BSE: Diversified Products stabilize Growth

BSE has over 5000 companies listed on it, the highest in any exchange around the World. The company also secures largest market share in listing segment.

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(A) About The Company

Bombay Stock Exchange is the oldest Stock Exchange of Asia established in the year 1875 as Native Shares and Stock Broker’s Association. It is the First Securities Market in India based in Dalal Street, Mumbai, India. The Company operates through one Segment namely Stock Exchange Operations i.e. "Facilitating Trading in Securities and other related Ancillary Services". Stock Exchange Board of India (SEBI) regulates BSE. 

(B) Brief History

Before establishing BSE, a group of 5 Stockbrokers used to conduct different meetings in front of the Mumbai Town Hall under a Banyan Tree in the early 1980s. But gradually, over time, the number of Brokers in the meeting increased, and because of this, the venue of the meeting used to change frequently.

At last, in 1874, the group of Brokers moved to Dalal Street for their meetings & made it their permanent location. It was then this Group of Brokers became an official organization known as "The Native Share & Stock Brokers Association" in 1875.

After decades of its working, BSE became the First Exchange in India recognized on 31st August, 1957 under the Securities Contracts (Regulation) Act by the Indian Government. After some years of its recognition, in the year 1986, a tool developed to measure the Bombay Stock Exchange’s overall performance known as the SENSEX, which is the Stock Market Index consisting of 30 well established as well as Financially sound Companies listed on BSE.

(C) Journey of BSE

BSE stock research with details of history
BSE stock research with details of history

(D) Executive Management of BSE

(i) Justice Vikramajit Sen - Chairman (Public Interest Director)

Justice Vikaramjit Sen is the current Chairman of BSE. He holds a Bachelor's Degree in History (Hons.) from St. Stephen's College, Delhi. He attained First Division in LLB from Faculty of Laws, Delhi University, and was also awarded the First Prize in Moot Court and Silver Medal in Labour Laws. Then, on 7th July, 1999, he was appointed as an Additional Judge  of the Delhi High Court. Later, on 30th, October, 2000, he was appointed as permanent Judge of the Delhi High Court.

He was the First Chairperson of Delhi High Court Arbitration Centre. Later, Mr Sen designated as Acting Chief Justice of Karnataka High Court on 12th September, 2011 and assumed office as Chief Justice, High Court of Karnataka on 24th December 2011. He took Oath as the Judge of Supreme Court of India on 24th December, 2012 and Retired on 30th December, 2015.

Then in September 2016, he was appointed as FIFA Observer to oversee the elections of CAF in Cairo and assigned as the Sole Administrator of the Delhi District Cricket Association from January 2017 to June 2018. He was also designated as the Chairman of the Draft Amendment Committee for Karnataka Private Medical Establishments Act, 2007 by the Govt. of Karnataka.

On 19th May, 2016, Mr. Sen became the Chairman of BSE. He was appointed as the Chairperson of the Broadcasting Content Complaints Council (BCCC) for the term 12-07-2017 to 11-7-2020. Age of Mr. Vikaramjit is 70 Years.

(ii) Mr. Ashish Kumar Chauhan - MD & CEO

Mr. Ashish Kumar Chauhan is the MD & CEO of BSE. He holds a Degree of B. Tech in Mechanical Engineering from IIT Bombay and a PGDM from IIM Kolkata. He has vast Experience of 29 Years. Mr. Chauhan started his career in the year 1991 with Industrial Development Bank of India as a Project Finance Officer. During 1993-2000, he worked as a Five-member Team to set up and operate National Stock Exchange (NSE). He is considered the "Father of Modern Financial Derivatives" in India due to his work at NSE.

In addition, he was instrumental in setting up initial Information Technology infrastructure including the first commercial satellite telecom network in India for NSE. He was also involved in conceptualization of National Securities Clearing Corporation (NSCCL). During his tenure with Reliance Group, from 2000-2009, Mr Chauhan worked as the Group Chief Information Officer. Then, he joined BSE in the year 2009 as Deputy CEO. Later in 2012, Mr Ashish became CEO of BSE. He is credited with reviving BSE. His efforts have been able to create a Derivatives Market at BSE from scratch to more than 20% Market Share within a short span of one year.

