The Pitch

11 September 2017 For private circulation only

BSE LTD INITIATING COVERAGE

RECOMMENDATION - BUY
CMP Target Price Investment 52 Week Market Cap 3 Months
(Rs) (Rs) Horizon High/Low (Rs) (Rs mn) Avg daily Vol. (Nos)
993 1170 12 Months 1200 / 886 57,290 0.135 mn

We initiate our BUY recommendation on BSE Ltd

BSE owns and operate the first stock exchange in Asia, which was formed in 1875. At the end of August 2017,
BSE was the world's largest exchange by number of listed securities (5,794 securities), and India's largest and the
world's 10th largest exchange by market capitalization.
BSE operates in three primary lines of businesses
Listing Business
BSE’s listing business consists of primary market, which is part of the market relating to the issuance of new securities.
Listings business includes IPOs, follow-on public issuances and private placements of equity securities including on both
the main market of the BSE as well as on the BSE SME platform, and also IPOs, follow-on public issuances and private
placements of fixed income securities.

Market Business
The secondary market is that part of the market that relates to the purchase and sale of previously issued securities. The
secondary market has the biggest share in the Market business and includes:
 the equity cash segment ("Equity Cash"), which includes (a) trading of shares in companies and ETFs and units in
closed ended mutual fund schemes, as well as shares in SMEs listed on SME platform, (b) trading of fixed income
securities such as corporate bonds, sovereign gold bonds and government securities, (c) securities lending and
borrowing services, which allow market participants to lend and borrowing securities for use in trading and (d)
platforms to facilitate offers to buy securities by listed companies and offers for sale of securities by substantial
shareholders of listed companies;
 the equity derivatives segment, consisting of derivatives on equity indices and individual stocks;

 the currency derivatives segment, which includes both currency derivatives and interest rate derivatives;

Data Products Business

The exchange provides data products to market participants as well as third parties, such as data vendors and media
companies. Market data products include data based on equities, equity derivatives, indices, fixed income securities,
currency derivatives and interest rate futures. The data is available as real time feeds or in delayed time intervals.
BSE entered into an agreement with Deutsche Börse in October 2013 under which Deutsche Börse act as the licensor of
BSE market data and information to all international clients. Under the terms of the agreement, Deutsche Börse is
responsible for the sales and marketing of all BSE market data products to customers outside India, while BSE is directly
responsible for the sales and marketing of BSE market data products within India.

Strong Balance Sheet with Attractive Dividend Yield

BSEs net cash as of March 2017 stands at Rs.29.2 bn (51% of market cap) and offers a dividend yield of 2.3% as it pays-
out 70-75% of its profits;
The Pitch 11 September 2017

Focusing on new segments with significant potential

All is not lost with NSE taking home the equities business, as BSE is leaving no stone unturned to stay ahead in the
emerging segments which offer rich potential, including: Currency derivatives, Interest Rate derivatives, SME platform,
MF platform. As of FY17, BSE enjoys a much healthy market share in these segments:
 ~38% in currency derivatives;

 ~29% in Interest Rate derivatives;

 ~80% in MF platform; and

 ~80% in SME platform.

Structural changes to drive long term growth

India’s turnover velocity (cash turnover to market cap) at ~50% is one of the lowest globally. However structural changes
such as rising free float, higher domestic inflows into equities, and companies tapping equities market to raise growth
capital, should drive this ratio higher and support long term volume growth for Indian exchanges. In addition to equity
markets, many other products such as commodities, bonds, currencies and interest rate futures, which are extensively
traded on global exchanges are still at a nascent stage in India and provide a huge opportunity for exchanges;

