INITIATING COVERAGE 29 AUG 2017

Bombay Stock Exchange

BUY

INDUSTRY EXCHANGES Bombay renaissance*

The Bombay Stock Exchange Ltd (BSE) is Asias oldest Valuation and outlook
CMP (as on 28 Aug 2017) Rs 985
stock exchange (estd. 1875 and listed in Feb-17). Long BSE has been constantly innovating and investing in
Target Price Rs 1,200 term investors should take cognizance of its recent (if technology, thus will remain a valuable franchise. We
Nifty 9,913 overdue) renaissance under a market savvy see value based on (1) Embedded non-linearity, (2)
management, including its recent listing. With the Huge net cash (excluding SGF and earmarked funds)
Sensex 31,751
latest technology platform (6 microsecond response of Rs 30bn (~Rs 567/sh, ~58% of MCap), (3) Increased
KEY STOCK DATA contribution from new growth engines (4)
time), BSE claims to be ten times faster than NSE (its
Bloomberg BSE IN much larger competitor). Reasonable dividend yield of ~3%.
No. of Shares (mn) 54 BSE has a diversified revenue stream, with only 51% At 23/22x FY18/19E earnings (a significant discount
MCap (Rs bn) / ($ mn) 53/828 of revenues (ex-CDSL) being market-linked (txn to MCX (39/32x FY18/19E EPS) and at par with global
6m avg traded value (Rs mn) 198 charges are ~33%). The rest is more secular (listing averages, BSE merits a BUY. Our SoTP for BSE factors
STOCK PERFORMANCE (%) fees/data contribute 37/7%). BSE has 17% market Rs 430/sh from CDSL and assigns 25x to Sep-19
52 Week high / low Rs 1,200/887 share in equity cash and leads the currency earnings (ex-CDSL) and works out to Rs 1,200 (22%
derivatives space with ~38% market share. upside from CMP).
3M 6M 12M
Absolute (%) (6.6) 4.0 - A clever rejig of transaction charges in equity cash Financial Summary (Consolidated)
Relative (%) (9.8) (5.9) -
(from ad valorem to per trade, the global norm) can YE March (Rs mn) FY16 FY17 FY18E FY19E FY20E
help gain market share, esp in block/bulk deals. More Net Revenues 4,248 5,172 4,169 4,632 5,160
SHAREHOLDING PATTERN (%)
evidence of its astute management is visible in the EBITDA 672 969 542 787 955
Promoters 0.00 36x jump in txn charges (0.275bps to 10.0bps) for APAT 1,795 2,414 2,308 2,469 2,708
FIs & Local MFs 8.72 exclusively listed stocks. In currency derivatives, it has Diluted EPS (Rs) 33.4 44.9 42.9 45.9 50.3
FIIs 23.22 stepped up rates (~6x so far), but is still at 77% P/B (x) 2.1 2.0 1.7 1.7 1.7
Public & Others 68.06 discount to NSE. Non-linear benefits are likely. P/E (x) 29.5 22.0 23.0 21.5 19.6
Source : BSE Further, BSE has invested in a mutual fund platform EV / EBITDA (x) 27.9 9.1 15.8 8.5 4.9
(StAR MF), an SME board and the newly-launched RoE (%) 7.1 9.1 7.6 8.0 8.6
Amit Chandra global exchange (India INX). A ~25% hike in equity Cash/mkt cap (%) 47.9 57.5 56.8 59.2 61.9
amit.chandra@hdfcsec.com listing fees for FY18, transaction charge hike across Source: Company, HDFC sec Inst Research
+91-22-6171-7345 segments, monetisation of investments in new
* The Renaissance was a period in European history. It began in
Apurva Prasad platforms and ADTV growth from increased market the 1300s, during the late Middle Ages. It ended during the 1500s,
apurva.prasad@hdfcsec.com activity can combine to boost revenue and EBITDA at when the modern era began. Renaissance means rebirth in
+91-22-6171-7327 11/33% CAGR over FY18-20E. French.

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
 BSE : INITIATING COVERAGE

Table of Contents
Macro tailwinds: India, the fastest growing economy ........................................................................................... 3
Indian exchanges catching up with global peers .................................................................................................... 4
Increasing free float to improve turnover velocity ........................................................................................... 5
BSE: Cash market share stable .............................................................................................................................. 7
Transaction revenue : Vital for an exchange .......................................................................................................... 9
Steep hike in pricing for exclusively- listed stocks ............................................................................................ 9
Change in pricing structure to gain market share .......................................................................................... 10
Equity derivatives: Missed opportunity ............................................................................................................... 11
Currency derivatives: BSE gaining market share .................................................................................................. 13
Price hike across segments.................................................................................................................................. 14
Steep hike in listing fees: Reduces price gap with NSE ......................................................................................... 16
BSE StAR MF platform: Possible revenue driver .................................................................................................. 18
India INX: Indias global exchange ....................................................................................................................... 19
BSE: Fastest exchange in the world ..................................................................................................................... 20
Financial analysis ................................................................................................................................................ 21
CDSL divestment: Value unlocking ...................................................................................................................... 24
Valuation & outlook ............................................................................................................................................ 27
Key Risks ............................................................................................................................................................. 29

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 BSE : INITIATING COVERAGE

Macro tailwinds: India, the fastest growing economy

Indian economy expected to
grow at 7-8% (real GDP
terms), reach USD 7TN by
2030E
The outlook for the Indian economy remains strong, Demonetisation was a significant step towards
and a number of agencies estimate that it will grow at making India a cashless economy. We expect
7-8% (real GDP terms) over the next few years. India demonetisation to lead to growth opportunities for
is expected to become the third largest economy in exchanges in India, based on factors like (1)
the world by 2030, with GDP approximately tripling Allocation of a larger portion of household savings in
to USD 7tn (10-year CAGR of 8.7%). productive financial assets (2) Adoption of digital
payments will lead to greater participation in capital
The strong growth outlook is driven by a number of markets, owing to the seamless integration of
factors, such as policy reforms like GST, focus on skill payment and trading platforms and (3) Drop in
development, thrust on reviving manufacturing via interest rates will make capital markets more
the Make in India initiative, focus on doubling attractive.
agricultural income, and close monitoring of inflation,
resulting in lower interest rates.

India Is The Fastest Growing Economy Globally India To Become USD 7TN Plus Economy By 2030
Average GDP growth 2011-2015 Average GDP growth 2016-2020P
US$ Nominal GDP (US$ TN)
%
9.0

7.9
8 7.4

7.4
Bold policy reforms like GST, 8.0

6.5
Make in India and 7.0

5.4
6.0 6
Demonetisation will drive

4.2
5.0 4.0
growth for the Indian

3.5
4.0
2.9

economy 2.4 4
2.4
2.2

3.2
2.1

3.0 2.2
2.0

1.9
1.7

1.8
1.3
1.2

2.0 2.2 2.4

0.9

0.8
0.8

1.0 2
0.0
Asia-Pac
Brazil
Russia

World
UK

US

India
Europe

Singapore
Hong Kong

China

0
2016E 2017E 2020E 2030E

Source: Economist Intelligence Unit, Oliver Wyman Report, HDFC Source: Oxford Economics, Oliver Wyman Report, HDFC sec Inst
sec Inst Research Research

Page | 3
 BSE : INITIATING COVERAGE

Indian exchanges catching up with global peers

Cash turnover velocity (cash
turnover to market cap) is
one of the lowest in India.
Market Cap to GDP for India
stands at 73%, slightly higher
than that of the emerging
market average of 61%
Growth in trading volume will
be led by rising free float,
higher inflow in equities,
more no of IPOs etc.
Market Cap To GDP Ratio For Different Countries
Prominent exchanges in India like NSE and BSE lag The cash turnover velocity for Indian markets (trading
behind global peers in various parameters like volume as a percentage of market capitalisation) has
MCap/GDP ratio, cash turnover velocity and free float fallen significantly in 2011, after STT was charged on
option premium rather than notional value, making
etc. However, with the Indian economy growing at a
swift pace, these criteria are expected to catch up the cash market less attractive. However, it has now
gradually. stabilised at ~40%, and will follow an upward trend
with improving economic growth and market activity.
The Market Cap to GDP ratio is a determinant of
where the market is likely to head in the long term. In We believe there is a clear case for growth in cash
India, market cap to GDP stands at 73%, slightly volumes based on the following factors, that are (1)
higher than the emerging markets average of 61%, Increasing retail participation (2) Huge inflows in MFs
but lower than that of the developed market average (3) Greater penetration of capital market products (4)
of 131%. Use of the mobile trading platform (5) Plans for
divestment (6) Rising free float levels (7) Large
The BSE Market Cap to GDP is at 76% for FY17, number of upcoming IPOs and (8) Rising investor
slightly higher than the long-term average of 70%. confidence.
Cash Turnover Velocity For Different Countries

