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HDFC Securities Institutional Equities
BSE Ltd. reported a strong quarter, with 31% QoQ revenue growth and healthy margins. The robust performance was on account of higher transaction revenue, supported by scale-up in derivatives volume and strong cash volumes.
Post the regulatory setback, BSE had to take an immediate price hike of ~35% to offset the impact of higher regulatory costs. The price hike which was an optionality became a necessity. The shift from premium to notional will cost BSE a regulatory fee of ~Rs 2.8/3.6 billion in FY25.26E, which is ~12% of revenue.
We believe the price hike will decelerate the pace of market share gain. Also, BSE pricing is now comparable to NSE, but options profitability is inferior due to lower premium realisation.
In April 2024, BSE had a notional/premium market share of 19/8.6%, which we believe will gradually reach 25/12% in FY26E. BSE was commanding a higher multiple based on strong growth and pricing optionality, which we believe will moderate.
We increase our revenue estimates by 16% due to the price hike but cut the margin estimate by 700 bps to account for higher regulatory costs. The revenue/earnings per share compound annual growth rate of ~42/45% over FY24-26E are robust but already factored into BSE's valuations.
We thereby downgrade BSE to Reduce, based on regulatory uncertainty, expected growth moderation in FY26E and rich valuations.
Our target price of Rs 2,860 is based on 35 times (versus 40 times earlier) core FY26E profit after tax + CDSL stake + net cash ex SGF.
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