Strengthened its position as the exchange of choice and expanded cross-border reach via strategic alliances:
 Internationally, BSE has signed an agreement with Deutsche Börse whereby they sell and market BSE market data
and information to international clients. Deutsche Börse also collaborates with BSE for product development and
innovation to create new market data solutions and infrastructure to support its product offerings;
 Within India, BSE has entered into a strategic partnership with S&P Dow Jones Indices LLC, USA ("SPDJI") to grow its
index business by calculating, disseminating and licensing its various index products;
 BSE is also a member of the BRICS Exchanges Alliance, whereby leading exchanges in Brazil, Russia, India, China and
South Africa cross-list futures products based on the flagship indices of each of the other exchanges;
 Similarly, options and futures based on the S&P BSE SENSEX are listed and traded on Eurex and the Dubai Gold and
Commodities Exchange; and;
 BSE has entered into an MOU with the Korea Exchange to list S&P BSE SENSEX-based derivative contracts and to
cooperate in other areas such as research, product development and information technology;

Diversifying product base for growth

The equity capital markets (including derivatives) in India are well developed whereas other segments such as bond,
currency, and commodity are still at a nascent stage. Currently, government regulations (select derivative products)
restricting individuals and other participants (such as insurance companies, pension funds, etc) and restriction on
introduction of longer-duration products have resulted in sub-par growth in these segments in India. However, these
segments should start growing as and when the regulator allows introduction of new products and participants in each
of the segment. This provides an opportunity to Indian exchanges including BSE to diversify their product offerings and
drive growth.
In this regard, BSE has proactively started an International Exchange in GIFT City, Gujarat, a mutual fund platform, an
electronic bond raising platform and a SME platform. Currently these services are in the rampup stage. In addition, BSE
has also applied to SEBI to start commodities platform. BSE plans to monetise each of these platforms over the next 12-
36 months.
International Exchange– INX: In January 2017, BSE started operation of India’s first International Exchange (INX) and an
International Clearing Corporation (ICC) at GIFT City in Gujarat. Currently it offers only derivatives products (index, stocks,
commodities, and currency). However, it is likely to introduce more products such as depository receipts and bond in the
second phase. The company is hopeful of volume growth on the exchange, given its superior technology (response time
of 4 microseconds vs. 60 microseconds for Singapore exchange) and low transaction cost (no STT, CTT, long term capital
gain tax, income tax for first 5 years, etc).
At present, BSE has invested Rs.1.15 billion in INX and ICC and is looking to invest an additional Rs.4 billion over the
next three years (including net worth requirement of Rs.3 billion). In terms of the revenue model, for the first year of INX
operations, BSE has decided not to levy any transaction charges in order to attract volumes to the exchange. Thereafter
(from FY2019), the company plans to charge $0.2/contract. Operations of INX are at a nascent stage to estimate its
revenue and profitability. However, company is confident of its ramp-up and views INX as the next big opportunity.
The Pitch 11 September 2017

Leveraging the pricing potential

Historically, BSE’s charges have been well below its competitors in terms of transaction and listing fees. Having an
inherent benefit of reducing this gap, BSE initiated a series of price hikes across segments in the past few years. While
the consolidated revenue from operations registered a 10% CAGR over FY2012-FY17, it has increased by 25% in the
past three years (FY2014-17) driven by increased transaction charges and listing fees.
Listing Fees contributed to 20-22% of BSEs total FY2017 revenues. For FY2018, BSE increased its annual listing fees by
22-25% over FY2017. This would drive BSE’s FY2018 revenues. Although now, the gap vs. NSE’s listing fees has
narrowed to 10-12%, the company mentioned that it plans to increase tariffs periodically.

Technology prowess is an encouraging backbone

Deutsche’s strategic stake (4.75%) in BSE has not only lent an edge in terms of the best-in class technology (Eurex
platform), but also at a significantly lower cost, having linked the charges to success in business. That keeps BSE’s
backbone ready to address any potential opportunity ahead of peers, if not alongside them;

