FY24's best-performing stock has more legs to run, say analysts

HDFC Securities foresees BSE derivatives market share breaching 30% by FY26; locks in target price of Rs 3,050

Shares of BSE (formerly Bombay Stock Exchange) rallied nearly six times in 2023-24 (FY24), the most among National Stock Exchange (NSE) Nifty 500 components. Analysts at HDFC Securities see that the stock has more legs to run.

Higher participation from algorithmic (algo) traders and foreign portfolio investors (FPIs) is expected to help the stock exchange make further inroads into the derivatives segment. 

HDFC Securities expects BSE’s derivatives market share, which was zero until April 2023, to exceed 30 per cent by 2025-26 (FY26).

The domestic brokerage has set a target of Rs 3,050 with a ‘buy’ recommendation. This implies an upside of 21 per cent over its last close of Rs 2,525, valuing the exchange at Rs 34,183.

The stupendous rally seen in FY24 has been driven by the relaunch of derivatives contracts for its S&P BSE Sensex and S&P BSE Bankex indices in the past year.

According to HDFC Securities, the bourse has attained a 20 per cent notional market share, with the Sensex contracts commanding 40 per cent of the market share, while Bankex currently holds a 12 per cent share.

HDFC Securities believes that while the Sensex contract has matured, Bankex is in the build phase. Upon expiry, Bankex volumes have surpassed Rs 100 trillion, while the same is approximately Rs 500 trillion for the NSE’s Nifty Bank Index.

“We believe the derivatives growth for BSE will continue to be led by the scaling of the Bankex contract, the go-live of large discount brokers, a higher volume of algo and proprietary traders, an increase in active unique client code, and greater participation of FPIs,” said analysts Amit Chandra and Dhananjay Jain in the report.

“We expect BSE derivatives notional/premium average daily trading volume to reach Rs 114 trillion/Rs 8,000 crore in FY26 estimates (FY26E), with a volume/premium market share of 30/11 per cent. BSE’s premium to notional is about 6 basis points (bps) versus about 19 bps for NSE,” they added.

The exchange’s net profit in the October-December quarter stood at Rs 106 crore, while revenue stood at Rs 431.5 crore. The net profit of the exchange had declined quarter-on-quarter due to an outgo of over Rs 91.7 crore towards the core settlement guarantee fund (CSGF) for its currency derivatives segment by its clearing arm.

“Our base case assumes an 11 per cent premium market share, revenue and profit compound annual growth rate of 44 per cent and 57 per cent over 2022-23 (FY23) through FY26E, and a core multiple of 40x,” said the analyst duo.

The brokerage estimates BSE’s profit after tax to grow to Rs 844 crore in FY24 and Rs 1,006 crore in FY26. 

The brokerage house has also estimated an increase in the CSGF contribution. In the first nine months of FY24, BSE had contributed Rs 110 crore to CSGF.

“The futures and options (F&O) volume has increased significantly for BSE, but the F&O segment is only 11 per cent of the total CSGF versus 63 per cent for NSE. We have assumed the CSGF for BSE will increase to Rs 1,380 crore in FY26 from Rs 760 crore in FY23. The clearing and settlement costs for BSE are three times those of NSE, as most of the client trades are settled in the NSE clearing corporation,” notes the report.

The clearing and settlement costs for BSE stand at 31 per cent of the transaction revenue as it has to pay charges to NSE Clearing. The settlement and clearing costs for NSE are 9 per cent of the transaction revenue.