BSE: Cockroach of Indian Business - PowerPoint Presentation

1. BSE: Cockroach of Indian BusinessExperience of surviving in 3 centuriesJune 21, 2019 by Dhiraj Dave

2. BackgroundStarted in 1875 as “The Native Share & Stock Broker’s Association”Launch of NSE in 1994 created survival crisis for broker-heavy BSE. NSE have replaced BSE from premium equity exchange over a period with market share in cash equity segment increased to 91% during FY19. 2005 BSE become Corporate entityTrying hard to regain ground in Equity business and also exploring other new business.

3. Business SegmentRs CroreLinkageFY14FY19CAGR%DescriptionTransaction chargeMarket29.4113.931.1%Directly linked to market activityTreasury income from Clearing fundsPartial Market Linked43.930.7-6.9%Partial link to market activity since that would lead to more margin being deposited by membersOther security servicesRecurring26.826.90.1%Network connection charge from membersService to CorporateRecurring 59.1213.629.3%Mostly from Listing fees, New issues listing is linked to marketData FeesRecurring20.430.28.2%Subscription fees, high scope when compared with global peersInvestment incomeRecurring218.3202.2-1.5%Driven by Interest rateOther incomeRecurring131.970.0-11.9%Mostly derived from rent and training institute etc., which are stable sources of incomeTotal529.8687.55.3%

4. BSE: Market share in various segments Source: BSE presentation May 2019In traditional listing related business, due to network impact, NSE has advantage. While it is monopoly in equity derivatives, which increase to 91% share in equity cash, and further 2/3 market in Fixed income and Interest rate derivatives, BSE has been able to compete well in new businesses.

5. Growth drivers: Existing businessData for BSE is only 5% of revenue, With increase share of passive investment, Data income from BSE (particularly Sensex linked fund) may register higher growth as we observe in LSETransaction income of BSE mainly driven the exclusive securities small cap, traded (which are prominently small cap). In FY19, nearly 56% was from Normal rateFrom June 1 2019, SEBI has permitted interoperability among Clearing Corporation which necessitate linking of multiple clearing corporation. Since BSE share in Cash market is 9% in FY19 and Equity derivative is near nil, it expects to gain in market share with this change from NSE.

6. New Initiatives:BSE StAR MF: MF distribution platform, started in 2009, BSE has 79% share as on March 31 2019 which contributed around Rs 29 Cr revenue. Value of order processed increased by 36% while income from segment grown at 194%.Insurance broking business, though JV in company named BSE EBIX Insurance Broking Private Ltd. BSE to hold 40% of equity and approval from IRDA is awaited.BSE also setup a stock exchange and clearing corporation at Gift City, Gandhinagar. India INX (BSE promoted exchange) is the dominant IFSC Exchange in GIFT city with market share of more than 75% in derivatives trading and 80% in debt listing.A joint promoter to power exchange along with PFC and ICICI Band as JV partner which is yet to regulatory approvalEntered commodity derivative segment in October 2018. Launched Gold, Silver, Oman Oil, Copper and Cotton contracts.

7. Demonstrated potential of business

8. ValuationDetailsValue Rs CrRs per shareEquity share post buyback4,72,74,827Core income FY19485.30Expense FY19433.68Cash profit51.62Tax5.16Core Business Cash PAT46.469.83Core Business Value P/E 25 (A )245CDSL Stake ValueMarket Cap2,297.00BSE Stake551.28Discount 40%220.51BSE Post Holdco Discount (B)330.7770Cash Equivalent (C)1,340.00284BSE Value (A+B+C)~600Optionality of new business with high growth INX/Commodity/ Insurance Broking/ BSE StAR/ Data Dissemination!!!Market price (June 18 2019)609

9. Downside protectionBSE announced buyback of ~13% equity (67,64,705 shares) through Tender route at price of Rs 680 per share. Even after buyback of Rs 460 Cr, the company would still have unencumbered cash of around Rs 1,340 Cr as on March 31 2019The company has been distributing more than 90% profit as dividend and hence limited cash requirement for future growth.Current dividend of Rs 30 per share is sustainable in my view and provide dividend yield of around 5% at current price.

10. Risk sNSE uses their revenues coming out of the equity and equity derivatives trading volumes to subsidize other markets which delay revenue making opportunity for BSE. During FY19, Consolidated PAT for NSE was Rs 1,708 Cr vis BSE Consolidated PAT of Rs 199.3 Cr. Given the deep pocket and deep pocket, BSE may take long time to fructify revenue from new ventures in exchange business. NSE is also looking at acquiring MCX. If the merger is approved then BSE would have further challenges as MCX is also have around 90% market share in commodities derivative market. NSE/MCX would have near monopoly in most of derivative business. All the new business are far from making meaningful contribution to BSE cashflow. As highlighted by management during May 2019 Conference call, effort to market MF through BSE StAR platform from 2009 have contributed meaningfully only from FY18, i.e. almost a decade. Further, sustainability of revenue from this business is yet to be assessed which can happen only after major downturn in equity market.

11. Past Experience: 1946Stock exchangeNo of listed companiesPaid up value of listed stocksMarket capitalisation Rs CrBombay197271123.3Calcutta576807147.5Madras19229840.6Ahmedabad818215.4Delhi739272.9Source: BSE History

12. DisclaimerI am not SEBI registered advisorBSE among my top 10 holdings. I may also exit this investment in case I find any other attractive opportunity. My view may be biased due to my holding.I am not recommending buy/sell on stock.The objective of presentation is more to explain business and growth driver then valuation.Reader shall consult his/her own investment advisor before making any investment.Reader shall take note of above points.