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BSE
First equity stock exchange to be listed
CM RATING47/100

BSE owns and operates the BSE exchange platform (formerly the Bombay Stock Exchange), the first stock exchange in Asia, formed on July 9, 1875. At the end of October 2016, BSE was the world's largest exchange by number of listed companies, with more than 5,000 listed companies, and India's largest and the world's 11th largest exchange by market capitalization, with US$ 1.7 trillion in total market capitalization of listed companies.

As the operator of the BSE, it regulates listed issuers and provides a market for listing and trading in various types of securities as allowed by SEBI from time to time. The company operates three lines of businesses. First is the listing business, comprising the primary market dealing with issuance of new securities. Second is the market business consisting of the secondary market and relates to the purchase and sales of previously-issued securities, BSE STAR MF online platform for the placement of orders and redemptions of units in mutual funds, the new debt segment reporting and trading system (NDS- RST), its platform for the reporting of over-the-counter corporate bond trading, membership including membership in the exchange, membership in its clearing corporation (Indian Clearing Corporation or ICCL), and depository participants in its depository (Central Depositary Services India or CDSL) and post-trade services including clearing corporation and depository). The third business is data (consisting of sale and licensing of information products).

In FY 2016, the BSE accepted an average of 284.92 million orders and 1.55 million trades in equity shares per trading day, placing it as the 12th most active exchange in the world in terms of electronic book trades in equity shares.

BSE derives revenues from a number of sources, including securities services (39% of revenue in FY 2016), services to corporate (26%), data dissemination fees (4%) and income from investments and deposits (31%). On 30 September 2016, the BSE had 1,446 unique members across all segments.

In addition to the primary lines of business, BSE also has supporting businesses including providing IT services and solutions, licensing index products such as the S&P BSE Sensex, providing financial and capital markets training, and operating a corporate and social responsibility portal. Moreover, it has an active treasury function focused on managing cash, including both its own funds as well as funds that it holds on behalf of third parties (such as margins placed by clearing members).

According to CARE Research, BSE ranks third globally in terms of currency options and futures contracts traded in 2015, with 430 million currency derivatives traded, a 103% increase from FY 2015.Further, turnover from the interest rate derivatives market grew from $26 billion in FY2014 to $1,141 billion in FY 2016.

To further leverage its brand, BSE is coming up with an international exchange and international clearing corporation at Gujarat International Finance Tech City - International Financial Service Centre (GIFT City), a multi-services special economic zone that is currently being developed as India's first international financial services centre. As it intends for the proposed exchange to offer equities in non-Indian issuers for trading, the project will also include establishing a clearing corporation as well as a depository to settle such trades.

BSE is a professionally run exchange and there are no promoters or promoters group.

The Offer and the Objects

The issue comprises an offer for sale of 1.54 crore shares by the selling shareholders. At the lower price band of Rs 805 per share, it works out to an issue size of Rs 1241.87 crore. Ay the higher price band of Rs 806 per share, the issue size is Rs 1243.42 crore. The minimum bid lot is 18 equity shares and in multiples of 18 equity shares. The issue is made through the book-building process and will open on 23 January and will close on 25 January, with anchor investor bidding date of 21 January 2017.

The objects of the offer for sale are to achieve the benefits of listing the equity shares on the NSE to enhance its visibility and brand image and provide liquidity to its existing Shareholders. BSE will not receive any proceeds of the offer and all the proceeds of the offer will go to the selling shareholders in the proportion of the equity shares offered by them.

There are a total of 302 selling shareholders who have offered to sale their stake in the OFS. Prominent institutions include Singapore Exchange, Atticus Mauritius, Quantum (M), GKEF Ventures, Citigroup Global Markets, Acacia Banyan Partners and Caldwell India Holdings. Singapore Stock Exchange is selling its entire share holding of 4.67%, at cost at which it acquired in FY 2008.

Strengths

Strong brand recognition helps in attracting companies to the listing platforms and attracts retail investors and wholesale participants to various market and data offerings.

The company operates a diversified and integrated business model including trading, clearing and settlement of products listed and traded on the BSE, as well as the provision of data products, IT services and solutions, index products and training. Such an integrated approach benefits and keeps costs low for participants and members by providing efficiencies that are associated with having a wide range of services integrated under one entity.

There are multiple contact points with members and market participants, providing the ability to generate revenues at multiple levels of business and from diversified sources such as trading fees, trading tariffs, revenues from post trade services such as clearing, settlement, depository, custody and nominee service fees, initial and recurring listing fees from equity, debt and derivative products and subscription fees from data products.

The steady growth of the Indian economy, growing awareness about the stock market, India's relatively young population, increasing literacy and urbanisation, increased participation by foreign institutional players, domestic institutional, retail and pension fund investors and increased penetration of share market trading services across India are some of the key factors driving the growth in Indian stock market.

The exchange will continue to focus on expanding its cross-border reach by entering into strategic alliances as there is tremendous growth potential in underpenetrated financial markets. It has signed an agreement with Deutsche Boerse to sell and market BSE market data and information to international clients. Further, it is a member of the BRICS Exchanges Alliance, where leading exchange in Brazil, Russia, India, China and South Africa cross-list futures products based on the flagship indices of each of the other exchanges.

BSE did not have a currency derivatives segment until November 2013. When BSE launched its own currency derivatives segment, volumes in the United Stock Exchange (USE), in which it had a strategic shareholding of 14.6%, dropped significantly. USE subsequently closed its trading operations in December 2014 and was merged into BSE from 1 April 2015. While NSE has continued to be the market leader in this segment, BSE has moved into second position, surpassing Metropolitan Stock Exchange of India (MSEI) and has significantly closed the gap with NSE.

