Kotak has initiated its coverage for India's oldest bourse BSE Ltd. with an 'add' rating, as it sees the exchange as having established a "credible" position in index options, with liquidity spreading beyond expiry day. It added that adjacent businesses such as cash, MF and colocation continue to deliver healthy growth.
"We expect these drivers to support ~17% revenue CAGR and ~20% adjusted EBITDA CAGR over FY2027-30E, even without further gains in derivatives market share," the brokerage wrote in its note.
It highlighted that BSE has transformed from a legacy cash-equities venue into the only credible competitor to NSE in index options, with its share of index-options premium turnover rising to 35% in the first half of fiscal 2027 from 3% in Financial year 2024.
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"Its growing presence beyond expiry days, alongside healthy growth in non-transaction revenues, should support ~17% revenue CAGR and 21% PAT CAGR over FY2027-29E. The asset-light model, strong cash conversion and improving payout capacity strengthen the investment case," Kotak outlined.
However, it flagged that valuations already price in much of the of the improvement in growth and business quality, limiting upside to only 9% from the last closing price to Kotak's TP of Rs 4,000.
Kotak said that while increase in non-expiry premium is helping the exchange, BSE still needs to diversify into new products to make the franchise more broad-based, as Sensex options will continue to contribute 65% of revenues.
Key Risks: Regulation, Volumes and Technology
Key risks include: further tightening of equity-derivatives regulations, especially given BSE's higher contribution from expiry day volumes; weaker trading volumes or lower retail/institutional participation; regulatory, clearing and technology costs growing faster than revenue; and technology outages or cybersecurity incidents.
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