (demonetization) point towards significant migration to financial assets in future and it will be a
“new trend” emerging. Another interesting aspect is the ownership pattern of Indian equities, where promoters own
47% (based on BSE100) and FIIs own 26%. Retail investors and domestic institutions own 13% each, with scope for more
gains in future.
How well BSE is placed to grow?
In the stock exchange business, BSE has gradually lost out to NSE, ever since its inception in 1994, and the gap has
significantly widened. NSE is the market leader for cash equities (~85% market share), equity derivatives (~94% market
share), currency derivatives (~59% market share) and IR derivatives (~79% market share) as of March 2016. Though the
market share of BSE in cash equities has stabilized at 15% and is a growth driver for the exchange, it is not well
positioned to capture the overall growth in the stock exchange business in our country. Its attempt to revive equity
derivative segment was a big failure*. So, the reversibility of market share trend may not be possible. (See page 2, para
1 – stock exchange business in India).
*In September 2011, BSE launched a series of liquidity enhancement incentive programs (the "LEIPS") in an attempt to gain market
share in equity derivatives segment. Under the LEIPS, BSE lowered transaction fees and offered volume-based and open interestbased cash incentives to members. The expenses for the LEIPS in FY 2012, FY 2013, FY 2014, FY2015 and FY 2016 was rupees 604.9
million, 955.4 million, 612.9 million, 342.5 million and 172.4 million, respectively. Although turnover increased under LEIPS, the
exchange began reducing incentives during FY 2013 and removed entirely as of April 1, 2016. Consequently, turnover slumped from
FY 2015 to FY2016 and for three months ended June 30, 2016, decreasing by 99.9% from its height of 2,080,160 equity derivative
contracts traded per day in FY 2015 to 1,446 in the three months ended June 30, 2016.
On the consolidated income, BSE has four income streams namely – Securities Services# (39%), Services to Corporates
(26%), Data Dissemination Fees (4%) and Income from Investments and Deposits (29%). BSE has more scope to improve
revenue from information services as international exchanges earn much higher revenue (10-25%) from such services.
(#Note: Securities Services income include income from depository services and clearing & settlement of subsidiaries. In
the absence of that, standalone income from security services is only 16% of total standalone revenue)
New initiatives – Key to future growth
BSE has commenced operations from India’s first ever International Stock Exchange at Gujarat International Financial
Tec (GIFT) City. A wholly owned subsidiary of BSE, India International Exchange or INX will allow traders to buy and sell
stocks for 22 hours in a day. Following the International trading timings, this unique stock exchange will start when
trading at Japanese stock exchange starts, and will end when US stock exchange stops. It will be world’s fastest exchange
in terms of response time, with median trade speed of 4 micro-seconds.
The international exchange will help BSE compete with other international financial centres such as Dubai, Singapore,
Hong Kong, New York and London. According to BSE M D, the exchange will reclaim some lost market share to equityfutures in Singapore, currency derivatives in Dubai and structured products in Hong Kong. India INX will start with equity
derivative products, commodity derivatives and eventually allow listing of depository receipts on its platform. The first
product is Sensex 50, an index derivative. Nearly 100 brokers comprising of foreign and domestic have sought
permission from regulators to set up offices inside the GIFT IFC. Around 40 brokers have received permission so far
In another initiative, BSE has entered into a strategic partnership with S&P Dow Jones Indices LLC, USA ("SPDJI") to grow
its index business by calculating, disseminating and licensing various index products, which has culminated in the
formation of an Indiabased joint venture, Asia Index Pvt. Ltd. Internationally, it has signed an agreement with Deutsche
Boerse whereby they sell and market BSE market data and information to international clients.
