What a difference a year can make. In mid-2016, when State Bank of India sold a 5% stake in National Stock Exchange Ltd to private equity fund ChrysCapital, the exchange was valued at Rs18,000 crore. About a year since then, there have been multiple deals that have valued the exchange about 2.5 times higher at over Rs45,000 crore.

One of the reasons for the massive appreciation is the change of guard at the exchange. NSE’s earlier management kept saying it isn’t averse to a listing, but its actions led investors to conclude otherwise. “NSE says one thing officially on listing… but it effectively keeps creating new road blocks and delaying tactics," Ravi Adusumalli, managing partner at SAIF Partners, said in end 2015.

The new management, on the other hand, has sounded keen to complete the IPO. This came as a breath of fresh air for investors. So much so that they have been willing to shrug off an inquiry by Securities and Exchange Board of India (Sebi) that has dragged for months and a directive that keeps a large part of the exchange’s profit locked away in an escrow account. In September 2016, the markets regulator ordered NSE to place revenues accruing from its co-location services in an escrow account, pending an enquiry. Till date, Rs945.4 crore has been transferred to this account, and the amount set aside so far this year accounted for 44% of consolidated Ebitda and 36% of pre-tax profit.

According to a private equity investor that has a stake in the exchange, investors aren’t excluding these amounts while valuing the company. In other words, hardly anyone expects a very high penalty on account of the exchange’s missteps with its co-location services.

Another reason for the growth in valuation is the high growth being reported by the exchange. In the first three quarters of this fiscal, operating revenues grew 23% to Rs1,888 crore and Ebitda rose 34% to Rs1,295 crore.

Investors are pleasantly surprised that NSE is growing at this pace despite a high base. BSE, with the benefit of a low base and aided by price hikes, is growing at a faster pace. However, investors don’t seem as impressed.

NSE’s valuation based on recent deals is well over ten times the market capitalization of BSE Ltd. Note that NSE’s consolidated pre-tax profit of Rs1,600 crore in the first nine months of this year was around 7.5 times higher than that of its listed peer. The fact that NSE is trading at a decent premium even before its listing is a telling commentary of the demand for its shares.

The exchange has a near monopoly in the equity derivatives segment, the largest category in the exchange business in the country. Besides, it has a share of over 85% in the equity cash segment and sizeable share in the currency derivatives segment. With stock exchanges being allowed to launch commodities trading later this year, another revenue stream may soon emerge. On the flip side, the exchange’s decision to snap ties with SGX may result in a marginal hit on the licence fees it earns on its mainstay Nifty index.

All told, if the exchange continues to grow at around 20%, as it has this year, investors who are buying its shares now may well end up with returns of 30% in a year’s time if the IPO becomes a reality in the next fiscal. After all, while some investors are able to exit through pre-IPO deals, there is a premium for the liquidity that a listing will bring about. The big question, of course, is if Sebi will stop dragging its feet on the co-location issue soon enough.

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