Maintain ADD on BSE - Fighting back, cash support - HDFC Securities

Mr. Amit Chandra, Institutional Research Analyst, HDFC Securities.

BSE (Q4FY20): Fighting back, cash support. Maintain ADD
(TP Rs 480, CMP Rs 434, MCap Rs 20bn)

BSE reported inline revenue but margin performance was below estimate in 4QYF20. There was improvement in core revenue stream (transaction charges +19.5% QoQ), but EBIT margin is still in negative territory. BSE cash market share has declined to 6.8% in FY20 vs. 8.9% in FY19. The StAR MF platform is witnessing strong volume growth (+60% YoY in FY20), but drop in realisation (Rs 6.5/transaction vs. Rs 8.5) will impact growth. We have cut FY21/22E EPS est. by 5.3/4.7%. We arrive at a SoTP based TP of Rs 480 by assigning 10x multiple to core FY22E PAT (Rs 16/sh), Rs 67/sh for the CDSL stake and adding net cash excluding SGF and clearing corporation liabilities (Rs 397/sh). Maintain ADD.

Revenue was up 8.8% QoQ to Rs 1.20bn (vs. est. of Rs 1.19) led by 19.5% growth in transaction revenue offset by 1.0% drop in annual listing fees. StAR MF revenue stood at Rs 0.12bn (-1.7% QoQ) led by higher volumes (+27% YoY) offset by lower realization (-23% QoQ). StAR MF was the only initiative of BSE which was witnessing solid growth, but drop in realization and Covid-19 will impact growth for FY21E.

BSE has managed to improve its cash market share by 53bps QoQ, but still down 188bps YoY to 6.9%. Currency derivative market share has declined sharply to 31.1% (-1,101bps YoY). INX is currently in investment mode (burning ~Rs 0.23bn annually). INX ADTV stood at USD 2.6bn (+48% YoY) and no of daily trades was 67K (+175% YoY). Hopefully, INX will start contributing to revenue from FY22E.

Adjusted EBITDA margin improved to 3.8% vs. -1.0% in 3Q, but was below our est. of 5.1%. For FY20, EBITDA margin was down 467bps to 1.8% due to flat revenue and 5% increase in total cost (adjusted for one-off). OCF stood at Rs 3.97bn vs. negative in FY19.

Valuation and view. BSE cash market share has slipped to 6.8% in FY20 witnessing third consecutive year of decline. Interoperability has offered some respite in 4Q, but the progress is slow. BSE is trying to fight back and build the derivative volume through LES, but it's still early days. New initiatives like Insurance platform, currency trading in INX sounds promising but there is no revenue visibility in the near term and is impacting margins. We expect revenue growth of 6.4/12.2% in FY21/22E led by rebound in transaction revenue and increase in listing fees. We expect operating leverage with growth (EBITDA margin of 5.3/12.8% for FY21/22E). BSE has net cash of Rs 18bn (~91% of MCap) and a dividend yield of ~4%, which limits downside.

Source : Equity Bulls

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