Emerging economies Developed economies Emerging Developed economies

Market Cap to GDP average 379%
219%
for developed countries is as
high as 131% 266%
140%
129%
119%
159%
88% 89% 89% 126%
73% 75% 102%
73%
41% 35% 30% 53%
Market Cap to GDP average 28% 28% 34% 40% 38% 32%
for emerging economies is

China
only 61%, huge scope for

Korea
Mexico
India

Indonesia

US
Singapore
Malaysia

Russia

Japan
Brazil

Thailand
Korea
Russia

Australia
Mexico
Brazil
India

China

Indonesia

Thailand

US
Japan

Singapore
Malaysia

improvement

Source: The World Bank Group, Oliver Wyman, HDFC sec Inst Source: The World Bank Group, Thomson Reuters DataStream, WFE,
Research Oliver Wyman Report, HDFC sec Inst Research * China includes HK

Page | 4
 BSE : INITIATING COVERAGE

BSE Mcap To GDP Ratio (%) Indias Cash Turnover Velocity (NSE+BSE) (%)
% 100%
BSE Market Cap to GDP is at 120 107 90%
76% for FY17, slightly higher 100
80%
than the long-term average 82 83 78
70%
76
of 70% 80 72 68 65 60%
67
60 63 50%
60
47 46 40%
40 30%
20 20%
10%
0
Turnover velocity in cash 0%

FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17

segment declined sharply in
FY10-14 due to increased
popularity of options,
currently stable at ~40%
Higher free float will drive
volumes and improve
turnover velocity
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: BSE, World Bank, HDFC sec Inst Research Source: BSE,NSE, HDFC sec Inst Research
Increasing free float to improve turnover velocity
Indian companies have a high promoter holding Retail investors constitute only ~13% of stock
structure, which leads to lower free float and inferior ownership in India. Number of Demat accounts in
turnover velocity. However, after SEBIs initiative to India is less than 10% of the number of bank
raise the minimum public shareholding to 25%, the accounts.
promoters holding has witnessed a decline (47% in
FY16 from 54% in FY10). We believe, with the planned disinvestment of
government stake in PSUs, greater number of IPOs,
Indian listed companies free float has increased from higher retail participation and rising institutional
~37% in 2010 to ~46% in 2015, but is still below the activity the free float level can increase further.
levels of developed countries at 85-90%.

Page | 5
 BSE : INITIATING COVERAGE

Stock Ownership In India Free Float Across Major Global Exchanges

Promoters FII DII Others (Incl. Retail)
% 2010 2015
100% 95
13% 100 93 89
90% 18% 18% 19% 19% 18% 17% 17% 83 82
7680 76
80% 13% 80 6866
12% 13% 13% 13% 12% 12% 11% 57
70% 60 46 47 49
13% 38 37 4346 43
60% 16% 17% 18% 21% 22% 23% 27% 30
40
50%
20
40%
30% 0

China (Shenzhen
57% 54% 52%

Brazil (Bovespa)
India (BSE)

Singapore (SGX)

UK (LSE)

US (NYSE)
Malaysia (Bursa)

Hong Kong SE
51%

India (NSE)

Japan (Japan SE)

49% 49% 49% 47%
20%
10%
0%

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16
Source: BSE, HDFC sec Inst Research Source: Oliver Wyman Report , HDFC sec Inst Research

Page | 6
 BSE : INITIATING COVERAGE

BSE: Cash market share stable

NSE has dominated the cash and derivative markets.
BSE losing market share to It commands a healthy market share of ~100% in the
derivatives segment, and ~84% in the cash segment.
NSE since 2006, have
stabilized at ~16% in FY17 BSE has been losing market share in the cash
segment to NSE since 2006, but this has now
stabilised in the last two to three years.
The primary reason for BSE losing market share in the
cash segment was the absence of the derivatives
(Stock Index F&O) segment on the exchange. This
eventually led to the shift of cash volumes to NSE.
BSE was facing legacy issues, Also, higher volumes in NSE lead to lower impact
lacked on product innovation
costs, and as rightly said, volume begets volume,
capabilities, had inferior
making BSE a less attractive exchange. BSE also
technology as compared to
NSE, which led to loss of
BSE Cash Market Share Has Stabilised
market share
NSE
100%
lacked product innovation capabilities, management
focus owing to legacy issues, and was unable to
compete with NSE on the technology front.
In FY17, BSE had ~16% market share in the cash
market (stable at this level for the last four years), as
the above-mentioned problems have been more or
less addressed. BSE has revamped its technology to
become the fastest exchange in the world.
Management increased focus on generating ways to
increase transaction income. BSE has also terminated
its efforts to develop the F&O market, where NSE
commands a dominant position.
BSE ADTV CAGR 25%
over FY14-17 vs 22%
for NSE
BSE And NSE Cash ADTV
BSE Rs Bn NSE BSE

15%
16%
16%

16%
17%
19%
90% 250

25%
26%
29%
31%

31%
34%
35%

80% 40
70% 200 58 35
30
BSE/NSE cash turnover 60% 65
46
150
increased at a CAGR of 50% 46
27 22 21

85%
84%
84%

84%
83%
81%

5.5/13.2% over FY-05-17 40%

75%
74%
71%

204
69%

69%

100
66%

40
65%

178
172
170
respectively 30% 34

141

141
113

113

112
109
20% 50 21

78
10%

63
45
0% 0
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17

FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
BSE ADTV has grown at a
CAGR of 25% in the last three
Source: BSE, NSE, HDFC sec Inst Research Source: BSE,NSE, HDFC sec Inst Research
years vs 22% for NSE

Page | 7
 BSE : INITIATING COVERAGE

Cash turnover volumes stood
at an all-time high in FY17
Total cash turnover grew at a CAGR of 11.4% over FY- better to look at long-term growth averages. The
05 to FY-17. BSE/NSE cash turnover increased at a long-term growth average for cash equities in Indian
CAGR of 5.5/13.2% over FY-05 FY-17 respectively. In markets is ~16%.
FY-17, cash turnover volumes stood at Rs 61tn, which
We expect total cash turnover to grow at a CAGR of
is an all-time high.
15% over FY17-20E. BSE turnover is expected to grow
It has been observed that the cash equity volume at 17% CAGR due to changed traffic structure (flat fee
growth does not follow a secular uptrend, and its per trade) for A&B segment stocks.

Total Cash Turnover Is At All-time High (BSE+NSE) BSE Long-term Cash Turnover Growth Average
Rs tn Cash Turnover growth YoY % Average growth %

Long-term growth average 65 61 100%

for cash equities in Indian 56
80% 76%
55 52 52 Average growth rate of 15.8%
markets is ~16% 50
47
60% 56%
45 46% 43%
39
35 40%
35 33 33
30 21% 22%
24 20%
25 2%
17 0%
15 -4%
-20% -6%
-15%
5 -25% -27%
-40%
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17

FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: BSE, NSE, HDFC sec Inst Research Source: BSE,NSE, HDFC sec Inst Research

Page | 8
 BSE : INITIATING COVERAGE

Transaction revenue : Vital for an exchange

Transaction revenue comprises the bread and butter
Transaction revenue for BSE
is ~33% of revenue, whereas
its ~73% for NSE
BSEs transaction revenue improved significantly in
BSE hiked transaction
charges for exclusive listed
stocks by 36x
Steep hike in pricing for exclusively- listed stocks
for any exchange. It contributed 23.7% to BSEs
operational revenue and 33.3% of total revenue (ex-
CDSL) in FY17. This is way below NSE, where
transaction revenue constitutes ~73% of revenue
from operations.
FY17 (+122.7% YoY to Rs 1,224mn), primarily owing
to rising cash volumes, stable market share,
contribution from currency derivatives and significant
contribution from exclusively-listed shares (XC, XD
and XT category) on BSE.
In Jan-16, BSE adopted a different pricing mechanism
for exclusively-listed stocks. It increased transaction
charges from Rs 27.5/mn to Rs 1000/mn, up 36x.
This led to a steep rise in revenue from exclusively-
listed stocks in FY16 and FY17. For FY17, revenue
from these stocks stood at Rs 612mn, ~51% of the
transaction revenue.
In volume terms, these exclusive stocks contribute
only 3.1% to total cash volumes. XC, XD and XT
segments volumes were up 277.2% in FY17, and
stood at Rs 306bn (ADTV of Rs 1.2bn). We believe
volumes in this segment are a function of increased
market activity, and BSE will continue to gain from
this.

