Stellar BSE debut to boost NSE's IPO prospects and valuation

The bourse's valuations may get a boost, as it gets set for its OFS of about Rs 10,000 crore

Stellar debut by Asia's oldest bourse company, BSE, may augur well for the coming IPO of National Stock Exchange (NSE), and may boost its valuations as investors show strong faith in the exchange business. IPO is initial public offering of shares.

"BSE's strong debut will work in NSE's favour," said Dara Kalyaniwala, vice-president, investment banking, Prabhudas Lilladher. "The merchant bankers pricing and marketing the issue will be guided by the response given to a company in a similar line of business (in this case, BSE)."

Last week, BSE listed at a 34 per cent premium to its issue price of Rs 806. The company's IPO was subscribed more than 50 times the number of shares on offer. 

NSE's IPO will sell 111.4 million shares, or 22.5 per cent stake of existing shareholders. At an expected valuation of Rs 40,000-45,000 crore, the issue size is seen close to Rs 10,000 crore, the highest since the Coal India IPO of Rs 15,000 crore in 2010. A few months back, Mauritius-based Veracity Investments had acquired a stake of five per cent in NSE from State Bank of India for Rs 911 crore, valuing the exchange company at Rs 18,200 crore.

The exchange firm has more than 80 per cent market share in the equity cash category and enjoys a near monopoly in the equity derivatives segment. "BSE is currently trading at an annualised price-to-earnings multiple of 35 based on its standalone current year's half-yearly net profit; NSE will trade at a higher multiple than this," said G Chokkalingam, founder, Equinomics Research and Advisory. 

India's first listed exchange company, Multi Commodity Exchange, had debuted at a price-to-earnings ratio of 37. It is now trading at 44 times its trailing one-year net profit. Most exchanges abroad are trading at a price-to-earnings ratio of between 22 and 30, with London Stock Exchange and Hong Kong Exchanges & Clearing among the most expensive ones. 

On the flip side, NSE may underprice its shares in IPO, to rival BSE's sizeable listing gains. While underpricing the issue may yield high listing gains for new investors, exiting shareholders may not feel too happy. Not leaving enough money on the table, on the other hand, could put off new investors. 

"Pricing will be a fine balancing act. NSE should be satisfied with listing gains of 10-15 per cent rather than aim for a blockbuster listing, with gains of 40-50 per cent on Day One," said Kalyaniwala. 

Twenty seven investors will be selling their shares through the NSE IPO. The list includes SAIF Investments, GAGIL FDI, Tiger Global Five Holdings, Norwest Venture Partners, Citigroup Strategic Holdings, State Bank of India, SBI Capital, IFCI, and Bajaj Holdings.

NSE, which is awaiting regulatory nod for its IPO, recently came under regulatory glare for allowing alleged unfair access to some brokers on its algorithmic trading platform. The regulator is examining a forensic audit report given by Deloitte India, a consultancy. It is unclear if all this will have a bearing on the valuations.