Age of Mr. Chauhan is 52 years. He also serves on the Board of Directors of Indian Clearing Corporations Limited (ICCL), Central Depository Services Limited (CDSL), Bank of India Shareholding Limited (BOISL), BSE Training Institute Limited (BTI), BFSI sector Skill Council (A section 25 company) and Marketplace Technologies Private Limited, and on the Board of Governors of Indian Institute of Information Technology (IIIT), Jabalpur. 

(E) Shareholding Pattern

Public holds majority of Shareholding in the Company i.e. 51.18% as on 30 September 2020.

BSE stock research
BSE stock research with details of major shareholders

(F) Product Categorization of BSE

As Capital Market transactions categorize into 2 Types, Transactions on BSE also include - Primary Market & Secondary Market transactions.

BSE stock research update with details of product offering

(v) Debt Market Segment

(G) Revenue Segmentation of the Company

BSE stock research update with detailed revenue segments

The Company derives Revenue primarily from:

(i) Services to Corporates:

The service mainly includes Listing fee of Corporates. Listing fee accounted for 42% of the total Revenue from operations for FY20. The rest of the fees include Building Software Charges, Company Reinstatement Fees & Other Fees.

(ii) Income from Securities Services:

Includes Income from Transaction Charges, Annual Subscription and Admission Fees, Processing fees, Treasury Income from Clearing & Settlement Funds, Clearing and Settlement Charges & Auction Charges. Transaction charges for securities traded on BSE platform formed 25% of the total Revenue from operations for FY20.

(iii) Data Dissemination Fees:

BSE also offers an extensive range of Market Data and Reference Data products to a wide range of customers including Data Vendors, Charting Software Vendors, Algo Traders, Websites, Television Channels, Mobile app developers, Custodians etc.

Software related services includes sale of Software Licenses, Development, Customization & Maintenance of Software.

Geographical Classification

Company's 96% of Revenue comes from India & Rest 4% comes from Outside India.

BSE stock research update with details of revenue segments

(H) Cost Structure

Following is the Cost Structure (as a % of total cost) of BSE Ltd for FY20:

BSE stock research with details of cost structure

Under the liquidity enhancement schemes (LES), brokers as well as the other market intermediaries are given incentives for a specified period of time to bring in liquidity and generate investor interest in securities that have limited trading activity.

For BSE, the major expenses include employee benefit expenses as well as computer technology expenses. Employee benefit expenses accounted to 34% of the total revenue (excluding investment income) for FY20. Computer technology cost accounted to 26% of the total revenue (excluding investment income) for FY20.

(I) Group Structure of BSE

BSE Limited has 8 Subsidiaries and 8 Associates as on 31. March. 2020.

BSE stock research update with details of group structure

(J) Segment wise Net Sales

BSE stock financial update
  • BSE owned 51% stake in CDSL, but according to SEBI’s regulations, BSE was required to bring down its stake to less than 24%. In FY18, BSE divested 26% of its stake in CDSL through offer for sale. Thereafter, CDSL is associate of BSE with 20% stake.
  • Transaction charges income is linked to market activity & investments levels.
  • On the other hand, Treasury Income on Clearing and Settlement Funds partially relates to the market activity. Partially it relates to interest rates. Increase in market activity will lead to more margin deposits by members.
  • Rest all fees have recurring nature.

Thus, market linked revenue accounts for 30% of the total revenue from operations. Listing Fee directly relates to the number of companies going Public each year.

(K) Market Share

Diversification facilitates the company to maintain Revenue Growth.

BSE stock market share

BSE commands leadership in Listing of companies. As on 30 September 2020, 5594 companies are listed on BSE. On the other hand, in Equity cash segment & Equity Derivates, company is losing market share to NSE. NSE's majority of the Income is Transactions based.