BSEs Transaction Revenue Mix Of Transaction Revenue (%)

Transactrion Revenue (Rs mn) Growth YoY % - RHS Cash (Non Exclusive) Cash (Non Exclusive)
Derivatives INX
Rs mn StAR MF
2,000 1,832 140% 100% 6 6 5
4 4 0 2 5
120% 5
1,558 7 10
Exclusive stocks contribute 28 18
1,500 100% 80% 7
only 3.1% to total cash 1,224 1,294 80% 51
7

volumes but contribute ~51% 60% 60% 54

1,000 47
95 96 96 100 42
to transaction revenue 40%
40%
505 550 20% 70
500 376 317
294 0% 20% 44
33 30 28
-20%
- -40% 0%
FY18E

FY19E

FY20E
FY12

FY13

FY14

FY15

FY16

FY17

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E
Source: BSE, HDFC sec Inst Research Source: BSE, HDFC sec Inst Research

Page | 9
 BSE : INITIATING COVERAGE

Change in pricing structure to gain market share

BSE changed its charge
structure for A&B segment,
now charging on per trade
basis vs. ad valorem earlier
BSE has changed the structure of its transaction
charges for the equity cash segment from an ad
valorem basis to per trade basis, effective 3-April-
17. BSE charged Rs 1 per trade to entities with
volumes less than 50k trades per month. This rate
was valid only for four months, after which it was
increased to Rs 1.50/trade in August-17.
We believe the structure was changed primarily to
attract volumes from NSE, which charges on an ad
valorem basis (Rs 32.5/mn, 0.325 bps).
This has also attracted more block/bulk deals from
competitors, and could eventually lead to market
share gain.
By charging Rs 1/trade, BSE was losing out on traction
revenue, and there was no significant increase in the
number of trades. On this account, BSE decided to
hike charges again to Rs 1.5/trade, effective Aug-17.
These charges are still at ~10% discount to NSE at Rs
1.7/trade.

This strategy is to gain BSE Cash Segment Trading Volume (Rs bn) No Of Cash Trades (NSE And BSE)
market share and attract
Vol A&B (Non Exclusive) Vol XC XD XT (Exclusive) mn BSE NSE
bulk/block deals
Rs bn 3,000
10,000 306
2,500
8,000 81 711 392
2,000 412

6,000 394 363

1,500 324

9,502
BSE decided to hike the
8,342

1,976
7,139
4,000

1,852
1,833
6,541

charges to Rs 1.5/trade 1,000

1,443
5,330

1,438

1,361
4,993

(earlier Rs 1.0/trade), 2,000 500

effective Aug-17
0 0

FY12

FY13

FY14

FY15

FY16

FY17
FY12

FY13

FY14

FY15

FY16

FY17
Source: BSE, HDFC sec Inst Research Source: BSE,NSE, HDFC sec Inst Research

Page | 10
 BSE : INITIATING COVERAGE

Realisations Per Cash Trade (Rs) Value Per Cash Trade (NSE And BSE)
Rs BSE NSE Rs '000 BSE NSE
1.8 1.7 30
1.5 1.5
1.6
BSE cash realisation is still at 1.3
1.4 25
1.4 1.3 1.3
~10% discount to that of NSE 20
1.2
0.9 0.9 1.0
1
0.8 15
0.8 0.7

26
25
24

23
10

20
20
0.6

19

18
17
17

14
0.4

12
Value per trade for BSE has 5
0.2
caught up with NSE in the last 0
0
three years

FY12

FY13

FY14

FY15

FY16

FY17
FY12

FY13

FY14

FY15

FY16

FY17
Source: BSE, NSE, HDFC sec Inst Research Source: BSE,NSE, HDFC sec Inst Research

Equity derivatives: Missed opportunity

BSE has been a failure in
Equity derivative segment,
NSE commands 100% market
share
Tried to compete with NSE
through LEIPS scheme and
charging ~75% lower
transaction fee, but didnt
succeed
The derivatives market has witnessed robust growth
in volumes since inception, led by options. Total
turnover has grown at a CAGR of 29% over FY07-17.
This growth has been led by Index Options and Stock
Options, which have grown at a CAGR of 57% and
41% in the same period.
The derivatives segment is clearly dominated by NSE,
with 100% market share in FY17. BSE ventured into
the equity derivatives segment in 2000, but was
unable to attract volumes from NSE.
BSE launched a Liquidity Enhancement Incentive
Programme (LEIPS) in Sep-11, to provide self-
sustaining liquidity in the derivatives segment. This
continued for five years, after which it was
withdrawn. During this period, BSEs market share
increased to 27% in FY15, but this was artificially
created.
The bourse spent Rs 3.19bn on the LEIPS scheme in
the last six years (FY12-17). This expense will not be
incurred in FY18, and the bourse is now completely
focussing on the international exchange set-up in Gift
City.

Page | 11
 BSE : INITIATING COVERAGE

Equity Derivative Market Share (%) Equity Derivative Market Growth

NSE BSE Total Derivative Market
NSE BSE Rs TN
0 1 0 0 0 3 0 1,000
100% 2
Derivative market has 6 900
90% 19 19
registered a strong growth in 27 800
80%
the last 10 years, BSE has 70% 700
missed the opportunity 60% 600
500

100

100
100
100

100
50%

99
98

97

94
400

81
40%

81
73
30% 300
20% 200
10% 100
0% 0

FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17

FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
NSE earns ~76% of its Source: BSE, NSE, HDFC sec Inst Research Source: BSE,NSE, HDFC sec Inst Research
transaction revenue from
Derivatives (~58 % of NSE
revenue) NSE Derivative Trading Volume Mix (%) NSE Transaction Revenue Mix (%)
Index Options (Notional) Stock Futures
Futures Options Cash
Stock Options (Notional) Index Futures
100% 5% 100%
11% 8% 8% 7% 7% 6%
3% 6% 6% 6% 5% 24 27 23 26 24 24
13% 13% 13% 15% 12% 12% 80%

Index options constitute the 60% 37 34 37 30 36 33

50%
bulk of trades 40%
72% 72% 73% 72% 76% 77%

20% 39 39 39 44 41 43

0% 0%
FY12 FY13 FY14 FY15 FY16 FY17 FY12 FY13 FY14 FY15 FY16 FY17

Source: NSE, HDFC sec Inst Research Source: NSE, HDFC sec Inst Research

Page | 12
 BSE : INITIATING COVERAGE

Currency derivatives: BSE gaining market share

BSE has gained market share
in currency derivative
segment.
Revenue from currency
derivative trading is a very
small part of transaction
revenue (~6%)
BSE has hiked the transaction
fee for the segment by 6x,
Currency Derivatives Market Share (%)
still at 75% discount to NSE
100%
BSE launched the currency derivatives segment in
Nov-2013 to gain market share in the derivatives
segment. The exchange launched futures contracts in
USD/INR, EUR/INR, GBP/INR and JPY/INR, and
currency options only in USD/INR. USD/INR
contributes more than 99% to volumes.
BSEs currency turnover has witnessed robust growth
since its launch and increased at a CAGR of 29% over
FY15-17 to Rs 31.7tn.
Turnover declined sharply in FY14 and FY15, led by
regulatory tightening by SEBI. To avoid speculation
and currency depreciation, SEBI tightened exposure
limits and increased trading margins.
This led to 22.1/16.4% fall in total currency turnover
in FY14/15 respectively. Volumes recovered sharply
in FY16 and FY17, led by the launch of currency
options.
For BSE, currency options ADTV increased by 49% in
FY17, while currency futures ADTV declined by 2.3%.
NSE BSE MSEI
4 4
12
80% 39 36
44 36
34
60% 4
While currency volumes cracked in FY14, BSE started
gaining market share from MSEI. Its current market
share stands at 38%.
BSEs market share gain was supported by new and
improved trading technology, and low latency time,
which attracted algo traders. Also, BSE charged fees
that were ~75% lower than NSE to attract volumes.
Currently, revenue contribution from currency
derivatives is very miniscule (~6% of transaction
revenue and ~2% of total revenue ex-CDSL). We
expect BSE currency trading volumes to grow at 10%
CAGR over FY17-20E.
BSE has increased currency transaction charges
over the last few quarters, and they currently
stands at Rs 2.5/mn for currency futures and Rs
250/mn for currency options (charges on options
premium). This will further boost revenues from
currency derivatives.
Currency Derivatives Market Growth
NSE BSE MSEI Total Turnover
Rs TN
100
38 80
60

40% 40
56 61 60 54 59 58
20% 20

0% 0

FY12

FY13

FY14

FY15

FY16

FY17
FY12

FY13

FY14

FY15

FY16

FY17

Source: BSE, NSE, MSEI, HDFC sec Inst Research Source: BSE,NSE, MSEI, HDFC sec Inst Research

Page | 13
 BSE : INITIATING COVERAGE

Price hike across segments

BSE has hiked transaction charges across segments,
which has provided a boost to its transaction
revenues in FY17. BSEs charges were much lower
BSE has lately realised that than that of NSE, and the price hikes were largely
taken to rationalise the pricing differential. Even after
transaction fee is not a very
the price hikes, BSEs charges are at a steep discount
critical parameter to attract to those of NSE.
volume
As mentioned earlier, BSE increased pricing for
exclusively-listed stocks by 36x, from Rs 27.5/mn to
Rs 1000/mn.
There are around 2500 exclusive category stocks.
These scrips have less than 5k shareholders and a
market cap lower than Rs 10bn. Of the total listed
companies in BSE, ~43% are in this category.
In the currency derivatives segment, BSE has hiked
charges by 6.3x in currency futures and 5.0x in
currency options over the last two years.
Even then, BSE charges 77/38% less than NSE for
currency futures and options respectively. We believe
that after gaining market share, there is further scope
for a price hike.
Price hikes in cash (exclusive segment) and currencies
led to a steep increase in transaction revenue in FY17
(+122.7% YoY), and we expect it to increase by 14.4%
CAGR over FY17-20E.

