After results, further re-rating looks difficult for BSE

Unless firm justifies current valuations, upside may remain restricted

Despite stellar listing gains, December quarter (Q3) results of BSE failed to generate excitement. After results, the BSE stock touched a low of Rs 988 and closed just above Rs 1,000, possibly on single-digit revenue growth posted by the exchange firm for Q3.
 
While core segment revenue at Rs 126.5 crore (72 per cent of total income) grew 11 per cent year over year, ancillary business of depositary posted revenue growth of only 2.5 per cent. Total revenue grew 8.8 per cent year over year to Rs 174.7 crore in Q3. However, costs, particularly manpower expenses, weren't kept in check this quarter. The 21 per cent increase in employee costs led to operating expenses soaring by 16.7 per cent to Rs 99 crore in Q3, resulting in operating profit of only Rs 75.8. Operating profit growth has been flat year over year. Operating profit margin, long under pressure, saw more pain in Q3, down 383 basis points year over year at 43.4 per cent.
 
Net profit at Rs 63.7 crore in Q3 seems a huge slip compared to Rs 76.63 crore a year ago. If latter is adjusted for exceptional income of Rs 30 crore, net profit in Q3 has actually risen 14.7 per cent year over year. Higher tax costs in the previous year also helped net profit inch up neatly.
 
Sanjiv Bhasin of IIFL says BSE show may continue to remain weak as the exchange is dependent on cash segment, which has of late seen a decline in volumes. "To me, BSE will always be a poorer cousin of NSE given that volumes are weak," Bhasin says. Another analyst says while BSE is exploring other means of revenues and is trying to depend less on trading volumes, it could take a long time for those efforts to realise earnings. "But, even if alternate segments start contributing materially, a stock exchange firm will always be valued primarily for its trading volumes. If that remains weak, I don't see much prospects for the stock," the analyst says.
 
In fact, for this reason, some say additional upside for BSE stock may be capped in near  to medium term. Bhasin, who maintains his underweight stance on the stock, recommends booking of profits after BSE IPO. Further re-rating is difficult for BSE.