BSE is selling around 15.4 million shares through an IPO of equity shares, with a face value of Rs2 each
The long-awaited BSE Ltd’s initial public offer (IPO) is set to open on 23 January 2017. So, apart from buying shares, mutual fund units and bonds on the stock exchange platform, now you have an opportunity to own a bit of the exchange itself. Here are the key points to help you decide whether buying at the offer price of Rs805-806 per share is worthwhile.
BSE is selling around 15.4 million shares through an IPO of equity shares, with a face value of Rs2 each. This is an offer for sale from existing shareholders, which means that BSE will not receive these funds for its internal use, rather the IPO is a way for many of the existing investors to exit the company, some fully and others partially. As much as 35% of the issue is reserved for retail investors. Allocation, in case of oversubscription, happens on the basis of draw of lots after the minimum allotment per application is determined.
It’s the first of its kind opportunity to invest in a large-sized exchange, which is also Asia’s oldest. For BSE, a bulk of its revenues are from listing fees: as capital markets and investor participation grows, fees from new listings and from existing companies are expected to grow. Today, BSE has a big brand presence, being one of the oldest and most popular brands in financial services.
At the press conference, Ashishkumar Chouhan, managing director and chief executive officer, BSE Ltd, said, “While we need to work on increasing market share in some products, at the same time we are in the compliance business and that has to be on the top." On financial metrics, the balance sheet is strong with low debt and high reserves. Operating margins have been in the range of 45-54% for the last 4 years. It is not easy for new companies to operate in this space given the entry barriers, hence margin erosion may not be a concern. Last year, the company paid out 85% of its profits as dividends and management indicated the likelihood of a high dividend payout going forward. New business segments like the BSE StarMF platform and the India International Index are looked upon as long-term growth drivers.
Despite under-penetration in equity investing, cyclicality due to unpredictable market movements, makes it hard to accurately predict earnings for long periods.
Last 3 years’ net profits have declined. For FY17 there may be a benefit from revision of some regulatory charges.
When you consider BSE’s market share and trading volume against that of NSE Ltd, it falls short on all major product segments: equity cash market, equity derivatives, currency derivatives and corporate debt. The market share at around 13% is low for the equity cash segment. In equity derivatives BSE has negligible volume, while NSE sees a daily turnover of nearly Rs3 trillion. So, any structural growth in these segments may not benefit BSE.
According to a senior mutual fund executive, “Primarily the valuation seems to be for assets held. NSE has an advantage over BSE in various segments and despite the recent changes BSE hasn’t been able to move forward from its legacy issues."
The new business segments have potential but revenue contribution from these is yet to be seen.
This is a regulated business and any unfavourable change can impact revenues negatively. Lastly, rumours that their CEO is being considered for a position at their competition, may hurt the company.
Mint Money take
While there is no comparable listed business in the domestic market, some of the internationally listed exchanges trade at anywhere between 18 times (forward) price earnings (for Deutsche Börse) to 40 times (for Dubai Financial Market).
But these may not be strictly comparable: their market capitalization and trading volumes differ from that of BSE.
At Rs806, the stock is priced at around 22-24 times expected consolidated earnings for FY17. BSE can be a good long-term investment based on potential market penetration and their ability to embrace technology.
Demand for the first exchange IPO in India is high and looked upon favourably by market participants, which itself can drive up the IPO listing price. But whether any likely listing gains sustain, is uncertain, also because of NSE’s impending IPO, among other things. Ideally, wait for at least two-three quarters after the IPO to get a better understanding of the market price and earnings dynamics before you invest.