Comparison Of Transaction Charges For NSE And BSE

BSE has taken price hike Rs/mn BSE (Rs/mn) BSE charges in bps NSE (Rs/mn) NSE charges in bps Discount to NSE %
across segments to reduce Rs 1.5/trade up to Considering earlier
Cash Market (Non
the huge pricing gap to NSE 0.5mn trades NM 32.5 0.325 charges of Rs 27.5/mn
Exclusive)
monthly discount was 15%
Equity Futures 5 0.050 19 0.190 -74%
Equity Options 250 2.500 500 5.000 -50%
Currency Futures 2.5 0.025 11 0.110 -77%
Currency Options 250 2.500 400 4.000 -38%
Source: BSE, NSE, HDFC sec Inst Research

Page | 14
 BSE : INITIATING COVERAGE

Price Hikes Taken In The BSE Currency Derivatives Segment

Currency Derivative FY15 FY16 FY17 FY18
Increased to Rs
Increased from NIL to Further Increased to Rs Increased to Rs 2.2/mn and
Futures 0.6/mn and further to
Rs 0.2-0.4/mn 1.2/mn and to Rs 1.8/mn finally stands at Rs 2.5/mn
Rs 1.0/mn
Further Increased to Rs Increased to Rs 200/mn and
Options 50/mn and then to Rs finally stands at Rs 250/mn
150/mn currently
Source: BSE, HDFC sec Inst Research

Price Hikes Taken In Currency Derivative Segment In A Phased Manner

Currency Futures Rate Currency Options Rate
Date In bps Increase % In bps Increase %
(Rs /mn) (Rs /mn)
Mar-15 0.4 0.004
Jun-15 0.6 0.006 50.0%
Sep-15 0.8 0.008 33.3%
Oct-16 1.0 0.010 25.0%
Dec-16 1.2 0.012 20.0% 50 0.500
Feb-17 1.5 0.015 25.0% 100 1.000 100.0%
Apr-17 1.8 0.018 20.0% 150 1.500 50.0%
Jun-17 2.2 0.022 22.2% 200 2.000 33.3%
Jul-17 2.5 0.025 13.6% 250 2.500 25.0%
Time Increase (x) 6.3 X 5.0 X
Source: BSE, HDFC sec Inst Research

Slabs Rates For The Cash Segment (Effective Aug-17)

Monthly Trade count Rs/trade
0-100K 1.50
100-300K 1.25
300-500K 1.00
500-2000K 0.75
More than 2000K 0.50
XC', 'XD', 'XT' and 'Z' (Exclusive Group) Rs 1000/mn (10bps)

Page | 15
 BSE : INITIATING COVERAGE

Steep hike in listing fees: Reduces price gap with NSE

BSE has hiked its listing fee by
another 25% in FY18. This will
boost the recurring listing
revenue for BSE
BSE derives 37.2% of its revenue (ex-CDSL) from
listing fees. Listing fee is a recurring income, and has
grown at a CAGR of 24.5% over FY12-17. The reason
for the robust growth has been continuous price
hikes taken by BSE in the last four years.
Listing fees were hiked by 100% for the base slab in
FY15 and FY16. For the remaining slabs, listing fees
were hiked by ~25-100% in FY15 and by ~5-20% in
FY16.
In FY18, BSE further raised its listing fees by 25% for
on the base slab. The price hike was as high as 50%
for some of the slabs.
Most of the exclusive companies in BSE fall in the
base slab, so the effective hike in listing revenue will
be around 23% for FY18. We have not assumed a
nominal 7-10% hike in listing fees for FY19-20E, which
will be at par with NSE.
After the steep price hike in FY18, listing fee is still
lower by ~10% as compared to NSE.

After the hike still its at 10%

discount to NSE BSE Listing Revenue No Of Listed Companies In BSE
Listing Revenue % of revenue ex CDSL - RHS No of Listed Companies Growth YoY % - RHS
Rs mn % Nos. %
2,000 1,897 60 6,000 5,914 6%
1,763 5,837
1,800 1,673 5,737 5%
50 5,800 5,687 5,637
1,600 1,446 1,382 5,627 4%
1,400 5,600
40 3%
BSE has the highest no of 1,200
958 5,400 5,339
2%
1,000 30 5,211
listed companies in the world, 5,200 5,133 1%
800
stands at 5.8K for FY18 600 462 426 484 20 0%
5,000
400 -1%
10 4,800
200 -2%
0 0 4,600 -3%
FY18E

FY19E

FY20E
FY12

FY13

FY14

FY15

FY16

FY17

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E
SEBI has ordered to delist Source: BSE, NSE, MSEI, HDFC sec Inst Research Source: BSE,NSE, MSEI, HDFC sec Inst Research
~200 shell companies thus
the no of listed companies
will come down in FY18-19

Page | 16
 BSE : INITIATING COVERAGE

Listing Fee Comparison For NSE And BSE

BSE FY17 Listing Fee BSE FY18 Listing Fee Hike NSE Listing Fee Discount to NSE
Category
(Rs) (Rs) (%) (Rs) ( %)
Initial Listing Fee 20,000 20,000 0.0% 50,000 -60.0%
Listed Capital (Paid up
capital)
Upto Rs 500 mn 200,000 250,000 25.0% 200,000 25.0%
Above Rs 500 mn and upto
200,000 250,000 25.0% 255,000 -2.0%
Rs 1,000 mn
Above Rs 1,000 mn and
200,000 300,000 50.0% 330,000 -9.1%
upto Rs 1,500 mn
Above Rs 1,500 mn and
236,250 300,000 27.0% 330,000 -9.1%
upto Rs 2,000 mn
Above Rs 2,000 mn and
303,750 375,000 23.5% 415,000 -9.6%
upto Rs 3,000 mn
Above Rs 3,000 mn and
367,500 450,000 22.4% 510,000 -11.8%
upto Rs 4,000 mn
Above Rs 4,000 mn and
487,500 600,000 23.1% 670,000 -10.4%
upto Rs 5,000 mn
Above Rs 5,000 mn and 487,500 + (X - 605,500 + (X - 675,000 + (X -
upto Rs10,000 mn 5,000)/50*(3,188) 5,000)/50*(3,530) 5,000)/50*(4,150)
Above Rs 10,000 mn and 806,250 + (X - 990,000 + (X - 1,100,000 + (X -
upto Rs20,000 mn 10,000)/50*(3,469) 10,000)/50*(3,930) 10,000)/50*(4,625)
Above Rs 20,000 mn and 806,250 + (X - 10,00,000 + (X - 1,125,000 + (X -
upto Rs30,000 mn 10,000)/50*(3,469) 10,000)/50*(4270) 10,000)/50*(5,025)
806,250 + (X - 10,20,000 + (X - 1,200,000 + (X -
Above Rs 30,000 mn
10,000)/50*(3,469) 10,000)/50*(3910) 10,000)/50*(4,600)
Source: BSE, NSE, HDFC sec Inst Research

Page | 17
 BSE : INITIATING COVERAGE

BSE StAR MF platform: Possible revenue driver

BSEs StAR MF platform has
gained immense popularity
and has ~80% market share
The number of orders
processed on the platform
stood at 6.5mn (+98% YoY) in
FY17, with a total value of Rs
743bn (+68% YoY)
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 and redeem
mutual fund units on behalf of their clients.
BSE StAR-MF platform witnessed increased
acceptance owing to its user-friendly features. The
number of orders processed increased to 6.5mn
(+98% YoY) in FY17, with a total value of Rs 743bn
(+68% YoY).
BSE StAR-MF platform has ~80% market share, and
currently only 10% of mutual fund orders are
processed electronically.
BSE was not charging any fee to the distributors for
the use of the platform. Management has said that
they want to monetise the effort, and will charge on a
pay-per-use model.
BSE is planning to charge Rs 6 to Rs 30 per
transaction that is routed through the platform. The
exchange received initial resistance from the mutual
fund industry, but BSE will start charging for
transactions executed on the platform 2HFY18
onwards.
This could add Rs 70-80mn to the transaction
revenue in FY18-19, considering the current run-rate
and average realisation of Rs 10/transaction.