Weaknesses

Trading volumes depend on number of economic and non-economic domestic and global factors that vary daily and remain unpredictable and can affect and lead to fluctuations in stock exchange's income and profit.

BSE is subject to credit risk, liquidity risk, settlement risk and collateral risk in its clearing and settlement business.

F&O trading account for 93% of the total trading volumes on Indian exchanges. But BSE has only 6% market share in the F&O segment.

Even in the cash segment, BSE has only 15% market share.

Consolidated PBT before exceptional items has continuously gone down from FY 2012 (Rs 324.41 crore) to FY 2016 (Rs 238.16 crore).

BSE derives substantial portion of its profit from financial income from debt-oriented investment of surplus funds. This stream of income will be under pressure due to fall in interest rates.

Change in regulations regarding clearing, settlement and ownership could materially affect its financials. BSE operates in a highly regulated industry and may be subject to censures, fines and other legal proceedings if it fails to comply with legal and regulatory obligations, including oversight obligations regarding listed companies.

Valuation

For FY 2016, consolidated net sales were up 18% to Rs 426.54 crore. The OPM stood at 16.1% compared with 11.5% for FY 2015 thus leading to a 65% increase in OP to Rs 68.78 crore. Other income was lower by 12% to Rs 231.73 crore. Interest costs stood at Rs 0.67 crore and depreciation was up by 5% to Rs 61.68 crore, leading to a 3% fall in PBT to Rs 238.16 crore. There was exceptional item of Rs 46.60 crore in FY 2016 compared with exceptional item of Rs 50.75 crore in FY 2015. After providing total tax of Rs 32.41 crore and minority interest (MI) of Rs 36.62 crore, consolidated PAT stood at Rs 122.53 crore, down by 6% over a year-ago period. EPS (adjusted for exceptional items) works out to Rs 30.3. The scrip is offered at P/E multiple of around 26.6 at the offer price of Rs 806.

For the half year ended September 2016, consolidated net sales rose 27% to Rs 242.18 crore, with the OPM of 22.1%, resulting in OP rising 215% to Rs 53.29 crore. Increase in transaction charges for certain group of illiquid securities led to higher income and profit. Other income stood spurted 20% to Rs 144.35 crore. After providing for total tax of Rs 23.75 crore and MI of Rs 0.53 crore, consolidated PAT for H1 ended September 2016 surged 60% to Rs 128.70 crore. After considering MI and share of profit from associates at the same level as FY 2016 (which was Rs 36.62 crore), adjusted annualized H1 FY 2017 EPS works out to Rs 47.6, which is discounted 17 times by the offer price of Rs 806.

Book value (BV) of BSE stood at Rs 456 per share end FY 2016 and Rs 475 per share end September 2016. The issue is offered at a P/BV of around 1.8 times. MCX's BV end FY 2016 was Rs 237 per share and is trading at P/BV of around 5 times.

Its nearest comparable listed player MCX (mainly a commodity trading exchange) is trading at P/E of around 43 times trailing 12-month earnings (TTM). Among its international peers, Hong Kong Exchange is trading at P/E of around 37 times based on TTM earnings.

BSE is operating in a market where there is only one major stock exchange apart from itself, that is, NSE. There is very limited scope for a new entrant to make any impact. While BSE fares poorly compared with NSE on most parameters, it does have its own place and opportunities in this duopoly business.

With NSE also in the process of coming out with IPO, BSE's valuation is likely to set a strong floor for NSE to build on.

BSE: Issue highlights
Offer size (in Rs crore )
- On lower price band1241.87
- On upper price band1243.42
Total Offer for sale (number of shares)1.54 crore
Price band (Rs)805-806
Post issue share capital (Rs crore) 10.73
Post-issue Promoter & Group shareholding (%)0%
Issue open date23-01-2017
Issue closed date25-01-2017
ListingNSE
Rating 47/100

 

BSE: Consolidated Financials
1203(12)1303(12)1403(12)1503(12)1603(12)1609(06)1509(06)
Net Sales315.35273.92266.79361.14426.54241.56190.76
OPM (%)30.6%11.6%9.2%11.5%16.1%22.1%8.9%
OP96.5331.8524.4241.7068.7853.2916.93
Other in. 263.31279.02263.03263.61231.73144.35120.66
PBDIT359.84310.87287.45305.31300.51197.64137.59
Interest1.362.450.380.660.670.520.11
PBDT358.48308.42287.07304.65299.84197.12137.48
Dep.34.0728.3132.3558.7761.6824.4125.10
PBT 324.41280.11254.72245.88238.16172.71112.38
Exceptional items60.4997.9161.2950.7546.6020.7923.34
PBT after Exceptional items263.92182.20193.43195.13191.56151.9289.04
Tax (including Deferred Tax)64.2637.6933.9943.7832.4123.7510.15
PAT199.66144.51159.44151.35159.15128.1778.89
MI and share of associates27.2225.1824.8221.6136.620.531.37
Total PAT172.44119.33134.62129.74122.53128.7080.26
EPS (Rs)*41.238.034.532.030.347.6#30.5#
*EPS is on current equity capital of Rs 10.73 crore of face value of Rs 2 each
EPS exclude Exceptional items and related tax adjustments
#EPS for half yearly results are annualised after considering MI and share of associates of FY 2016 levels
Figures in crore
Source: Capitaline Database

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