Q4FY23 Review: BSE: Cost rationalisation to drive PAT growth

12 May 2023 , 10:54 AM

BSE reported strong PAT growth, aided by likely one-off income and expense. Analysts of IIFL Capital Services estimate FY24 adjusted PAT to grow by 20% YoY driven by: 1) Withdrawal of LES 2) Tariff increase in equity cash and listing fees. The company targets to gain market share in various segments through product differentiation. Although we do not build upside from this, analysts of IIFL Capital Services upgrade FY24-25 EPS by 7-8% given cost-reduction initiatives. Stock has given 18% return since our upgrade in Apr’23.

Strong performance partly aided by one-offs: 

BSE reported strong growth in Q4 — up 22% YoY and 77% QoQ to Rs912mn – 46% ahead of estimates. Profit growth was boosted by: 1) No SGF contribution during the quarter (Rs164mn in Q3) 2) Likely one-off income and expenses (Rs250mn). Adjusted profit growth too was ahead of estimates, given better-than-expected performance of subsidiaries (BSE IT). Operationally, BSE’s Equity Cash revenues were down 37% YoY and 15% QoQ to Rs334mn, mirroring weak volume growth (Rs35bn ADTO). BSE’s market share in Equity Cash segment was down ~85bps YoY and QoQ to 6.6%. MF business continues to do well with revenues growing by 58% YoY to Rs237mn, driven by 38% YoY volume growth (78mn) and 14% YoY improvement in yield (Rs3.04/transaction).

Targeting profitable growth: 

BSE discontinued liquidity enhancement schemes (LES) for its Equity Derivative segment and Commodity segments; and lowered the benefits on INX Exchange. This would add Rs300-320mn to FY24 profits (vs. Rs363mn cost in FY23). In addition, BSE also stopped offering discounts on technology support and co-location services – which would lower P&L drag. This, coupled with tariff increases in Equity Cash segment and annual listing fees, would drive FY24 PAT growth. Further, BSE targets to revive Equity Derivative segment and is reintroducing Sensex and Bankex products with reduced contract size and Friday expiry (NSE contracts expire on Thursday). BSE has also decreased tick sizes in the Equity Cash (for stocks under Rs100 trading price) and Currency segments, to lower impact cost and improve market share.

Upgrade EPS by 7-8%; maintain ADD: 

Although we do not build any contribution from new businesses, including Equity Derivatives, our FY24- 25 EPS has seen 7-8% upgrade as we build in benefits of lower costs.

Analysts of IIFL Capital Services raise their SOTP from Rs525 to Rs600; maintain ADD. BSE to sell 5% stake in CDSL in H1FY24 – increasing cash would lead to higher payouts in FY24.