Sensex Derivatives Launch At India INX Will Broaden Global Investor Access

Key Takeaways

• Strategic technology upgrades and tax reliefs are expected to enhance trading volume, operational efficiency, and margins, boosting revenue and market activity.
  
• Expansion efforts in mutual fund distribution and derivatives aim to drive revenue growth through increased transaction volume and global investor participation.
  
• Changing regulatory landscapes and market dynamics could suppress BSE's revenue growth and profit margins, with execution risks and competitive pressures compounding challenges.

Catalysts

Provides a platform for trading in equity, currencies, debt instruments, derivatives, mutual funds, and other securities in India and internationally.

• BSE plans to continuously upgrade its trading systems to adopt future-ready technology, which is aimed at enhancing trading experience, clearing, and risk management capabilities. This focus on technology could potentially increase transaction volumes and improve operational efficiencies, potentially boosting revenues and margins.
  
• The anticipated increase in spending power due to major tax reliefs announced for the middle class may lead to increased financial savings and investments, which could positively impact the capital markets and increase trading activity on BSE, thereby increasing transaction-related revenue.
  
• BSE's mutual fund distribution business, BSE StAR MF, showed a record performance with transaction processing increasing by 39%. Continued investment in this platform could lead to further revenue growth in this segment due to increased market penetration and functionality enhancements.
  
• BSE's efforts to deepen and broaden the market, such as attracting new participants and expanding product offerings, particularly in its derivatives segment, may drive increased trading volumes and contribute to revenue growth.
  
• The launch of Sensex derivatives contracts at India INX is expected to broaden access to India's benchmark index for global investors, which may increase international participation and contribute to revenue growth from international market activity.

BSE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BSE's revenue will grow by 23.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 32.8% today to 47.1% in 3 years time.
• Analysts expect earnings to reach ₹25.3 billion (and earnings per share of ₹187.91) by about May 2028, up from ₹9.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.3x on those 2028 earnings, down from 93.0x today. This future PE is greater than the current PE for the IN Capital Markets industry at 19.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.01%, as per the Simply Wall St company report.

BSE Future Earnings Per Share Growth

Risks

• Increased market volatility and global fragility, coupled with geopolitical tensions and macroeconomic challenges, may adversely affect market sentiment and lead to unpredictability in revenues and profit margins.
  
• Regulatory changes, such as new SEBI recommendations and compliance requirements (e.g., for core Settlement Guarantee Fund contributions), could lead to increased operating expenses and affect net margins.
  
• The decline in Bankex trading volumes by 95% since changing the expiry days may indicate execution risk in modifying product offerings, potentially impacting future trading revenues.
  
• As an exchange, BSE's ability to attract institutional participation and increase market share in the derivatives and cash segments is crucial. Failure to do so due to competitive pressures from NSE or lack of innovation could limit revenue growth.
  
• Uncertainty regarding the future structure and independence of clearing and settlement businesses, as indicated by potential regulatory changes, might affect BSE's revenue streams and profitability from its clearing operations.

Valuation

• The analysts have a consensus price target of ₹6016.917 for BSE based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹6730.0, and the most bearish reporting a price target of just ₹4690.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹53.7 billion, earnings will come to ₹25.3 billion, and it would be trading on a PE ratio of 48.3x, assuming you use a discount rate of 14.0%.
• Given the current share price of ₹6359.0, the analyst price target of ₹6016.92 is 5.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.