BSE tumbles by over 5% after Jefferies downgrade stocks to 'underperform'

Many are hopeful that BSE may gain market share from the spillover trades into the continuing weekly products

Shares of Bombay Stock Exchange (BSE) dropped over 5 per cent on Wednesday after brokerage Jefferies downgraded the stock’s rating to ‘underperform’ from the earlier ‘hold’ amid concerns about impact on volumes due to the new norms on futures and options (F&O).

Jefferies has revised the price target to Rs 3,500 per share for BSE, nearly 22 per cent lower than Wednesday's close of Rs 4,495.

BSE’s stock has rallied over 30 per cent in the past one month on hopes that the exchange will be impacted less than bigger rival National Stock Exchange (NSE) due to the implementation of stricter derivatives trading norms.

Further, many are pinning hopes that BSE may gain market share from the spillover trades into the continuing weekly products.

“At current market price, we feel the risk-reward has turned unfavourable with the risks (higher impact of regulations on market volumes, low spillover gains for BSE and more regulations) outweighing incremental gains,” said a report by Jefferies.

The majority of the new norms by the Securities and Exchange Board of India (Sebi) will kick in from November 20. BSE will be retaining the Sensex contracts while NSE will continue with Nifty50 contracts in the weekly options segment. Sebi has also increased the contract size and position monitoring. 

“Monthly contracts remain unaffected (Rs 30 per cent of market) under new F&O framework and BSE's market share is relatively lower (Rs 10 per cent) in this segment. Adjusting for this, current valuation may be implying a 40-50 per cent market share for BSE in weekly contracts (weeks 1-3), which seems over-optimistic to us. This assumes a major shift in participant behaviour, especially on non-expiry days,” noted Jefferies.

BSE’s managing director and chief executive officer Sundararaman Ramamurthy on Wednesday told CNBC-TV18 that they are working to increase the participation and number of products in the derivatives segment. It is targeting to take the participation to 600 stock brokers from 450 and to around 500 foreign portfolio investors (FPIs) from 150 at present, he said.

Analysts expect a 30-40 per cent drop in the volumes following the mandate by Sebi. The market regulator has introduced stringent norms to address the rising retail losses in the segment.