BSE Limited - Pricing pressure remains a challenge - ICICI Securities

BSE Limited's (BSE) total revenues (operating + investment + dividend income) declined 2.2% YoY to Rs1.6bn with EBITDA margin at 29.5% (down 431bps YoY) and adjusted PAT down 13% YoY to Rs391mn in Q1FY21. BSE's cash segment witnessed a robust ADTO growth of 39%, but decline in exclusive segment turnover led to decline in transaction charges from equity segment. Mutual fund segment (80% market share within total orders in Q1FY21) continues to register strong growth (25% revenue growth in Q1FY21). The valuation of free cash and CDSL's 20% stake with a holding company discount of 20% limits the downside for the company; however, evolving pricing pressure in StAR MF platform remains an overhang. Post the run-up of 31% in stock price in past two months, we downgrade from Buy to ADD with a revised target price of Rs577 (earlier: Rs542).

- Contrary to our expectations, Q1FY21 exhibited positive momentum in cash ADTO and number of trades: The cash turnover for Q1FY21 was Rs2.2trn, a level last seen in Q1FY19. This was also supported by record number of cash trades (122mn) in Q1FY21. This spurt in cash volumes and relative outperformance over derivatives was a unique pattern observed in March-May and could be associated as a retail behavioural change during Covid. However, due to lower volumes in the exclusive segment, BSE's transaction revenues declined 13% in Q1FY21. Treasury income on C&S funds declined 7% YoY to Rs69mn, listing fees remained flat while book building fees were down 54% YoY, data dissemination charges fell 6% YoY and income from investment/deposit (Rs544mn) increased 11% on mark to market gains. EBITDA margin at 29.5% was down 431bps YoY. Q1FY21 adjusted PAT declined 13.3% YoY.

- Operating income outlook remains weak on account of pricing pressure: Transaction revenues witnessed a CAGR of (-) 0.8% in FY18-FY20 and we expect 2.6% CAGR between FY20-FY22E. Listing and book-building fees clocked 10.6% CAGR between FY18-FY20 and we expect this to be at 3.6% between FY20-FY22E. Operating income, which grew 6.4% between FY18-FY20, is expected to attain 2.9% CAGR between FY20-FY22E.

- Margins to decline in FY21E and recover in FY22E in line with Covid impact: Between FY18-FY20, revenues grew 2.1% while total operating expenses grew 8.7% resulting in sharp decline in EBITDA margin. We expect EBITDA margin to shrink to 20.4% in FY21E on account of lower revenue growth and recover to 27% in FY22E. Trailing 4-quarter revenue and EBITDA stands at Rs6.1bn and Rs1.4bn respectively vs our estimate of Rs6 bn and Rs1.2bn respectively.

- Cash contributes significantly to overall value. Total own cash (cash + investments - SGF - margin money) remains high (expected at ~Rs19.8bn by FY22E).

- StAR MF continues robust growth, pricing pressure remains an overhang: BSE processed 18.6mn orders on its mutual fund platform BSE StAR MF in Q1FY21, up 52% YoY. BSE earned Rs142mn (up 25% YoY) in transaction revenues from this segment in Q1FY21. Management decision to lower the rate per order will have an impact on FY21E/FY22E transaction revenues if the growth momentum in total orders slows down. BSE's market share in exchange-processed mutual fund transactions stood at a dominant ~80% in FY20.

- New initiatives remain possible, but growth drivers seem distant. ADTV and average daily number of orders traded on BSE-INX platform rose 2.9x and 3.5x in FY20. However, INX currently remains in the red with a loss of Rs230mn in FY20. Q1FY21 total turnover increased 8% due to introduction of currency derivatives. Insurance broking and EKYC businesses look promising, but without material contribution as of now. Interoperability results have been short of expectations

- Downgrade to ADD. We do an SoTP-based valuation of BSE as follows: (1) ~10x multiple to core earnings (excluding other income), (2) value BSE's 20% stake in CDSL at our target price (Rs354 per share) post a holding company discount of 20%, and (3) free cash of Rs19.8bn (Rs439/share) - to arrive at a target price of Rs577(earlier Rs542)

Source : Equity Bulls

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