Orders Received On StAR MF Platform Value Of MF Trades Executed On StAR MF Platform

Orders Received mn YoY% - RHS Value (Rs bn) YoY% - RHS
Mn Rs bn
BSE will now monetise the 7 6.5 200% 800 743.01 350%
effort, and will charge on a 6
180% 700 300%
pay-per-use model 160%
600
5 140% 250%
120% 500 442.35
4 3.3 200%
100% 400
3 80% 150%
300
2 1.6 60% 100%
200
40% 104.94
1 0.6 100 41.31 55.95 50%
0.1 0.3 20% 9.95
0 0% 0 0%

FY12

FY13

FY14

FY15

FY16

FY17
FY12

FY13

FY14

FY15

FY16

FY17

Source: BSE, HDFC sec Inst Research Source: BSE, HDFC sec Inst Research

Page | 18
 BSE : INITIATING COVERAGE

India INX: Indias global exchange

India INX is the global
exchange of India, the
company is very positive
about the future of this
exchange
The prime objective is to
attract volume from Hong
Kong and Singapore
BSE launched Indias first International Exchange
(INX) in Jan-17 at GIFT City in Gujarat. The objective
this was to attract volumes from global exchanges
like SGX and Hong Kong Stock Exchange (HKEX).
The features of INX are (1) 22 hours of trading (2)
Best technology (response time of 4 microseconds vs.
60 microseconds in the Singapore exchange) (3) Low
transaction cost (no STT, CTT, long-term capital gain
tax, income tax for the first five years) (4) Access to
all asset classes on a single platform (5) No foreign
exchange risk (Transaction and settlement in USD)
and (6) No transaction charges in the first year.
BSE has invested Rs 1.15bn in INX and ICC, and will
invest another Rs 4bn over the next three years,
which includes Rs 3bn net worth requirement for the
clearing corporation. The company will use the cash
proceeds from the CDSL stake sale to fund the INX
capex. The company is confident of witnessing a
ramp-up in INX volumes, and views it as the next big
opportunity. However, we believe it will take at least
two to three years for the volume to ramp up.
BSE is currently not charging any transaction charges,
but is planning to levy them from FY19. The company
will charge USD0.2/contract (Rs13/trade) starting
FY19. We have assumed the number of trades to
increase to 50k/day, and INX will generate
transaction revenue of Rs 163mn in FY19.
INX will be margin dilutive in FY18-19, and will break-
even in FY20E.

INX Total Turnover (USD mn) INX No Of Trades (Monthly Nos.)

BSE has invested Rs 1.15bn in US$mn '000
INX and ICC, and will invest 1,400 90
1,199 77
80
another Rs 4bn (received 1,200 1,066 68
1,014 70 64
from CDSL stake sale) over 1,000
60
the next three years 800 50
600 40
30
400 274 18
20 11
200 110 6
11 54 10 1
The exchange is not charging 0 0
anything now but will charge

Jul-17
Apr-17

May-17
Jan-17

Feb-17

Jan-17

Feb-17

Mar-17
Mar-17

Jun-17

Jun-17
Jul-17
Apr-17

May-17

20cents/trade from FY19

onwards
Source: BSE, HDFC sec Inst Research Source: BSE, HDFC sec Inst Research

Page | 19
 BSE : INITIATING COVERAGE

BSE: Fastest exchange in the world

BSE lagged in technological capabilities vis-a-vis the Technology Spend As % Of Revenue
competition, and was losing market share. Technology spend % of revenue - RHS
Management lately realised the importance of Mn %
BSE entered into a strategic technology, and invested in a complete tech revamp. 1,400 1,238 30
tie-up with Eurex to upgrade 1,158
BSE entered into a strategic tie-up with Eurex in
1,200 1,055 1,063 25
its trading platform 1,000
March-13, to deploy the latest Eurex trading system 806 20
for various segments. This led to major changes in the 800 693 717 642 704
technological offerings by BSE. 15
600
Initially, the response time of BSE was reduced from 400
10
300 milliseconds to 10 milliseconds. After additional 200 5
changes, the response time was reduced to 6
BSE has now become the 0 0
microseconds. This made BSE the fastest exchange in
fastest exchange in the world

FY18E

FY19E

FY20E
FY12

FY13

FY14

FY15

FY16

FY17
the world, as the second fastest exchange was at 60
with a response time of 6 microseconds(BSE became ten times faster than the
microseconds closest competitor). Source: BSE, HDFC sec Inst Research

Orders per second changed from 5k to 500k

orders/second (100 times bigger and 1,600 times New Product Offerings To Start Yielding Results In
faster). FY18-20
Revenue Monetisation of
The current technological set-up is enough to handle Business Contribution the platform
Current technological is 10x the current volumes. The technology spend has (%) likely by
enough to handle 10x the been completed for BSE, but INX will attract more International Exchange 0% FY19
current volumes spends. Mutual Fund Distribution
0% FY18
(StAR MF)
Started
SME Platform ~1%
contribution
Bond Trading 0% FY19
Commodities 0% FY20
BSE has invested in a number
Source: BSE, HDFC sec Inst Research
of new platforms which will
drive future revenue growth

Page | 20

Financial analysis
Revenue ex-CDSL has
increased at a CAGR of 27%
over the last three years to Rs
3.71bn
Transaction revenue to grow
at a CAGR of Rs ~15% over
FY17-20E
EBITDA margin (ex CDSL) will
increase from 4.7% in FY17 to
18.5% in FY20E
No contribution to SGF and
liquidity enhancement
scheme will boost profits
BSE has a diversified revenue stream, which can be
broadly classified as (1) Revenue from securities
services (51% of revenues ex-CDSL, CAGR of 9.1%
over FY12-17) (2) Revenue from services to
corporates (42% of revenue ex-CDSL, CAGR of 15.5%
over FY12-17) and (3) Data dissemination revenue
(7% of revenue, CAGR of 3.5 % over FY12-17).
Total revenue ex-CDSL has increased at a CAGR of
11% over the last five years, and at 27% over the last
three years to Rs 3.71bn. We expect revenue ex-CDSL
to increase at a CAGR of 11.6% over FY17-20E. Total
revenue (including CDSL) increased at a CAGR of 10%
over FY12-17 to Rs 5.17bn.
We expect transaction revenue to grow at a CAGR of
Rs 14.4% over FY17-20E, led by a hike in transaction
charges (for the non-exclusive segment and currency
derivatives), monetisation of StAR MF platform, and
revenue contribution from the INX exchange from
FY19.
BSE offloaded its stake in CDSL (currently at 24%) in
1QFY18. CDSL, which contributed partly to the
revenue from security services, will not be present in
FY18. We expect revenue from security services (ex-
CDSL) to increase at a CAGR of 12.1% over FY17-20E.
Transaction revenue will be 36% of revenue in FY20
vs 33% currently (ex-CDSL). Revenue contribution
from security services will increase to 52% of revenue
in FY20E vs 51% in FY17 (ex-CDSL).
BSE : INITIATING COVERAGE
Revenue from corporate services includes listing
revenue, which is the largest source of recurring
revenue for BSE (contributed 37.2% of revenue ex-
CDSL) in FY17. With a 25% price hike taken in listing
fees in FY18, we expect listing revenue to grow at a
CAGR of 11.2% over FY17-20E.
BSE spent aggressively in the last three years for
technology upgradation, BSE StAR MF and setting up
of the India INX exchange. Expenses increased at a
CAGR of 20.1% over FY14-17, including CDSL, and
23.9% over the same period ex-CDSL.
We believe BSE has incurred most of the planned
expenses, and hereon we expect it to grow at a CAGR
of ~6% over FY17-20E. With operating leverage,
EBITDA margin will increase from 4.7% in FY17 to
18.5% in FY20E.
EBITDA (ex-CDSL) will grow at a CAGR of 76% over
FY17-20E, led by margin expansion and lower base
effect.
BSE contributed 25% of the profits to the Settlement
Guarantee Fund (SGF) till FY17. In Aug-16, SEBI
amended the regulation. As per the new amendment,
BSE will no longer be required to transfer 25% of its
profits to the SGF. It will continue making formula-
based contributions to Core SGF (CGSF) in the future.
The CGSF amount was Rs 2bn in FY17, and we do not
expect further contributions to impact profits in FY18.
We expect PAT (ex-CDSL) to grow at a CAGR of 15%
over FY17-20E. Including CDSL PAT, CAGR is only 4%
over the same period.
Page | 21
 BSE : INITIATING COVERAGE