BSE Star MF Platform retains its market share at 78-79% over last 2 years. On the other hand, cash segment lost market share from 16% on FY17 to 6% at September 2020.

(L) Operational Parameters

(i) IPO Count

BSE stock research update with details of IPO count

IPO Income is associated with number of IPOs Processed during the year. More the IPOs Processed on BSE Platform, more will be the IPO Income earned by BSE. During FY 2019-20, 14 companies tapped the Capital Market through the IPO process to get listed on the Mainboard of BSE. The amount raised through IPOs for FY20 is INR 20,827 crore.

(ii) Mutual Fund Transactions

Over the Years, Company's Market Position in Mutual Fund Industry has strengthened. In the F.Y. 2019-20, Mutual Fund crossed 5.75 Crore transactions witnessing 60% growth as compared to 3.59 Crore transactions in FY 2018-19. All the Mutual Fund Transactions are placed on BSE StAR MF platform of BSE.

(The following graph shows count of Mutual Fund Transactions in last 3 years) Click to enlarge the image

BSE stock research update with details of Mutual Fund transactions

Mutual Fund Revenue

Mutual Fund Revenue increased drastically over the last three years. In F.Y 2019-20 MF Revenue increased by 54.13% from the last Fiscal Year. (The following graph shows revenue from Mutual Fund Transactions in last 3 years in Rs million) Click to enlarge the image.

BSE stock research update with details of Mutual Fund Revenue

BSE StAR MF Platform

StAR MF is an Online platform launched by BSE in Dec-2009, after SEBI allowed Stock Exchanges to offer Services for buying and selling Mutual Fund (MF) units. The platform allows Mutual Fund Distributors, Investment Advisors etc. to purchase as well as redeem Mutual Fund Units on behalf of their Clients.

BSE launched StAR MF platform for IFAs (MFD Model) on March 6, 2014. Such MF Distributors can Purchase as well as Redeem Mutual Fund Units on behalf of their clients but shall not handle Payout and Pay In of funds as well as Units on behalf of investors. The Exchange also introduced Investor friendly Systematic Investment Plan (SIP) facility on December 10, 2010 and XSIP facility in July,2012.

Features Of BSE StaR MF

BSE stock research update with details of BSE Star MF Platform

It is the only platform in Indian Mutual Funds Industry that supports all modes and type such as -Regular as well as Direct Mutual Funds Schemes, Demat as well as Non-demat Mode of holding of Mutual Funds Units, Funds and Mutual Funds units Settlement via Broker Pool (Mutual Funds Intermediary (MFI)) as well as Direct with Investors for Mutual Funds Distributors/Registered Investment Advisers (RIA).

BSE launched 'Corp Direct' It is Direct Investment Portal for Corporates. The platform includes with more features which will further simplify and provide end-to-end value-based services to the Asset Management Companies (AMCs), Distributors, Investors, and Mutual Fund Industry Participants.

With this, corporates can seamlessly transact (both in Direct & Regular mode) with all AMCs & Schemes, at one go using Corp Direct instead of switching between multiple platforms 

It will soon be available for other non-individuals (HUF, Partnership Firms, Societies, etc.)

(iv) Listed Companies

BSE stock research update with details of count of listed companies

(v) Equity Cash Segment - Average Daily Turnover

BSE stock research update with details of average daily turnover of equity cash segment

(M) Financial Parameters

(i) Net Sales

BSE stock research update with details of net sales

(ii) Profit After Tax

BSE stock research update with details of profit growth

(iii) PBIDT Margin

BSE stock research update with details of profit margin

(iv) PAT Margin

BSE stock research update with details of PAT margin

(v) ROE

BSE stock research update with details of return on equity

(vi) ROCE

BSE stock research update with details of ROCE

Lower ROCE is because of higher level of cash & bank which includes clearing & settlement cash.

