BSE IPO Analysis

Bombay Stock Exchange (BSE) Asia’s oldest stock exchange has received market regulator Securities and Exchange Board of India (SEBI)’s green signal for its initial public offering (IPO), as per the regulator’s website. The exchange had filed its draft red herring prospectus (DRHP) in September 2016.

Purpose of the issue: As per the information provided by BSE in its draft prospectus, some of the existing shareholders of the bourse would be diluting their stake. The exchange has nearly 9,300 shareholders out of which 262 are likely to sell their shares in the proposed IPO. Singapore Exchange Ltd (SGX) is expected to sell its entire 4.7 per cent stake of 5.09 million shares. Other shareholders who will be utilising this opportunity to dilute their stakes include Atticus Mauritius Ltd, Mauritius investment arm Quantum (M) Ltd, GKFF Ventures, Acacia Banyan Partners Ltd, Canada-based investor Thomas Caldwell’s Caldwell India Holdings Inc., and Bajaj Holdings and Investment Ltd.

The offer: The BSE shareholders will offer for sale up to 15,427,197 shares, representing 27.43 per cent of BSE’s pre-sale capital.

Lead merchant bankers: BSE has enlisted the services of Edelweiss Financial Services Ltd, Axis Capital Ltd, Jefferies India Pvt Ltd, Nomura Financial Advisory and Securities (India) Pvt Ltd as merchant bankers.

Size of the issue:  Rs. 1243.43 crore.

Issue Price: Rs. 805 – Rs. 806.

Market Lot: 18 Shares.

Face Value: Rs. 2/- per share.

Offer Open/Close: Open - Jan 23, 2017 Close – Jan 25, 2018.

Listing of the issue: The shares will be listed on the NSE as SEBI does not allow self-listing of the shares.

About BSE: BSE is the largest exchange in terms number of companies listed on it (more than 5,500) and the 11th largest in the world by market cap. Established in 1875, BSE is Asia’s oldest stock exchange.

BSE is engaged in primarily three businesses – listing, market and the data. Listing consists of primary market, “market business” relates to secondary market for securities and MFs, OTC corporate bond trading and memberships. The data business consists of the sale and licensing of information products. As for revenue mix, BSE generates ~27 per cent of revenue from transactions, ~24 per cent from listing, ~42 per cent from other sources and ~3 per cent each from market data and IT.

The company has seen highest growth in the “services to the corporate” segment which has grown at a CAGR of 20.6 per cent over FY13-16 and pulled the overall revenue growth at a 7.8 per cent CAGR over FY13-16. Considering the operating revenues, we see that the exchange achieved break-even at the operating profit level in FY2016. On the net profit front, its EPS saw erosion from Rs 20.17 in FY12 to Rs 14.9 in FY16.

Growth prospects: We see that globally information and data services contribute 10-25 per cent to the revenues of exchanges. In India, exchanges currently derive 4-5 per cent from these services which we believe can be potential growth area. This is because as the markets mature, investors insist on more reliable information sources. The other areas of growth for the exchange are currency and interest rate derivatives and corporate debt. Recently inaugurated India’s first international exchange-India (INX) in Gujarat International Financial Tech City (GIFT) is BSE’s wholly owned subsidiary. BSE will be investing ~Rs 500 crore in INX which will fuel growth of BSE.

Valuation: The bourse has shown subdued performance of 3 per cent CAGR growth over FY12-16. The exchange lags in financial performances as it operates at 53 per cent and 20 per cent EBITDA and PAT margins, respectively, as compared to its peer NSE’s 74 per cent and 49 per cent margins, respectively. On the valuation front, considering upper band of Rs 806 the stock is available at P/E of 26.55x on FY17E earnings.

Considering past subdued performance and comparatively lower margins, investing for long term may not bear fruits though one can definitely look at this IPO for some quick listing gains.