BSEs Revenue Segments And Assumptions

CAGR CAGR CAGR
Segments FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
FY12-17 FY14-17 FY17-20E
Securities services
Transaction Charges 376 317 294 505 550 1,224 1,294 1,558 1,832 26.6% 60.9% 14.4%
Income from Depository Services 956 905 871 1,046 1,227 1,458 0 0 0 8.8% 18.8% NM
Treasury Income on margin deposit 459 339 439 532 413 405 413 421 429 -2.5% -2.7% 2.0%
Others 392 375 269 254 223 270 311 357 411 -7.2% 0.2% 15.0%
Total (A) 2,183 1,936 1,872 2,337 2,413 3,357 2,017 2,336 2,672 9.0% 21.5% 1.4%
Growth YoY % 11.3% -3.3% 24.8% 3.3% 39.1% 39.9% 15.8% 14.4%
Securities services (ex CDSL)
Transaction Charges 376 317 294 505 550 1,224 1,294 1,558 1,832 26.6% 60.9% 14.4%
Treasury Income on margin deposit 459 339 439 532 413 405 413 421 429 -2.5% -2.7% 2.0%
Others 392 375 269 254 223 270 311 357 411 -7.2% 0.2% 15.0%
Total (B) 1,227 1,031 1,002 1,291 1,186 1,899 2,017 2,336 2,672 9.1% 23.8% 12.1%
Growth YoY % 16.0% -2.8% 28.9% -8.1% 60.1% 6.2% 15.8% 14.4%
Services to corporate
Listing Fees 462 426 484 958 1,446 1,382 1,673 1,763 1,897 24.5% 41.9% 11.2%
Book Building Software Charges 48 75 74 55 112 143 165 189 218 24.3% 24.4% 15.0%
Others 252 78 33 41 53 44 48 53 58 -29.5% 9.7% 10.0%
Total (C) 763 579 591 1,054 1,611 1,569 1,886 2,006 2,173 15.5% 38.4% 11.5%
Growth YoY % 24.1% 2.1% 78.2% 52.9% -2.6% 20.2% 6.4% 8.4%
Data Dissemination (D) 208 224 204 221 224 247 266 290 315 3.5% 6.5% 8.5%
Growth YoY % 7.8% -8.8% 8.3% 1.4% 10.0% 8.0% 9.0% 8.5%
Total revenue from
3,154 2,739 2,668 3,611 4,248 5,172 4,169 4,632 5,160 10.4% 24.7% -0.1%
Operations (A+C+D)
Growth YoY % 13.1% -2.6% 35.4% 17.6% 21.8% 19.4% 11.1% 11.4%
Total revenue from
2,198 1,834 1,797 2,566 3,021 3,714 4,169 4,632 5,160 11.1% 27.4% 11.6%
Operations (ex CDSL) (B+C+D)
Growth YoY % 16.5% -2.0% 42.8% 17.7% 22.9% 12.2% 11.1% 11.4%
Source: BSE, HDFC sec Inst Research

Page | 22
 BSE : INITIATING COVERAGE

BSE Cost Analysis And EBITDA

CAGR CAGR CAGR
Expenses (Including CDSL) FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
FY12-17 FY14-17 FY17-20E
Employee Expenses 749 772 854 999 1,074 1,415 1,209 1,297 1,445 13.6% 18.3% 0.7%
Technology Expenses 693 717 642 704 806 1,055 1,063 1,158 1,238 8.8% 18.0% 5.5%
Other operating Expenses 746 931 928 1,492 1,695 1,734 1,355 1,390 1,522 18.4% 23.2% -4.2%
Total Expenses 2,188 2,421 2,424 3,194 3,576 4,204 3,627 3,845 4,206 13.9% 20.1% 0.0%
Growth YoY % 10.6% 0.1% 31.8% 11.9% 17.6% 13.7% 6.0% 9.4%
EDITDA (Including CDSL till FY17) 965 319 244 417 673 969 542 787 955 0.1% 58.3% -0.5%
Margin % 30.6% 11.6% 9.2% 11.5% 15.8% 18.7% 13.0% 17.0% 18.5%

CAGR CAGR CAGR

Expenses (Excluding CDSL) FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E
FY13-17 FY14-17 FY17-20E
Employee Expenses 601 679 807 859 1,166 1,209 1,297 1,445 18.0% 19.7% 7.4%
Technology + Other Operating
1,270 1,182 1,787 2,127 2,372 2,418 2,548 2,761 16.9% 26.1% 5.2%
Expenses
Total Expenses(ex CDSL) 1,871 1,862 2,593 2,986 3,538 3,627 3,845 4,206 17.3% 23.9% 5.9%
Growth YoY % -0.5% 39.3% 15.1% 18.5% 2.5% 6.0% 9.4%
EBITDA (ex CDSL) -39 -83 -35 33 175 542 787 955 NM 76.2%
Margin % -2.1% -4.6% -1.4% 1.1% 4.7% 13.0% 17.0% 18.5%
Source: BSE, HDFC sec Inst Research

Page | 23

CDSL divestment: Value unlocking
The Central Depository Services (India)
Limited (CDSL) is the second-largest depository in
India, with 44% market share. CDSL provides
depository services to all market participants like
depository participants, corporates, market
intermediaries and insurance companies.
BSE owned 51% stake in CDSL, but according to SEBIs
regulations, BSE was required to bring down its stake
to less than 24%. BSE divested 26% of its stake in
CDSL through OFS. The size of the IPO was Rs
5.24bn.BSE will receive ~77% of the proceeds (~Rs
4.03bn). Post the IPO, BSE will hold 24% stake
in CDSL.
CDSL has 12.3mn demat accounts in FY17, and has
grown at a CAGR of 10.2% over FY13-17. CDSL has
been gaining market share from NSDL, which
currently has 56% market share. CDSLs market share
has grown from 40% in FY13 to 44% in FY17. In terms
of incremental demat accounts addition, CDSL has
60% share, which will help it to further increase
market share.
CDSL derives revenues from Annual Issuer
Charges/Transaction charges/IPO/Data Charges/
Others contributing 35/21/11/13/19% to revenue
respectively. Revenue has grown at a CAGR of 13%
over FY13-17, and currently stands at Rs 1.46bn
(+18.8% in FY17)
BSE : INITIATING COVERAGE
In comparison, NSDL derives 51% of its revenue from
transaction charges and 37% from custody fees, while
the annual fee constitutes only 7% of revenues. NSDL
charges Rs 4.5/debit transaction, while CDSL charges
Rs 5.5/debit transaction.
CDSL operates at a healthy EBITDA margin with
embedded non linearity, which led to healthy margin
expansion (increased from 39.4% in FY13 to 54.4% in
FY17). EBITDA grew at a CAGR of 22% over FY13-17.
PAT for FY17 stands at Rs 8.57bn, with EPS of Rs
8.2. CDSL is more cost-efficient as compared to NSDL,
and operates at an EBITDA margin of 54% vs NSDLs
margin of 39%.
CDSL has RoE of 16.1% in FY17, net cash of Rs 5.15bn
(15% of market cap), and a dividend yield of 1.1%.
We expect CDSL revenue/EBITDA/PAT to increase at a
CAGR of 19/23/17% over FY17-20E.
CDSL has a diversified revenue stream, with a high
component of annuity revenue (AMC, 35.4% of
revenue). Growth in market activity and higher
number of IPOs will fuel transaction/IPO revenue
(32.7% of revenue). Embedded non-linearity and low
capital requirements will lead to margin expansion
and higher return ratios. We believe this business
will command a higher multiple, and we arrive at a
fair value of Rs 430 assigning 35x to Sep-19 EPS.
Page | 24
 BSE : INITIATING COVERAGE

CDSL P&L
YE March (Rs mn) FY14 FY15 FY16 FY17 FY18E FY19E FY20E
Net Revenues (Rs mn) 889 1,053 1,229 1,460 1,730 2,058 2,459
Growth (%) (2.0) 18.4 16.7 18.8 18.5 19.0 19.5
Employee Expenses 175 192 215 249 285 329 381
Other operating Expenses 388 409 374 417 467 535 615
EBITDA 327 452 639 794 977 1,194 1,463
EBITDA Margin (%) 36.8 42.9 52.0 54.4 56.5 58.0 59.5
EBITDA Growth (%) (8.4) 38.1 41.5 24.3 23.1 22.1 22.6
Depreciation 50 62 42 37 49 68 92
EBIT 277 389 597 757 929 1,125 1,371
Other Income (Including EO Items) 347 419 716 408 445 482 519
Interest 0 0 0 0 0 0 0
PBT 625 808 1,313 1,166 1,374 1,607 1,890
Tax (Incl Deferred) 129 233 402 300 357 418 491
Minority Interest 2 -2 1 8 8 9 9
RPAT 494 577 910 858 1,008 1,181 1,390
EO (Loss) / Profit (Net Of Tax) 9 17 331 0 0 0 0
APAT 485 560 579 858 1,008 1,181 1,390
APAT Growth (%) (4.3) 15.4 3.4 48.2 17.5 17.1 17.7
Adjusted EPS (Rs) 4.6 5.4 5.5 8.2 9.6 11.3 13.3
EPS Growth (%) (4.3) 15.4 3.4 48.2 17.5 17.1 17.7
Source: CDSL, BSE, HDFC sec Inst Research

