By Geetanjali Kedia

BSE Limited is entering the primary market on Monday, 23^rd January 2017 with an offer for sale (OFS) of upto 1.54 crore equity shares of Rs. 2 each, in the price band of Rs.805 to Rs.806 per share, by 302 selling shareholders, both trading members and financial investors (mainly Singapore Stock Exchange, PE funds Attiucs, GKFF, Acacia and George Soros’ Quantum). Representing 28.26% of the post issue paid-up share capital, the issue will raise Rs. 1,243 crore, at the upper end, and will close on Wednesday, 25^th January. Since self-listing is not permitted, shares of BSE Limited will be listed only on NSE.

It will be interesting to watch if the broking entities participating in the OFS can keep aside their conflict of interest while advising clients (subscribe or avoid) on the IPO. Many biggies like Sharekhan, Citigroup, Centrum, JM Financial, Emkay Global, Keynote and Progressive Share Brokers are participating in the OFS and exiting completely. Care to practice what you preach?

BSE Limited, Asia’s oldest stock exchange, has the world’s largest number of listed stocks (5,868, as of Oct 2016), but has failed to leverage its dominant position, as it had CY16 market share of less than 15% in equity cash segment (derivatives share less than 1%), sizeably lagging rival NSE. Despite its 140 year old legacy, strong brand name, and being synonyms to stock markets in India, BSE has failed to become the exchange of choice for all - investors, brokers and issuers.

While the company has made efforts to get its crowning glory back, desired results were not achieved as competition has been tough. Having spent Rs.269 crore over 5 years to enhance volumes in the derivatives segment (through liquidity enhancement incentive programs), lack of fruitful results prompted the company to discontinue the initiative.

Compliance, at times, has been mere namesake, as prompt action does not seem to have been taken against erring companies. Take for instance, BK Birla group company Kesoram Industries, which is yet to submit FY16 annual report, and Mandhana Industries, having not yet considered Q1 and Q2 FY17 numbers, with independent directors having resigned, FY16 declared dividend withdrawn, and continues to be listed in the B category. On the contrary, mid-caps like Pondy Oxide, Quantum Paper, NR Agarwal, Roto Pumps, Haldyn Glass, Samkrg Piston to name a few, which meet listing norms and some even have institutional holding, fall under the XC and XD category, where transaction charges are higher, as also, face weekly/monthly/quarterly/ yearly price caps, which are seen much lower than their worth, causing confusion for adequate and due returns to the investors. In this day and age technology and speed, where even nano seconds make a difference, with its operations being in this very competitive space, importance of timely compliance and quick action thereon cannot be undermined, which needs to be adhered to while uploading quarter numbers, where NSE seems to be having an edge.

Coming onto the financials, although FY16 consolidated total income increased 5% YoY to Rs. 658 crore, PBT before exceptional items contracted marginally by 3% YoY to Rs. 238 crore. Accounting for tax and share of minority and associates, PAT declined 6% YoY to Rs.123 crore, which has been on a downward trajectory – declining from Rs.172 crore in FY12 to Rs.135 crore in FY14 and further down in FY16.

For H1FY17 however, financials fared better, as consolidated total income improved to Rs. 383 crore and PAT (after minority) came in at Rs.105 crore, resulting in an EPS of Rs.19.22. BSE currently owns 50.05% stake in depository CDSL, which will reduce to 24%, in compliance with regulations, by way of IPO of CDSL, expected in FY17. Thus, in FY18, consolidated topline of BSE will reduce by about Rs.120 crore and PAT by about Rs.20 crore. Moreover, two exceptional items – expense on liquidity enhancement scheme and SEBI-directed 25% transfer of profit to settlement guarantee fund – will not recur, which should boost bottomline going forward.

Based on back of the envelope calculations, one can infer that treasury operations and depository (CDSL holding) are the twin bread-earners for the company, while core stock market activity yields meagre profits, as seen from the below table:

Note: CDSL data is sourced from its DRHP dated 24Dec16.

Thus, pure play core activity of running a stock exchange is not materially earnings accretive for BSE. Also, hefty dividend pay outs each year indicate lack of growth avenues for the company.

As of 30-9-16, BSE’s consolidated net worth stood at Rs. 2,553 crore, translating into BVPS of Rs. 468. Being debt free, company, like other stock exchanges, is cash rich with cash and equivalents of Rs. 2,492 crore (cash per share of Rs. 464). Since its demutualization and corporatisation, it does not have any identifiable promoter. Currently, 43.56% stake is held by trading members, 20.72% under FDI, 9.05% by FIIs, 4.68% by LIC and balance 21.99% by public (mainly financial investors).

Financial investors participating in the ensuing OFS such as Quantum and Bajaj Holdings have cost of acquisition in the range of Rs. 800 and Rs. 809 per share. While Quantum is exiting completely, Bajaj Holding is selling half its holding, at cost price, after holding the same for over 7 years now. Exiting a 7-9 year old investment at cost price fares worst that India’s quasi risk-free savings bank interest rate too!

At Rs, 806, company will have market cap of Rs. 4,328 crore, which translates into PE multiple of 36x and 21x, based on FY16 and FY17E earnings respectively. Closest Indian peer in the listed space is MCX, which not only has double digit growth rates and a near-monopoly position but also a lion’s market share of 90% in its segment of commodities, although its market cap of Rs. 6,175 crore and PE multiple of 40x (FY17E) are both higher. In a nutshell, while BSE has been a wealth creator for the Indian and global investor community, sadly, it cannot boast of the same feat as a company, for its own shareholders. This IPO looks structured as a ‘long overdue’ exit route for BSE’s shareholders.

However, if one can take a call purely on valuations, excluding cash on hand and value of CDSL holding, just the stock exchange business is available at a valuation of approximately Rs. 1,100 crore, which is probably the rock-bottom. Hence, if one can take a bet, considering upcoming international exchange at GIFT city, it may not be a bad choice in the long term, purely from a valuation point of view, due to no pure stock exchange listed now in the market. 

Thus, despite facing a competitive scenario, one may consider the issue for the long term, thanks to its inexpensive valuations!

Disclosure: No Interest.