Financial Performance
Consolidated Financial Highlights
Particulars (Rs. Crores) FY Ended
Mar-16
Mar-15
Mar-14
Mar-13
Mar-12
Total Income
658.00
624.00
530.00
553.00
578.00
Total Expenditure
359.00
320.00
243.00
244.00
220.00
PBIDT
299.00
304.00
287.00
309.00
358.00
OPM%
45.44
48.72
54.15
55.88
61.94
159.00
151.00
160.00
144.00
199.00
PATM(%)
24.16
24.20
30.19
26.04
34.43
Minority Interest
36.00
21.00
24.00
24.00
26.00
122.00
129.00
135.00
119.00
172.00
22.35
23.63
24.73
21.80
31.51
2449.28
2460.55
2376.40
2289.75
2230.22
PAT before minority interest
PAT after minority interest
EPS
Net Worth
Total Debt
2.53
4.10
1.80
0.87
306.05
1525.00
1410.00
1125.00
527.00
816.00
537.00
865.00
1061.00
826.00
569.00
1610.00
1452.00
1469.00
2048.00
2202.00
ROCE(%)
6.40
8.94
8.34
7.20
10.93
RONW(%)
5.43
7.32
6.86
5.92
9.43
Non Current Investments
Current Investments
Cash and Bank balance
Note: On a standalone basis, total income for FY2016 is Rs.516 crores, out of which income from investments and
deposits is Rs.234 crores.
Earnings Trigger: In its board meeting on May 19, 2016, the SEBI Board approved an amendment to remove the
provision that required all recognized stock exchanges to transfer 25% of their profits to the Settlement Guarantee
Fund. SEBI is currently working on amending the regulations, the amendments have not yet taken effect. If it comes in
to effect, BSE will see earnings upgrade to that extent.
Note: MCX, which is a only listed exchange in our market now is in to commodity trading. It is trading at more than 40
PE, but it is a market leader with 89% market share in commodity trading business in India.
Valuation
At the issue price of Rs.806 per share the IPO is priced at 36 times FY2016 earnings and the total Market Capitalisation
works out to Rs.4,400 crores. BSE has huge cash and investments in its books. At the end of FY2016, total value of
investments is Rs.2,062 crores and cash & bank balance is Rs.401 crores (Net of deposits & current liabilities) as per its
consolidated balance sheet as at 31st March, 2016. The value of cash and investments works out to Rs.450 per share,
which will provide some down side protection for investors. Last year, BSE has paid a dividend of 902% or Rs.18 per
share. A major buy-back (up to max. permissible limit) would be a more prudent way of utilizing the cash and rewarding
shareholders. This would help improving the RoE profile also, which is at sub-par levels.
Besides this, BSE also holds 54.2% in CDSL, which is India’s second largest depository. CDSL has also filed papers for IPO
and BSE would be looking to sell up to 30% stake to bring down its stake in line with regulatory requirements.
Preliminary reports suggest total valuation of CDSL at about Rs. 1,500 crores.
Disclaimer : This report has been prepared by Inditrade Capital Ltd. This does not constitute an offer or solicitation for the purchase or sale of any
financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other
sources believed to be reliable. The user assumes the entire risk of any use made of this information. Each recipient of this report should make such
investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this
report (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The
investment discussed or views expressed may not be suitable for all investors. This information is strictly confidential and is being furnished to you
solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other
person or published, copied, in whole or in part, for any purpose. The information given in this report is as of the date of this report and there can
be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior
notice. Inditrade capital reserves the right to make modifications and alterations to this statement as may be required from time to time. Inditrade
or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any
inadvertent error in the information contained in this report. Neither Inditrade Capital nor any of its affiliates, group companies, directors,
employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including loss of revenue or
lost profits that may arise from or in connection with the use of the information. The disclosures of interest statements incorporated in this report
are provided solely to enhance the transparency and should not be treated as endorsement of the views in the report.
Analyst-Certification: The analyst for this report certifies that all of the views expressed in this report accurately reflect his personal views about
the subject company or companies and its or their securities, and no part of his compensation was, is or will be, directly or indirectly related to
specific recommendations or views expressed in this report. Neither the analyst, nor Inditrade Capital holds not more than 1% in any of the
company discussed in this report .The analyst is neither a previous employee nor, getting any kind of remuneration from any of the company
discussed in this report. SEBI Reg No: INH200001418
BINU JOSEPH
Inditrade Capital Limited, JJ Complex, Dairy Methanam Road, Edapally Cochin, Kerala 682 024
Phone: 0484 3006245 E-mail: [email protected]
Visit us at www.inditrade.com
Digitally signed by
BINU JOSEPH
Date: 2017.01.23
11:06:04 +05'30'