CDSL public offer to impact BSE

Bourse will deploy proceeds in new ventures; revenue and margins may dip

The coming initial public offering (IPO) of equity in Central Depository Services (CDSL) will impact its parent, BSE, in multiple ways. First, there will be capital gains, as BSE’s stake in the company will come down to 24 per cent, from 50 per cent. In fact, BSE had sold a 4.15 per cent stake in CDSL for Rs 34 crore during the December 2016 quarter and booked some gains. Second, given the sticky nature of CDSL’s revenues and high margins, it contributed 36 per cent to BSE’s consolidated net profit and 18 per cent to its revenue in FY17. 

With a lower share, analysts expect BSE’s revenue and margins to fall this financial year. Besides, investors must note that with its high dependence on volume of transactions, BSE’s revenue and financials have been rather volatile in recent years. 

“Depository income is a big revenue contributor for BSE, as it had  majority ownership in CDSL. This will go away from FY18, once CDSL becomes its associate after the IPO,” says Nilanjan Karfa, analyst at Jefferies. The capital gains will be partly used to capitalise its International Exchange (INX), he adds. 

Apart from the CDSL issue, BSE is ramping up operations at the INX in GIFT City and is awaiting approval for launching a commodity exchange. While these are new growth avenues, a key monitorable is that its peer, the National Stock Exchange (NSE) also plans to get into these businesses. Thus, BSE has to get the execution right, to make these businesses a success without ceding much ground to competition. 

In a call with investors after result, the BSE management indicated it would start monetising INX in FY19. A change in the revenue model, from charging transaction fees on number and not value of trade, will also have some bearing on its revenue this financial year, estimate analysts. 

The BSE stock has surged 34 per cent since listing on February 3 and now trades at 26 times the FY18 estimated earnings. 

While this is at the higher end, some of the premium can be attributed to the fact that it is the only listed stock exchange in India. Strong brand recall and high growth potential in an under-penetrated market are positives. 

Any delay in launching the new businesses and high competitive intensity are key risks. Overall, the stock seems fairly priced.