(vii) Valuation

As on 8 December 2020:

(i) Market Cap = Rs. 2,528 crore
(ii) P/E = 20.80
(iii) Enterprise Value (EV) = Rs. 685 crore
(iv) Earning Yield = 26%
(v) EV/EBITDA = 3.78
(vi) BSE Ltd is Debt-Free Company. Over last 11 Years, Net Sales of the Company grew at CAGR of 2.50%.
(vii) Return on capital employed (ROCE) not retained over last 10 Years.
(viii) Cash & Investments (30 September 2020, excluding subsidiaries/associates) = Rs. 1,567 crore

(N) Management Discussion & Concall Highlights (Q2 FY21)

New Events

  • BSE launched Commodity Options in GoldM and SilverKG contracts in June 2020.
  • Secondly, BSE launched India’s first Exchange traded Interest Rate Options (IRO) contracts based on Government of India securities on August 26, 2019. These contracts are part of the Interest Rate Derivatives in the Currency Derivatives Segment.
  • BSE also launched RFQ platform for execution and settlement of trades in NDS-RST system after receiving the markets regulator SEBI’s approval w.e.f February 3, 2020. RFQ platform is a web-based Online Trade execution and settlement platform for trading of Corporate Bonds, Commercial Papers, Certificate of Deposit, G-secs, T-bills, State Development Loans, Municipal Bonds and securitized Debt.

Performance Highlights

  • Commodity futures contracts include Gold, Silver, Copper, Oman Crude Oil, Guar, Gum, Guar Seed, Cotton, Almond, Brent Crude Oil, Aluminum, Zinc, and Turmeric. BSE’s market share in commodity derivatives stands at 7%.
  • During the Quarter-2 FY21, BSE incurred a one-time expense of INR145.3 Million.
  • The Star MF platform is seeing strong traction in volumes. The number of orders processed grew 56% YoY in 2QFY21.
  • On the other hand, BSE market share in India International Exchange, operating out of GIFT City, stood at 79%.
  • Total Market Share for BSE in the Equity segment is still below 6%.

Other Key Highlights

  • BSE suspended over 1000 default companies, which were billed, but were bad accounts and had to be provisioned for. These companies are now not required to be billed.
  • NSE’s competitive pricing impacted BSE’s ability to charge in the Star MF, INX, and Commodity Derivatives segments.
  • License approval for the power exchange from the Central Electricity Regulatory Commission (CERC) is delayed but in progress.
  • BSE recently commenced insurance broking with Motor segment. It has recently also expanded in Health and Life Insurance.
  • Currently, BSE hosts a large amount of Smaller Companies on the Platform.
  • BSE expects inter-operability, along with a push toward the best price execution in order to increase liquidity on its electronic trading platform over time.

(O) Growth Opportunities

(i) Diversification in Products & Service Offerings

BSE currently operates in a wide array of segment and offers a bouquet of products including Equity, Debt, Derivatives in Equity, Currency, Commodity and Interest Rate, Mutual Fund, Insurance, SME and Start-ups Segment. In addition to ongoing Service offering, BSE intend to target the investors’ needs for all Financial Products through innovative Product and Service offerings. This diversified Product/Service Portfolio will also help BSE in exploring more opportunities in future.

(ii) India International Exchange - Possible Revenue Driver

India INX set up India’s first international primary markets platform, the Global Securities Market to cater to the needs of Indian and foreign issuers to raise Funds from Global Investors. During the FY 2019-20, India INX was the largest Exchange at GIFT IFSC with an overall Market Share of 81.79% based on the notional Trading Turnover for Derivatives (Futures and Options). Increasing Turnover and Market Share will help the company in Tapping more future opportunities.

India International Exchange IFSC

India International Exchange (IFSC) Limited (India INX) is India’s first international exchange in International Financial Services Centre (IFSC) located at the Gujarat International Finance-Tec City (GIFT City). It is a subsidiary of BSE Limited. The Exchange commenced its operations on Jan 16, 2017.

