BSE shares have more 25% upside potential, says Sharekhan; here’s why

Despite a stellar rally, BSE shares have more than 25% upside potential as the exchange is expected to deliver robust earnings on the back of increasing volumes in equity derivatives, according to brokerage firm Sharekhan.

BSE has been witnessing strong traction in equity derivatives volumes, however volumes are mostly skewed towards the expiry day. Thus, it has currently raised tariffs only on the Sensex 30 running weekly expiry contract.

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“We believe pick up in the volumes in long dated Sensex-30 contract as well as in Bankex gradually would further accelerate volume growth / revenue and aid operating leverage because major investments have been done additionally, clearing charges which are levied would substantially reduce due to higher volumes,” said the brokerage firm.

Moreover, BSE is rapidly gaining market share in the derivatives segment. Market share based on premium turnover monthly reached ~4.5% in November, while its expiry day market share is even higher and has been growing much faster.

At the operational level, the brokerage expects BSE’s core EBITDA margins to be higher significantly from the current levels once the derivative segment starts to contribute significantly to the top line from FY25E onwards as majority of the fixed cost has already been incurred and variable cost would be minimal. Thus, operating leverage will play out. 

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Major fixed cost is clearing charges. Previously clearing charges paid by BSE on derivative contracts were at ₹280 per million vs currently ₹180 per million due to a rise in volumes in recent months. This is going to fall further as volumes accelerate.

BSE has increased tariffs on equity options w.e.f. November 1, 2023, effectively increasing tariffs on a slab basis to ₹260 per million (on a blended basis) versus earlier ₹50 per million; and as of now, the rise is only in the Sensex running weekly contract. 

“Going forward, as volumes pick up at sustainable levels, the company would gradually increase the tariffs on Bankex and Sensex contracts beyond the current week. However, higher charges have not been factored in the estimates and, thus, may lead to an upside risk. Moreover, an increase in volumes in long dated contracts would help in fetching higher premiums there by increasing transaction revenues,” Sharekhan said.

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The pick up in overall volumes in equity derivatives as well as gradually increasing tariffs on Bankex and Sensex contracts beyond the current week remains a key catalyst. 

Sharekhan believes BSE is likely to deliver robust revenue, EBITDA and earnings CAGR of 35%, 84% and 62% over FY23-FY26. 

It has raised earnings estimates, factoring in a higher market share in equity derivative volumes, higher margins from operating leverage and rolled forward its valuation to FY26E. 

The brokerage stays positive on BSE stock and has a target price of ₹3,130 per share, implying an upside of over 25% from Friday’s closing price.

At 12:45 pm, BSE share price was trading 0.29% higher at ₹2,505.95 apiece on the BSE.

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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Updated: 04 Dec 2023, 12:46 PM IST