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 BSE : INITIATING COVERAGE

BSE Revenue And Growth (ex CDSL) EBITDA And EBITDA Margin To Improve Significantly
Revenue (ex CDSL) Growth % - RHS EBITDA (Including CDSL)
Rs mn % Rs mn EBITDA Margin (Incliding CDSL) - RHS %
5,500 5,160 50 1,200 0.2
5,000 4,632 40 969 955
4,169 1,000
4,500
30 787 0.2
4,000 3,714 800 673
3,500 20
3,021 542
3,000 600 0.1
2,566 10 417
2,500 400 319
1,834 1,797 0 244
2,000 0.1
1,500 -10 200
1,000 -20 0 0.0

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E
Source: BSE, HDFC sec Inst Research Source: BSE, HDFC sec Inst Research * FY18/19/20 EBITDA excludes
CDSL

EBITDA And EBITDA Margin Ex CDSL Return Ratios To Improve Gradually

EBITDA (Ex CDSL) EBITDA Margin (ex CDSL) - RHS RoE % RoIC %
Rs mn % %
18.0 16.9
1,200 0.2
955 16.0
1,000 0.2
787 14.0
800 12.0
0.1 9.6
542 9.5 9.1
600 10.0 8.3 8.2
0.1 7.1 7.1 7.3 7.6
400 8.0
5.2 5.9
175 0.0 6.0
200 3.6
33 4.0 2.7
0 -0.1
2.0
-39 -83 -35 0.0
-200 -0.1
FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E

FY18E

FY19E

FY20E
FY13

FY14

FY15

FY16

FY17
Source: BSE, HDFC sec Inst Research Source: BSE, HDFC sec Inst Research

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 BSE : INITIATING COVERAGE

Valuation & outlook

We expect BSEs (ex-CDSL) revenue/EBITDA/APAT to
increase at a CAGR of 12/76/15% respectively over
FY17-20E. The EBITDA margin will expand from 4.7%
in FY17 to 18.5% in FY20 (posted 15% margin in
1QFY18).
RoE for the business is only 9.1%, owing to high cash
on the books (Rs 30bn ex SGF and clearing and
settlement cash). Adjusting cash, RoIC stands at ~17%
in FY17. ROE is likely to moderate in FY18E, given the
investment in INX and stake sale in CDSL (16.1% RoE
for FY17).
BSE has been constantly innovating and investing in
technology, thus will remain a valuable franchise. We
see value based on (1) Embedded non-linearity, (2)
Huge net cash (excluding SGF and clearing) of Rs 30bn
(~Rs 567/sh, ~58% of MCap), (3) Negative core capital
employed in the business (4) Value unlocking in
higher margin CDSL and (5) High dividend yield of
~3%. BSE currently trades at 23.0x FY18E and 21.5x
FY19E EPS (discount of ~2% to the global average).
We have valued BSE on a SOTP basis by assigning a
fair value of Rs 430 to CDSL (~26% premium to CMP)
and 25x to BSEs core earnings (ex CDSL). We initiate
coverage on BSE with a TP of Rs 1,200 (22% upside
from CMP), which includes core BSE value at Rs 1,060
and CDSL stake value at Rs 140.

BSE SOTP Valuation

CDSL Fair Value (Rs) (35x to Sep-19 EPS) 430
CDSL Target Mcap (Rs mn) 44,976
BSE stake in CDSL 24%
Value of stake (Rs mn) 10,794
Taking 30% holding discount 7,556
Value /Share of CDSL 140
BSE Value (ex CDSL) (25x Sep 19 Earnings) 1,060
TP 1,200
Upside 22%
Source: Company, HDFC sec Inst Research

Page | 27

Management Profile
Name
Ashishkumar Manilal Chauhan
BSE board has approved Nayan Mehta
reappointment of Ashish
Chauhan as the CEO of the
Nehal Vora
company for another five
years (Nov-17 to Nov-22)
Neeraj Kulshrestha
Kersi Tavadia
Source: Company, HDFC sec Inst Research
BSE : INITIATING COVERAGE
Designation Professional details
With over 25 years of experience and Ashish is known as the father of
modern financial derivatives market. He is one of the founders of NSE,
where he worked from 1992 to 2000. He joined BSE in 2009 and prior to
MD and CEO
that he worked as the Group Chief information officer in Reliance
Industries. He is an alumnus of IIT Bombay (Mechanical Engineering) and
IIM Kolkata (PGDM).
He is a C.A. and Cost and Works Accountant by qualification and has over
Chief Financial Officer 25 years of experience. He worked in NSE (AVP Finance), MCX (CFO) and
CARE (Joint GM, Accounts) prior to joining BSE as a CFO in 2012.
19+ years of experience in area of legal and compliance. Has worked with
Chief Regulatory
SEBI for 10 years and worked as a Director Law & Compliance at DSP
Officer
Merrill Lynch Ltd.
25+ years of experience in capital markets, joined BSE in May-16. He heads
the trading and listing business. Prior to BSE he worked with Morgan
Chief of Business
Stanley India as ED, he was with NSE managing operations and also
Operations
worked as a CEO of India Index Services Ltd. and Dotex International Ltd.
He completed his MBA from IIM Indore.
30+ years of experience in the area of Application Systems/IT
Chief Information Infrastructure development. Played an important role in transforming BSE
Officer into the fastest exchange. Prior to BSE he worked with Log-in Utility and
Invest Smart Financial Services Ltd.
Page | 28
 BSE : INITIATING COVERAGE

Valuation: Global exchanges

M-Cap Revenue Forward P/E (x) Forward P/B (x) EV/EBITDA (x) ROE (%)
EBITDA EPS growth PEG
Country growth (2-yr
(US$ % (2-yr CAGR) (x) 1-yr 2-yr
CAGR) 1-yr fwd 2-yr fwd 1-yr fwd 2-yr fwd 1-yr fwd 2-yr fwd
bn) fwd fwd
Emerging markets
BSE (HDFC Sec estimates) India 0.81 11.7 13.0 18.5 1.2 23.0 21.5 1.7 1.7 15.8 8.5 7.6 8.0
MCX (HDFC Sec estimates) India 0.84 15.2 33.3 15.5 2.0 38.6 31.8 3.8 3.6 45.3 31.7 10.0 11.5
Bloomberg Consensus estimates
BM&FBovespa SA Brazil 14.8 10.9 72.8 14.3 1.5 24.1 21.5 1.9 1.9 16.0 13.0 8.6 9.8
Bursa Malaysia Bhd Malaysia 1.3 3.4 59.2 3.6 6.7 24.8 24.0 6.5 6.4 11.2 10.9 27.0 27.7
Bolsa Mexicana Mexico 10.6 6.8 54.7 8.5 1.9 17.4 16.0 3.1 3.0 10.3 9.6 31.0 19.3
Multi Commodity Exchange India 0.8 40.4 34.0 26.5 0.8 32.2 22.5 3.4 3.2 39.6 21.2 15.0 15.5
BSE India 0.8 9.1 42.7 8.2 2.8 24.8 22.9 1.9 1.9 9.8 9.0 8.2 8.8
EM average 14.1 52.7 12.2 2.7 24.6 21.4 3.4 3.3 17.4 12.7 18.0 16.2

Developed markets
CME Group USA 43.0 5.1 72.3 8.1 2.9 26.3 23.8 2.0 2.1 16.4 15.3 8.7 8.8
Hong Kong Exchanges Hong Kong 32.5 9.2 71.8 11.4 2.8 35.9 32.1 7.5 7.2 17.8 15.9 23.0 24.3
Intercontinental Exchange USA 38.5 5.4 64.0 12.3 1.6 22.2 19.5 2.4 2.3 14.8 13.6 12.1 13.1
Deutsche Boerse Germany 20.4 6.7 58.5 12.5 1.3 18.9 16.7 3.6 3.2 12.1 11.0 20.2 20.3
Nasdaq OMX USA 12.7 4.2 53.0 7.7 2.2 18.5 16.8 2.3 2.1 12.3 11.6 13.7 18.9
Japan Exchange Group Japan 9.4 2.8 61.0 2.2 10.6 23.9 23.8 3.7 3.6 14.2 14.0 15.1 14.7
Singapore Exchange Singapore 5.9 4.2 57.5 2.0 10.1 21.5 20.2 7.4 6.9 14.6 13.8 34.8 31.6
ASX Australia 8.3 4.6 75.7 5.0 4.5 23.5 22.4 2.7 2.6 15.6 14.9 11.9 12.3
CBOE Holdings USA 11.2 9.1 63.7 10.5 2.4 29.4 25.6 3.8 3.6 19.2 16.1 19.1 20.1
Hellenic Exchanges Greece 0.4 22.7 38.5 58.3 0.5 48.9 26.5 2.7 2.6 18.8 11.0 10.5 13.9
Developed markets average 7.4 61.6 13.0 3.9 26.9 22.7 3.8 3.6 15.6 13.7 16.9 17.8
Global average 10.8 57.1 12.6 3.3 25.8 22.1 3.6 3.4 16.5 13.2 17.4 17.0
Source: Bloomberg, HDFC sec Inst Research Note: 1-yr refers to FY18/CY17 & 2-yr FY19/CY18

