Jefferies initiates coverage on BSE with Buy, says derivatives ramp up a key driver

In an interesting development, Jefferies has initiated its coverage on BSE with a Buy rating and a target price of Rs 2,700, indicating almost 24% upside from current levels. According to the brokerage, derivatives ramp up is key driver for recent earnings upgrades and stock performance, “BSE can leverage macro-tailwinds along with headway into derivatives to deliver 150% earnings jump in FY24e and double it over FY24-26E.”Additionally they believe that the “risk is from regulations and competition.”

Impact of steady GDP growth on Indian exchanges

Jefferies highlights how Indian exchanges are benefitting from healthy GDP growth, rising market cap/GDP along with financialization of savings and rising equity mkt participation (investor base up 4x in 5yrs).

Derivatives in fast lane

Derivatives are now the largest revenue stream for exchanges. BSE’s derivatives market share jumped to 14% from less than 1% in last 6 mnth led by new product launches. Continued growth and improved monetization is expected to lift share of derivatives income to 35% of revenues in FY25e (vs 2% in Q2 FY24).

Continued growth in equity investor base, higher share of derivatives users (currently 10%) and new low-ticket products should keep derivatives growth (+30% FY24 YTD) in fast lane. This is as per Jefferies and they do not consider high volumes to be high risk as they don’t see “systemic risk from the high derivatives turnover growth (140% YTD) as it masks the relatively lower underlying premium growth (30% YTD).” The report showed how over last 4 years, despite 8x jump in turnover, premiums have grown by 3x.

“Further, share of small retail options traders in system premiums is <0.5%. Indian regulators have adopted an incremental approach on new regulations (vs outright curbs), and we expect a similar trajectory,” the brokerage added.

Jefferies added that “valuations remain attractive” and that’s the reason they have “initiated at Buy led by strong growth and margins uptick, BSE should deliver 150% earnings jump in FY24e and double it over FY24-26e.”