Q2FY23 Review: NSE: SGF contribution weighs on profit growth

3 Nov 2023 , 01:49 PM

NSE reported a subdued profit growth of 13% YoY in Q2FY24 as it contributed Rs5bn towards SGF (Settlement Guarantee Fund). Adjusting for this, profits grew 36% YoY highlighting strong operational performance. Equity transaction revenues grew by 20% YoY in the quarter driven by cash and option segments. In equity options, despite market share loss and falling premiumto-notional ratio, NSE premium turnover is up 20% in FY24 YTD. Company remains confident of maintaining its dominant position in equities, as well as is focusing on creating new revenue streams (Gift City, commodities, etc.). The profit growth in near term (until FY25) is likely to remain subdued given incremental SGF contributions (company targets to increase its SGF balance from Rs60bn to Rs100bn over the next 2-3 years). Resultantly analysts of IIFL Capital Services estimate NSE FY24 reported profits to remain flat YoY (adjusted profits to grow by 13% YoY). Separately, there was no new update on the colocation case or IPO during the quarter. 

Operationally strong; but SGF contribution restricts PAT growth: 

NSE’s Q2FY24 consolidated PAT grew by 13% YoY to Rs20bn; however adjusting for the SGF contribution of Rs5.6bn the profits were up 36% YoY to Rs24.4bn. The strong earnings growth was driven by 20% YoY increase in equity transaction revenues to Rs30bn (despite 4-5% tariff cut from 1st April 2023) driven by Cash (+31% YoY) and Option (+22% YoY) segments. Note that equity transaction revenues contribute 75% of total income (including treasury income). Sharp increase in clearing services income (+125% YoY to Rs1.78bn) also aided revenue growth. NSE management shared that higher treasury income on margin money and contribution from BSE (Rs250mn) drove growth in this segment. 

Not concerned on market share loss in Equity options: 

NSE market-share in the Equity Option premium turnover has declined to 96.6% in Oct-23 (vs. 100% at year beginning) as BSE volumes rampup. Also, the premium-to-notional ratio has been declining (from 22bps to 17bps over Apr-Oct 2023) as volumes are getting concentrated around expiry. Nonetheless, equity option premium turnover is up 20% to Rs575bn ADTO in FY23 YTD as the overall derivative market continue to grow. Thus company is not overly concerned around market-share loss; also as bulk of clearing of BSE trading happens on NSE platform it earns clearing and settlement revenues further moderating the impact. As such, NSE does not have any immediate plans to shift/introduce any expiry on Friday/Monday; if required this would be done after following due regulatory process. Further, company shared that it is also focusing on assets classes other than equities such as commodities, mutual fund, fixed income, Gift City Exchange, etc. to create new revenue streams.

No incremental update on colocation case; no clarity on IPO timelines: 

SEBI had challenged SAT order in the colocation case in Supreme Court; there has been no new update in the matter in the quarter. The case is likely to be heard on 10th Nov. If the petition is admitted then NSE would be required to return the Rs3bn to SEBI. In another case, which also pertains to 2013 – the trading access point (TAP) – NSE has filed a consent application with SEBI to resolve the matter. The case is about select brokers/members benefitted through by-passing the TAP system (restricts the 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. 

Reported earnings to see subdued growth given regulatory contributions: 

In the previous calls, NSE management had shared that it targets to double SGF balance to Rs100bn over the next 2-3 years. In this regards, it transferred Rs5bn on an ad-hoc basis in the quarter; and plans to make similar contributions in coming quarters. Further, it would invest Rs14bn as equity in its clearing corporation, which in turn would be transferred to the SGF account. Thus, NSE expects to increase its SGF balance from ~Rs53bn in FY23 end to Rs80bn by year end. The additional contribution would weigh on company’s profitability resulting in flat profits on reported basis in FY24. However on adjusted basis, profits are likely to grow by 13% YoY to Rs86.7bn (EPS of Rs175) in FY24 driven by volume growth and higher clearing and settlement income.