NSE: Growth levers, easing regulatory pressure underpin Jefferies' buy call

Jefferies, which assigned a 'buy' call to NSE with a target price of ₹2,085, expects a 17 per cent upside from the last closing price of ₹1,770.

NSE share price: Global investment bank Jefferies has initiated coverage on the newly-listed National Stock Exchange (NSE) as it believes easing regulatory headwinds and new growth levers paves way for earnings expansion. 

 

The market leader had made a quiet debut on rival BSE's platforms a month ago on September 24, and has failed since to reach its listing day high of ₹1,878. Yet, Jefferies, which assigned a 'buy' call to NSE with a target price of ₹2,085, expects a 17 per cent upside from last closing price of ₹1,770.

 

Its bullish call is underpinned by structural growth prospects and scope to offer diversification, along with newer opportunities. 

 

Contrary to popular perception that NSE story is tied closely to equity options, global brokerage Jefferies disagrees as it expects segment contribution to decline from 60 per cent of FY26 revenue as new products scale up. 

 

"We are particularly optimistic about the commodity F&O opportunity, the new mutual fund ordering platform, and the recently launched Electronic Gold Receipts (EGRs)," said Jefferies as they could create an additional c.14 per cent revenue and PAT opportunity for NSE by FY30e. Further, new revenue opportunities could emerge from corporate bond futures, GIFT City and market lens, it added.

 

Growing equity participation remains another lever for NSE, said Jefferies, with expectations that the growing incomes of younger cohorts, combined with wealth transfer from previous generations, could result in an increase in frequency of investing in equities and in ticket sizes over the medium term. 

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A post-COVID rise in options has reduced earnings cyclicality. Since options trading activity tends to rise with volatility, exchange revenues can remain resilient even when markets are weak or moving sideways, reducing their dependence on traditional market cycles, believe Jefferies.

 

While index options has a key role in driving exchange revenues, it also drew the regulator's attention due to a rise in speculation and retail traders making losses, prompting SEBI to introduced multiple changes in index options, including index option expiries being limited to one per exchange. 

 

Jefferies noted that there have been concerns regarding the size of Indian option trading market as contract volumes have been 4-5x of the US. However, premium turnover, India is a fifth of the US. It further added that low-turnover clients account for only 2-3 per cent equity options revenue, limiting the risk from SEBI action to protect small traders. We see the equity options share in transaction revenues to fall to 50 per cent from the current 60 per cent over the next 5 years, it said.

 

Operating revenue CAGR was 6 per cent between FY24-26, as NSE's equity F&O business was adversely impacted by regulatory changes and higher taxes. Jefferies thinks these are now largely in the base. Hence, it now expects growth to improve to 15 per cent over FY27-29e driven by equity options market share stabilizing at 65 per cent, cash equity turnover growing at 16 per cent led by IPOs, promoter/PE sell-downs, and tech infra revenues growing at 23 per cent CAGR.

 

"We expect EBITDA margin to expand by 200 bps to 78 per cent by FY29e due to: benefits from investments made in employees and technology over the last 3 years, revenue growth improving over FY27-29e, and scale-up of new businesses," it said.

 

Furthermore, Jefferies says it values NSE at a premium of 15 per cent to BSE as the former's greater diversification, higher optionality, dividend yield, and structurally higher margins give it an edge.

 

Disclaimer: Views and outlook in this report belong to the brokerages and analysts cited. They do not reflect the views of Business Standard. Readers are advised to exercise discretion.