Q1FY24 Review: NSE: Profit growth moderates; regulatory overhang persists

2 Aug 2023 , 12:42 PM

NSE’s Q1FY24 profit growth moderated (+16% YoY) as: 1) The 6% tariff cuts across equity products came into effect. 2) NSE started contributing 2% of transaction revenues towards SGF fund. 3) Premium-to-notional ratio declined (0.22% vs 0.28% QoQ and 0.39% YoY), given the falling volatility. Having said that, volumes across Equity segment picked up in July – this augurs well for FY24 PAT growth (on analysts of IIFL Capital Services current assumptions, profits are likely to be flat in FY24). NSE IFSC–SGX connect is now fully operationalised and is seeing volume traction; however, net revenue contribution would be lower given the sharing with Singapore Exchange. On regulatory cases: 1) Colocation case will be heard in Supreme Court in Sept’23. 2) In the TAP case, NSE has filed a consent application with SEBI to resolve the matter. Impasse on the IPO continues with no new development during the quarter. This continues to weigh on stock valuations – 20x FY23 EPS on Rs3,000/sh valuations vs other Indian exchanges trading at 30-40x 1YF EPS. Long-term prospects of the company remain strong, given the dominant position in Equities and development of new revenue stream (NSE IFSC). 

Profit growth moderates in Q1: 

NSE’s adjusted profits grew by 16% YoY to Rs19.5bn – slowest in last 13 quarters, as 6% tariff cuts (across equity products) were effected from 1-Apr-23. NSE shared that tariff cuts resulted in Rs1.5bn revenue loss (~6% of PBT). The reported profits were further impacted (+9% YoY to Rs18.4bn) due to one-off expense of Rs725mn – paid to SEBI towards settlement of 24-Feb-21 trading halt case. Operationally, option premium volumes were up 33% YoY to Rs542bn ADTO, while equity cash volumes grew by 4% YoY to Rs585bn ADTO. However, equity futures volumes declined by 13% YoY to Rs1.04trn. On sequential basis, equity option volumes have fallen by 9% despite 17% increase in notional turnover, given the sharp fall in premium-to-notional ratio (down to 0.22% vs. 0.28% QoQ). Analysts of IIFL Capital Services believe this is due to sharp decline in the volatility index – VIX India is at its multi-year low. 

Regulatory expense increasing; NSE files consent application in the TAP case: 

NSE Board decided to double the SGF corpus from Rs50bn to Rs100bn over the next few years. In this regard, NSE has started contributing 2% of transaction revenues (Rs2bn) to its SGF corpus, and it would also make an ad-hoc transfer to this fund (Rs14bn transferred at the end of Q1FY24). As the interest earned on SGF fund does not accrue to the exchange, such lumpsum transfers impact treasury income (~Rs1bn p.a., on Rs14bn transfer). As for ongoing regulatory cases – in the colocation case, the next hearing will be in Sept’23 in Supreme Court. In the interim, based on Supreme Court order – SEBI has released Rs3bn out of Rs11bn, back to NSE in Apr’23. In another case, which also pertains to 2013 – trading access point (TAP) – NSE has filed a consent application with SEBI to resolve the matter. The case is about certain members getting benefitted through by-passing the TAP system (restricts order flows per second) then. The matter is sub judice and NSE has not made any provision for this as of now. There was no new update on the IPO timelines. 

Volumes building up in NSE IFSC–SGX connect; volume pickup in July on domestic exchange too: 

The NSE IFSC – SGX connect is fully functional from 3rd July 2023. Volumes have also started to pick up on the platform, as more traders are now gaining confidence to trade. We note that futures volume averaged at US$1.3bn ADTO (10% of domestic futures volume) in the first 13days of the month, which increased to US$5bn (40% of domestic futures volume) in the last 8 trading days of the month. In NSE IFSC, the exchange charges are on a per-contract basis (US$0.4/contract) – this is similar to what it earns in the domestic market (based on analysts of IIFL Capital Services calculation). However, due to 50-50 revenue sharing with SGX, net contribution is lower. The platform can contribute 4-5% to NSE’s top line if its volumes increases to domestic futures volumes (US$12-13bn ADTO). As STT is not applicable in GIFT City (NSE IFSC – SGX), volume ramp-up is expected to be in the Futures segment rather than Options. Separately, in the domestic market, volumes are up across equity segments in July – the cash ADTO is up 24% to Rs727bn vs Q1 average; while futures and option premium turnover up 18%/23% to Rs1.23trn/Rs665bn ADTO respectively. This augurs well for NSE’ earnings growth.