BSE: A watershed moment

23 Oct 2023 , 10:31 AM

Recommendation: Buy; Target price: Rs 2000

 

BSE has increased its Equity Option tariff by 3-6.5x (blended increase estimated at 5x), leading to 25-35% upgrade in analysts of IIFL Capital Services FY25- 26 EPS. Since the tariffs are still 25-40% lower than NSE, there is scope for further increase. In volumes, BSE accounts for 10% of the India Option turnover (3.6% of premium turnover) and this is likely to rise with a likely pickup in Bankex volumes (currently <1% of Sensex volumes). Analysts of IIFL Capital Services upgrade BSE to BUY (from ADD) and raise their SOTP-based TP to Rs2,000. The momentum in Bankex and further tariff increases, could drive earnings surprise. 

BSE increases Option tariff by ~5x: 

So far, BSE is charging a flat fee of Rs5 per lakh on premium turnover in Equity Options; from 1-Nov’23, BSE has introduced slab-based tariff (in line with NSE) – effectively increasing option tariffs by 300% to 650%. As of now, the increase is only in Sensex30’s running weekly contract. Thus, BSE will continue to charge old tariffs on the Bankex and Sensex-30 contract beyond the current week (up to 7 weeks at a time, hence contracts are available for trading). Post the increase, the Equity Option tariff ranges from Rs5-37.5 per lakh of premium turnover vs Rs8-50 for NSE– still at 25-40% discount to NSE. Thus, there is still headroom for further increase. As bulk of volumes are concentrated in the Sensex-30 current week contract (>99%), blended tariff is likely to see sharp increase. Analysts of IIFL Capital Services estimate a 5x jump in tariffs to Rs25 per lakh (on a full-year basis) as they believe high-client contraction will result in top traders falling in the lower tariff slabs (as also seen in NSE). 

BSE has 10% share in Options; Bankex to be the next driver: 

Since the launch in mid-May this year, BSE has seen a sharp increase in its options volumes (traded as zero-date option; volumes only on expiry) and now accounts for 10% of India’s notional option turnover (Rs33trn ADTO) in Oct’23. As volumes are largely concentrated on expiry day, its market share in premium turnover is 3.6% or Rs18bn ADTO. BSE has recently shifted its Bankex weekly expiry to Monday (NSE’s Mid-cap index too, has the same day expiry); this is likely to further drive volumes. During the 1st expiry on 16th Oct – Bankex saw a turnover of Rs928bn (<1% of Sensex30 expiry turnover) and thus, has a huge potential to grow (for NSE – Bank Nifty contributes ~60% of option turnover). Also, as BSE accounts for 50- 60% of Friday volumes; it attracts more participants. 

Upgrade FY25-26 EPS by 25-35%: 

BSE was incurring losses on its equity derivative volumes (C&S payment to NSE). However, after the increase in tariffs, analysts of IIFL Capital Services estimate a 45-50% net contribution. Consequently, their FY24/25/26 EPS is revised upwards by 12%/34%/23% respectively.