BSE Ltd’s $182 million initial public offering (IPO) is far from exciting, although the size of the issue and the relatively modest pricing should ensure there are enough takers. The issue is priced at around 17 times adjusted earnings, far lower than Multi Commodity Exchange of India Ltd’s valuation of around 40 times earnings.
There are some good reasons BSE’s offering has been priced modestly. First, growth at the exchange has been sluggish. Annualized revenues for the first six months of this fiscal year stood at Rs767 crore, which represents an annual growth rate of 5.8% for the past five years. Growth in earnings before interest, tax, depreciation and amortization was lower at 2.3%.
Besides, BSE has all but given up on the equity derivatives segment, the biggest money-spinner for rival bourse, National Stock Exchange. It has a share of less than 15% in the equity cash segment. It has done much better in new ventures such as its mutual fund investment platform, currency derivatives and its SME (small and medium enterprises) exchange. But these are fairly small in the overall scheme of things.
Revenues have picked up since fiscal year 2014, thanks largely to hikes in listing fees in two successive years. BSE has the record for the largest number of companies listed on an exchange, and an increase in listing fees adds meaningfully to its revenues. Interestingly, revenues from listing fees were 2.6 times revenues from transaction charges in FY16. Of course, it would be too much to expect similar hikes in listing fees regularly.
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A silver lining is that the Securities and Exchange Board of India has withdrawn a requirement that bourses should transfer 25% of profits to their settlement guarantee fund. Besides, last year, BSE ceased its liquidity enhancement schemes, on which it had spent around Rs270 crore over a five-year period. As a result, net profit margins will soon look better than they did in the past few years.
But while things may be looking up a bit for the exchange, investors who are exiting through the offer for sale will do so at a loss, after adjusting for the depreciation in the rupee since the time of their investment. In rupee terms, the sale price will enable them to more or less break-even, but considering the sharp depreciation in the rupee in the past 8-10 years, losses in dollar terms will be significant.
In other words, the BSE investment hasn’t lived up to expectations of many of its existing investors. Will new investors be better off? While the inexpensive pricing of the issue helps, the company’s management also needs to ensure that it grows market share and monetizes its new segments well.