BSE - Shift Towards Better-Margin Volumes: HDFC Securities

HDFC Securities Institutional Equities

Following the implementation of regulatory changes mandating one weekly expiry per exchange, the notional volume has seen a significant decline across equity exchanges. The equity notional volume is down ~19% in Q3 FY25E and ~37% in Dec 2024. Conversely, premium volumes have only decreased by 4% in Q3 and about 8% in Dec 2024, driven by a higher P/N ratio, which has risen from 15 bps to ~23 bps currently.

The shift from expiry to non-expiry and longer duration contracts is leading to higher premium realisation. Exchanges earn on the premium, while regulatory and clearing costs are based on the notional and the number of contracts traded, resulting in cost savings for the exchanges and margin expansion.

BSE Ltd.'s notional volume dropped by around 20% in Dec 2024, primarily due to the collapse of the BANKEX contract, which fell by ~99%. However, BSE's premium increased by 7% in Q3, driven by a 34% rise in the P/N ratio. BSE's premium realisation was about one-third of NSE's, as ~95% of its volume was on expiry day, which fetches lower premiums.

The shift from expiry to nonexpiry volumes is beneficial for BSE, as there is ample scope for improvement (BSE is at 11 bps versus 28 bps for NSE in December 2024).

The higher premium realisation will lead to a 20% reduction in costs for BSE, resulting in a margin expansion of around 10 percentage points. We have reduced the notional turnover for BSE by ~40% for FY26E and increased the premium realisation by around 70%, leading to a 2% increase in revenue from options. The Ebitda margin is expected to expand from 53% to 63% in FY26E. We have increased revenue by 2-3% and EPS by ~18% for FY26E.

We maintain our Reduce rating as the situation remains volatile, and the real impact will be visible in January 2024 when the expiry shifts to Tuesday for BSE.

In anticipation of market share gains, the stock has rallied 22/72% in 1/3 months and trades at a valuation of 48 times FY26E, which limits further scope for re-rating. We assign a SoTP-based target price of Rs 5,000, based on 38x (versus 35x earlier) FY27E core PAT + net cash excluding SGF and clearing funds + CDSL stake.

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