Passive Investing And Blockchain Will Erode Trading Revenues

Key Takeaways

• BSE faces structural challenges from shifting investor preferences, disruptive technology, and sustained regulatory pressures that threaten revenue stability and profitability.
  
• Lagging digital innovation and ongoing market share losses to competitors further impede BSE's growth prospects and long-term competitiveness.
  
• Diverse revenue streams, secular growth trends, innovation, and strategic investments position BSE for sustained profitability, strong market presence, and resilient long-term shareholder returns.

Catalysts

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

• The ongoing investor shift toward low-cost, passive investing solutions such as ETFs and index funds is poised to erode BSE's transaction-based revenues over the long run, as these vehicles generate lower trading activity and have minimal reliance on traditional exchange platforms, which will put sustained pressure on the company's top-line growth.
  
• The rapid advance of decentralized finance and blockchain-based tokenization models threatens to disrupt BSE's core business by bypassing centralized exchanges altogether, potentially resulting in a structural decline in transaction volumes and fee income, which could undermine the exchange's revenue stability and long-term viability.
  
• BSE's persistent underperformance in technology modernization, particularly when compared to global peers and even key local competitors, is likely to drive operating costs higher and compress net margins further, especially as the exchange struggles to meet the evolving expectations for digital innovation and low-latency trading infrastructure.
  
• The company continues to face the real possibility of losing additional market share to NSE across critical segments like equity cash and derivatives, which directly impedes BSE's ability to drive revenue growth and improve earnings over time, especially as major brokers remain reluctant to fully support or integrate BSE's newer products on their platforms.
  
• Intensifying global regulatory scrutiny and anticipated increases in compliance complexity are set to drive up BSE's regulatory and operating expense base, further weighing on net profitability and limiting the company's capacity to reinvest in innovation or improve its financial competitiveness over the coming years.

BSE Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on BSE compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming BSE's revenue will grow by 14.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 44.2% today to 51.5% in 3 years time.
• The bearish analysts expect earnings to reach ₹27.6 billion (and earnings per share of ₹68.2) by about August 2028, up from ₹15.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 30.0x on those 2028 earnings, down from 64.5x today. This future PE is greater than the current PE for the IN Capital Markets industry at 24.3x.
• 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 14.73%, as per the Simply Wall St company report.

BSE Future Earnings Per Share Growth

Risks

• The rapid growth of BSE StAR MF, with transaction volumes increasing 61% year-over-year and revenues rising 80%, provides a high-quality, recurring income stream, which supports long-term revenue growth and margin expansion.
  
• Strong secular trends such as the rising financialization of household savings in India and robust growth in IPOs and listings have dramatically increased BSE's transaction-related income and primary market activity, suggesting recurring tailwinds that can continue to drive top-line growth.
  
• Strategic investments in technology infrastructure, expansion of co-location racks, and a growing high-frequency trading and algo trading base are likely to further boost volumes, efficiency, and market share, positively impacting revenues and possibly net margins.
  
• Product innovation, including successful launches in derivatives and single-stock options/futures, and the ability to broaden and deepen the client base, indicate that BSE is well-positioned to benefit from new asset classes and segments, which can drive sustainable growth in trading and clearing revenues.
  
• Higher dividends, a growing balance sheet, and prudent reinvestment in technology and clearing capacity signal robust ongoing profitability and financial health, supporting the sustainability of both earnings and shareholder returns in the long term.

Valuation

• The assumed bearish price target for BSE is ₹1327.69, which represents two standard deviations below the consensus price target of ₹2440.3. This valuation is based on what can be assumed as the expectations of BSE's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3200.0, and the most bearish reporting a price target of just ₹893.33.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹53.5 billion, earnings will come to ₹27.6 billion, and it would be trading on a PE ratio of 30.0x, assuming you use a discount rate of 14.7%.
  
• Given the current share price of ₹2482.0, the bearish analyst price target of ₹1327.69 is 86.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.