Nuvama Bullish on BSE, Sees 31% Upside with Market Share, Revenue Growth

Domestic brokerage Nuvama Institutional Equities has joined a group of global and local brokerages that have started covering BSE Ltd., Asia's oldest stock exchange. Nuvama has given BSE a "buy" recommendation, with a target share price of Rs 6,730. This suggests that the stock has the potential to increase by 31% from its current price.

Nuvama believes that BSE is highly adaptable, even with tighter rules around index derivatives, and will continue to thrive. The brokerage pointed out that the weekly contracts that were recently discontinued made up only 21.3% of BSE’s index option premium volumes, compared to 46.9% for the National Stock Exchange (NSE). Additionally, BSE has a lot of potential to grow its active customer base for derivatives. Currently, BSE has between 1.5 million and 2 million monthly active customers, while the NSE has 4.2 million.

At 9:25 AM, BSE's share price rose by 4%, reaching Rs 4,692 per share.

Nuvama also mentioned that the new regulations from the markets regulator, SEBI, which are increasing the contract sizes, won't have a major negative effect on BSE's index option premium volumes. This is because BSE’s average number of contracts traded per order is just five. The brokerage expects that the higher contract sizes will lead to lower clearing charges, as these charges are based on the number of contracts cleared. With fewer contracts to clear, the charges will drop from Rs 2,013 per Rs 1 crore of premium turnover in FY24 to Rs 734 by FY26, helping to increase BSE’s EBITDA margin from FY24 to FY27.

BSE's revenue is mainly driven by its StAR MF platform, which holds an 85% market share in FY24 and has seen a 63% increase in mutual fund revenue year-on-year. StAR MF revenue is expected to grow at a compound annual growth rate (CAGR) of 30.9%, reaching Rs 290 crore by FY27. Nuvama also believes that revenues from BSE’s AIPL and colocation services will increase in the coming years.

The brokerage has based its target price of Rs 6,730 on a price-to-earnings ratio (PE) of 50 times BSE’s expected earnings per share in FY27, as well as the value of its stake in CDSL. Nuvama believes that a PE of 50 times is appropriate, given the duopolistic nature of India’s stock exchange market and the relatively high valuation of capital market infrastructure companies in the country.

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