600% Dividends, 320% Gains YTD: Jefferies Initiates Buy On BSE For TP Of Rs 2700; 14% Upside Seen

Leading American brokerage Jefferies has initiated coverage on Sensex-benchmark's exchange BSE Ltd owing to the digitization of Indian capital markets. The brokerage has suggested 'BUY' on BSE shares for a target price of Rs 2,700 apiece. Following Jefferies' positive outlook, on November 28th, BSE shares witnessed huge buying and settled with over 9% single-day gains.

On its counterpart's exchange, BSE share price ended at Rs 2,367 apiece, which skyrocketed by Rs 196.30 or 9.04% on Tuesday. Overall, the stock gained by at least 9.2% by hitting a high of Rs 2,369.90 for the day.

BSE shares 52-week high and low are at Rs 2,475 apiece and Rs 406.20 apiece respectively. From its 1-year low, BSE shares have zoomed by a huge 483% at the current levels. YTD, the stock has soared by a massive 326%.

The exchange is also among dividend-paying large-cap stocks as well. In 2023, so far, BSE paid a dividend of upto Rs 12 per share or 600% to its shareholders, which is lower compared to a dividend of Rs 13.50 per share or 675% in 2022, and 1050% or Rs 21 per share in 2021.

In its research note, Jefferies said, "Indian exchanges are benefiting from the financialization of savings, rising equity participation (from digitization of capital markets), growth in equities, product innovations & stable fees versus other capital market platforms." It believes that BSE can leverage macro-tailwinds along with headway into derivatives to deliver a 150% earnings jump in FY24E and double it over FY24-26E.

On the valuation, Jefferies said, " Led by strong growth and margins uptick, BSE should deliver 150% earnings jump in FY24E and double it over FY24-26E. Stock trades at 31x 1-yr fwd P/E vs RTAs' 38x, AMCs' 28x, depositary's 48x and distributors' 30x. Initiate at BUY; PT of Rs2,700 based on 35x Sep-25E P/E."

In its investment rationale, Jefferies highlighted five key factors to why invest in BSE shares further:

1. Indian exchanges offer superior play on capital markets:

Indian exchanges benefit from healthy GDP growth, rising mkt cap/GDP (India at 100% vs 130-200% for peers) along with financialization of savings and rising equity mkt participation (investor base up ~4x in 5 yrs). Moreover, exchanges are insulated from risks of compression in fees, unlike the debate between active & passive AMCs as well as discount & full-service brokers.

2. Digitization and sachetization to keep derivatives in the fast lane:

Derivatives are now the largest revenue stream for exchanges (~65% for mkt leader NSE) driven by a growing user base (~10x in 5 yrs) and sachetization of products to lower ticket sizes. Continued growth in equity investor base, a higher share of derivatives users (currently ~10%) and new low-ticket products should keep derivatives growth (+30% FY24 YTD) in the fast lane.

3. High volumes do not equal high risk:

Jefferies doesn't see systemic risk from the high derivatives turnover growth (~140% YTD) as it masks the relatively lower underlying premium growth (~30% YTD). Over the last 4 years, despite a ~8x jump in turnover, premiums have grown by ~3x.

Further, the share of small retail options traders in system premiums is

4. Derivatives to make up ~35% of BSE's revenues:

BSE's derivatives mkt share jumped to ~14% (from

5. Diversified revenue streams provide a long growth runway:

BSE's cash equities (20% of revenue mix) and mutual fund processing (10% of the mix) are steady growth segments (FY20-23 CAGR 27%) riding on macro tailwinds of financialization of savings and growing investor base. Corporate services (35% of the mix) are recurring fees and clearing and treasury (25% of the mix) benefit from higher market activity. The addition of the derivatives segment will improve the already healthy long-term growth outlook for BSE.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.