Key Risks
Increased Competition from other exchanges, market share loss
Regulatory delays
Technology risks
Delay in monetisation of investments in new platforms like StAR MF and India INX

Page | 29
 BSE : INITIATING COVERAGE

Income Statement (Consolidated) Balance Sheet (Consolidated)

YE March (Rs mn) FY16 FY17 FY18E FY19E FY20E YE March (Rs mn) FY16 FY17 FY18E FY19E FY20E
Net Revenues (Rs mn) 4,248 5,172 4,169 4,632 5,160 SOURCES OF FUNDS
Growth (%) 17.6 21.8 (19.4) 11.1 11.4 Share Capital - Equity 107 108 108 108 108
Employee Expenses 1,074 1,415 1,209 1,297 1,445 Reserves 25,122 26,516 30,243 30,823 31,438
Technology Expenses 806 1,055 1,063 1,158 1,238 Total Shareholders Funds 25,229 26,624 30,350 30,931 31,545
Other operating Expenses 1,695 1,734 1,355 1,390 1,522 Settlement guarantee fund 1,761 2,045 2,045 2,045 2,045
EBITDA 672.4 968.7 542.0 787.5 954.7 Minority Interest 2,373 2,909 2,909 2,909 2,909
EBITDA Margin (%) 15.8 18.7 13.0 17.0 18.5 Total Debt 0 0 0 0 0
EBITDA Growth (%) 61.2 44.1 (44.1) 45.3 21.2 Net Deferred Taxes (Net) (26) (189) (189) (189) (189)
Depreciation 537 540 459 510 568 Long Term Provisions & Others 81 88 71 79 88
EBIT 136 429 83 278 387 TOTAL SOURCES OF FUNDS 29,418 31,477 35,186 35,775 36,398
Other Income (Including EO Items) 1,987 2,627 2,509 2,464 2,591 APPLICATION OF FUNDS
Interest 3 10 10 10 10 Net Block 1,559 1,644 1,686 1,732 1,784
PBT 2,119 3,047 2,583 2,732 2,968 CWIP 26 60 60 60 60
Tax (Incl Deferred) 371 406 517 546 594 Goodwill 850 850 850 850 850
Minority Interest 442 445 0 0 0 Investments 15 26 26 26 26
Share of profit / (Loss) of associate 22 11 242 283 333 LT Loans & Advances & Others 4,425 3,440 2,918 3,243 3,612
RPAT 1,329 2,206 2,308 2,469 2,708 Total Non-current Assets 6,876 6,020 5,540 5,910 6,332
EO (Loss) / Profit (Net Of Tax) (466) (208) 0 0 0 Inventories 0 0 0 0 0
APAT 1,795 2,414 2,308 2,469 2,708 Debtors 472 687 514 571 636
APAT Growth (%) (0.5) 34.4 (4.4) 7.0 9.7 Other Current Assets 901 740 584 649 722
Adjusted EPS (Rs) 33.4 44.9 42.9 45.9 50.3 Cash & Equivalents 34,126 44,194 44,412 46,270 48,343
EPS Growth (%) (0.5) 34.4 (4.4) 7.0 9.7 Total Current Assets 35,500 45,621 45,510 47,490 49,701
Source: Company, HDFC sec Inst Research Trading margin from members 4,780 4,776 5,364 6,055 6,870
Other Current Liabilities & Provns 8,177 15,389 10,499 11,571 12,765
Total Current Liabilities 12,958 20,164 15,864 17,626 19,635
Net Current Assets 22,542 25,457 29,646 29,864 30,066
TOTAL APPLICATION OF FUNDS 29,418 31,477 35,186 35,775 36,398
Source: Company, HDFC sec Inst Research

Page | 30
 BSE : INITIATING COVERAGE

Cash Flow (Consolidated) Key Ratios (Consolidated)

YE March (Rs mn) FY16 FY17 FY18E FY19E FY20E FY16 FY17 FY18E FY19E FY20E
Reported PBT 2,119 3,047 2,583 2,732 2,968 PROFITABILITY (%)
Non-operating & EO items (1,472) (2,551) (2,509) (2,464) (2,591) GPM 74.7 72.6 71.0 72.0 72.0
Interest expenses 7 10 10 10 10 EBITDA Margin 15.8 18.7 13.0 17.0 18.5
Depreciation 617 540 459 510 568 APAT Margin 42.3 46.7 55.4 53.3 52.5
Working Capital Change (825) 7,981 (3,466) 1,324 1,510 RoE 7.1 9.1 7.6 8.0 8.6
Tax Paid (733) (406) (517) (546) (594) RoIC (or Core RoCE) 5.2 16.9 2.7 5.9 9.6
OPERATING CASH FLOW ( a ) (287) 8,620 (3,441) 1,565 1,871 RoCE 6.2 8.0 6.9 7.0 7.5
Capex (621) (564) (500) (556) (619) EFFICIENCY
Free cash flow (FCF) (909) 8,056 (3,941) 1,009 1,251 Tax Rate (%) 17.5% 13.3% 20.0% 20.0% 20.0%
Investments 143 (11) 0 0 0 Fixed Asset Turnover (x) 0.9 1.0 0.7 0.7 0.7
Non-operating Income 1,642 2,835 2,509 2,464 2,591 Inventory (days) 0 0 0 0 0
INVESTING CASH FLOW ( b ) 1,163 2,261 2,009 1,908 1,971 Debtors (days) 41 48 45 45 45
Debt Issuance/(Repaid) (17) 0 0 0 0 Other Current Assets (days) 77 52 51 51 51
Interest Expenses (7) (10) (10) (10) (10) Payables (days) 411 337 470 477 486
FCFE (933) 8,046 (3,951) 999 1,242 Other Current Liab & Provns (days) 703 1,086 919 912 903
Share Capital Issuance/CDSL IPO Cash Conversion Cycle (days) (995) (1,322) (1,293) (1,293) (1,293)
(10) 0 3,160 0 0
proceeds Debt/EBITDA (x) 0.0 0.0 0.0 0.0 0.0
Dividend (1,244) (1,506) (1,500) (1,605) (1,760) Net D/E (x) -1.4 -1.7 -1.5 -1.5 -1.5
FINANCING CASH FLOW ( c ) (1,278) (1,516) 1,650 (1,614) (1,770) Interest Coverage (x) 41 45 9 29 40
NET CASH FLOW (a+b+c) (402) 9,365 218 1,858 2,072 PER SHARE DATA (Rs)
EO Items, Others (1,441) 703 0 0 0 EPS 33.4 44.9 42.9 45.9 50.3
Closing Cash & Equivalents 34,126 44,194 44,412 46,270 48,343 CEPS 43.4 54.9 51.4 55.4 60.9
Source: Company, HDFC sec Inst Research Dividend 23.2 28.0 27.9 29.8 32.7
Book Value 469.8 494.9 564.1 574.9 586.3
VALUATION
P/E (x) 29.5 22.0 23.0 21.5 19.6
P/BV (x) 2.1 2.0 1.7 1.7 1.7
EV/EBITDA (x) 27.9 9.1 15.8 8.5 4.9
OCF/EV (%) (1.5) 97.9 (40.1) 23.3 40.2
FCF/EV (%) (4.8) 91.5 (45.9) 15.0 26.9
FCFE/Mkt Cap (%) (1.8) 15.2 (7.5) 1.9 2.3
Dividend Yield (%) 2.4 2.8 2.8 3.0 3.3
Source: Company, HDFC sec Inst Research

Page | 31
 BSE : INITIATING COVERAGE

RECOMMENDATION HISTORY
Date CMP Reco Target
BSE TP
1,200 29-Aug-17 985 BUY 1,200
1,150
1,100
1,050
1,000
950
900
850 Rating Definitions
800
BUY : Where the stock is expected to deliver more than 10% returns over the next 12-month period
Feb-17

May-17

Jun-17
Mar-17

Apr-17

Aug-17
Jul-17
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12-month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12-month
period

Page | 32
 BSE : INITIATING COVERAGE

Disclosure:
We, Amit Chandra, MBA, & Apurva Prasad, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject
issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to
the specific recommendation(s) or view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have
beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities
Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No
HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475.

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Page | 33
 BSE : INITIATING COVERAGE

HDFC securities
Institutional Equities
Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park,
Senapati Bapat Marg, Lower Parel,Mumbai - 400 013
Board : +91-22-6171 7330 www.hdfcsec.com
Page | 34