Outlook and Valuation

The stock has corrected about 17% from its 52-week high and currently trades at 24.6x its FY2017 earnings. On a
forward basis, the stock is trading at 23.5x and 22.2x FY18 & FY19 earnings respectively. We value BSE on a P/E basis at
26.2x its FY2019E earnings, resulting in a target price of Rs.1,170. Given robust cash position, the strong brand recall,
unique business opportunity and future growth potential, we find it reasonable to value BSE at a premium to the
emerging market exchanges.
Risks to our View: Technological/regulatory risks, market share loss, failure in ramping up the international exchange
business may act as a risk to business.
Financial Summary
FY Ended (Rs Mn) Net Sales Change PAT Change EPS Change P/E
Consolidated (Rs Mn) (%) (Rs Mn) (%) (Rs) (%) (x)
FY2017 5,627.5 22.4 2,205.7 65.9 40.4 65.5 24.6
FY2018E 4,626.8 -17.7 2,302.6 4.4 42.2 4.4 23.5
FY2019E 4,863.9 4.5 2,434.7 5.7 44.6 5.7 22.2
Source: Company Annual Report, Equinomics Research and Advisory Pvt Ltd.

One year stock performance vis a vis index

110
Sensex BSE Ltd
105

100

95

90

85

80
07-Jun-17 07-Jul-17 07-Aug-17 07-Sep-17

Source: Equinomics, BSE. On base of 100

The Pitch 11 September 2017

Disclosure/Disclaimer
The information contained herein is being circulated by KSL based on the Research Report obtained from Equinomics Research & Advisory Private Ltd (Equinomics), a SEBI
Registered Investment Advisor (Registration No. INA000001712). As declared by Equinomics, the said investment advisory firm, its Research Analyst and its Managing
Director Mr. I. G. Chokkalingam and his relatives have no material conflict of interest in providing the said details to us except the below.
Disclosure/Disclaimer of Equinomics Research & Advisory Private Ltd as declared by it:
Whether Research Analyst's or relatives/ Equinomics/ Associate Company have any financial interest in the Subject Company and nature of such financial interest - No
Whether Research Analyst or relatives/ Equinomics/ Associate Company have actual/beneficial ownership of 1% or more in the securities of Subject Company at the end of
the month immediately preceding the date of publication of the document- No
Whether the Research Analyst/ Equinomics/ Associate Company has received any compensation or any other benefits from the Subject Company or third party in connection
with the research report or any other activity. Whether Managing Director of Equinomics / Research Analyst has served as an officer, director or employee of the subject
company. Whether the Research Analyst/ Equinomics/ Associate Company has been engaged in market making activity of the subject company. Whether the Research
Analyst/ Equinomics/ Associates or Relatives, have any other material conflict of interest at the time of publication of the research report or at the time of public appearance.
Whether Equinomics or its associate company have managed or co-managed public offering of securities for the subject company in the past twelve months. Whether
Equinomics or its associate company have received any compensation for investment banking or merchant banking or brokerage services from the subject company. Whether
Equinomics or its associate company have received any compensation for products or services other than investment banking or merchant banking or brokerage services
from the subject company - No
Whether Research Analyst / Equinomics has recommended the scrip to its clients in the past and the recommendation is active as on the date of this report- No
Equinomics' Ratings and Other Definitions
BUY- We expect this stock to deliver more than 15% returns over the next 12 months.
ACCUMULATE- We expect this stock to deliver 5-10% returns over the next 12 months.
HOLD- We expect this stock to deliver 5% returns over the next 12 months.
SELL- Above Target Price. *Wait for stock update when target price reached.
Equinomics Research & Advisory Private Ltd, Chokkalingam - Founder & Managing Director, Address: J-1, J-2, New Gitanjali Society, Gate No: 3, Raheja Township, (Opp. To
Malad Panchvati Co Op Housing Society), Malad East, Mumbai - 400 097. Ph: +91 22 28769268 | Email: chokka.g@equinomics.in | Website: www.equinomics.in.
CIN:U67190MH2014PTC252252. For general disclosures of Equinomics Research & Advisory Private Ltd, pls refer the link http:// equinomics.in/wp-
content/uploads/2017/05/Equinomics-Morning-Insight-Disclaimer.pdf
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The Pitch 11 September 2017

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