Nuvama positive on NSE, BSE growth despite volume dip in F&O segment

Sebi's proposal on dilution of stake in clearing corporations to hit financials, says report

Amid a series of regulatory changes which may impact the revenues of bourses, Nuvama Institutional Equities is positive on the growth in revenue and profit of National Stock Exchange (NSE) and rival BSE.

 

The report highlights that though the recent norms on index derivatives will cause short-term volatility in revenues, it will strengthen the market.

 

“We reckon the company (NSE) shall deliver a revenue/adjusted profit after tax (APAT) compound annual growth rate (CAGR) of 10.3 per cent/16.8 per cent over FY24–27E,” notes the report.

 

At present, NSE has a market share of 93 per cent in cash equities, while 99 per cent in equity index futures, and around 88 per cent in equity index options premium. As per Nuvama, the market share gives NSE a hard-to-catch-up lead.

 

For BSE, which is listed, the brokerage house has a target price of Rs 6,730 for ‘Buy’ recommendation —nearly 24 per cent upside from Tuesday’s close. 

 

“Even after building in the hit from regulatory changes, we forecast BSE shall turn in an FY24–27E revenue/APAT CAGR of 39.9 per cent/70.8 per cent, lifting its RoE to 37.9 per cent,” pointed the report.

 

The market regulator Securities and Exchange Board of India (Sebi) introduced six measures to curb the frenzy in index derivatives, a majority of which are now in effect. The changes have led to a sharp decline in volumes, but a clearer trend will be seen in the next few months, say market players.

 

Nuvama added that BSE has immense scope to grow its customer base and the higher contract sizes will reduce clearing charges, thereby lifting earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin.

 

Further, the market regulator’s proposal on independence of clearing corporations from the exchanges may also impact the financials.

 

“Sebi’s discussion paper suggesting exchanges dilute stakes in clearing corporations could also hurt earnings… For FY24, NCL contributed 16.1 per cent to NSE’s consolidated APAT, while ICCL contributed 20.1 per cent to BSE’s consolidated APAT,” noted the report.

 

The report also points to the significant surge in regulatory fee paid by the exchanges to Sebi along with the contributions to Investors’ Service Fund and Settlement Guarantee Fund.

 

“NSE/BSE regulatory expenses compounded at 152 per cent/53 per cent in FY20–24, accounting for 59 per cent/33 per cent of total expenses and 19.5 per cent/24 per cent of revenue,” states the report.

 

On another positive note, Nuvama has hinted towards the listing possibilities of NSE as it has settled three major cases of litigation in the ongoing financial year.