Features of INX

Asset Classes and Contracts

  • Equity Index Derivatives : Sensex and India 50
  • Indian Stock Futures : 139 stocks including Reliance Industries Limited, HDFC Bank Limited, Axis Bank Limited, Infosys Limited, Tata Steel Limited, Maruti Suzuki India Limited, Tata Motors Limited, ICICI Bank Limited, Larsen & Toubro Limited and State Bank of India Limited.
  • Commodity Futures : Gold, Gold KG, Silver, Copper, Aluminium, Lead, Nickel, Zinc, BRENT Crude Oil.
  • Commodity Options : Gold
  • Currency Derivatives : INR USD, USD INR, EUR USD, GBP USD and JPY USD
  • Debt Securities : Masala Bonds, Foreign Currency Denominated Bonds

Global Access

BSE’s India INX launches Global Access with connectivity to CME Group Exchanges, LME, ICE US & Europe, Eurex & Euronext N.V.

(iii) BSE StAR MF Platform - Gaining Market Share

BSE StAR-MF platform is witnessing increased acceptance owing to its User-friendly features like - 24X7 Order acceptance, Overnight Investment framework facilitates, Any day Systematic Transfer Plan and Completely Digital and Real Time onboarding of Investors. This platform emerged as the largest Mutual Fund distribution Infrastructure with close to 73% of Market Share amongst similar platforms in Mutual Funds Industry. This strong Market position in Mutual Fund Industry will also lead the BSE to grab more opportunities.

(iv) Collaboration of BSE with other Exchanges

BSE is an active member of various international forums like World Federation of Exchanges (WFE), International Organization of Securities Commissions (IOSCO), Futures Industry Association (FIA), South Asian Federation of Exchanges (SAFE) etc. These Collaborations will lead to development of Businesses, Products and Markets and to share Knowledge as well as strengthen International connectivity.

(v) Product Innovation to Strengthen Position

BSE actively evaluates Products and Asset classes outside its traditional focus areas in order to diversify Revenue sources and attract market participants and issuers. Examples of past product innovations include “BSE StAR” as well as “BSE SME”. These Product innovations will help the company in unlocking Future Opportunities.

(vi) State of Art Infrastructure and Technology

Maintaining and improving infrastructure is critical to any exchange, as it lays the foundation for Growth and Expansion by providing its Customers with an efficient and accessible Marketplace, thereby enhancing its competitiveness. BSE has competitive Electronic Systems for Entry, Trading, Clearing & Settlement and Depository.

(P) Risk/Concerns

(i) Industry Activity Levels Decline

The Company’s performance is dependent upon the volume and value of trades executed on its trading platform, the number of new/ further listings and the amount of capital raised through such issues, the number of active traders in the market, etc. Adverse Macro-economic developments and Political uncertainty may dampen the sentiments of the Capital Markets and negatively affect the business.

(ii) Regulatory Changes

Stock Exchange Board of India regulates the operations of BSE. The company has to work according to the Rules and Regulation frame by SEBI. Thus, any change in these Regulations will directly effect the operations of the company as a result Transaction Volumes and Revenue also affects.

(iii) Cybersecurity Threats

Even though company has bolstered its defence against Cyber-attacks, still the company may have threat of Cryptojacking, hacking of Consumers' Accounts and loosing Confidential Data & Information available with the Company, Advanced Persistent Threat etc.

(iv) Volatility in Trading Volumes Exposes to Profitability Risk

A major proportion of BSE’s Revenues is dependent on Trading Volumes and Price Level, primarily in Equity Segment, which is volatile in nature. Consequently, this volatility in Volumes may have a material impact on the financial condition, cash flows and results of operations.

(v) Increasing Competition

Besides NSE, BSE also competes globally with a broad range of Market Participants for Listings, Clearing, Trading and Settlement Volumes across different product categories including Cash Equities, ETFs, Structured Products, Futures Options and other Derivative Products. With continuance in intensity of competition, downward pressure may be exerted on Fees and other Charges, which adversely affect the Business, Financial condition and Profitability.

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References:  Annual Reports, News Publications, Investor Presentations, Corporate Announcements, Management Discussions, Analyst Meets & Management Interviews, Industry's Publications. 

Disclaimer: The report only represents personal opinions and views of the author. No part of the report should be considered as recommendation for buying/selling any stock. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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