'Reasonable' Valuation Makes BSE IPO Attractive, Say Analysts

The BSE is offering shares for public subscription through its initial public offer (IPO), which opened on Monday. BSE's Rs 1,243 crore IPO is priced in a narrow range of Rs 805-806. The IPO, from Asia's oldest and world's largest exchange by number of listed companies (5,963 companies), is open till Wednesday and can be subscribed in lot sizes of 18. Out of the total issue, 35 per cent is reserved for retail investors. BSE has already raised Rs 373 crore from anchor investors by allotting shares at Rs 806. Its shares will be listed on National Stock Exchange on February 3.
Here are 10 things to know before you decide to invest in the IPO:

1) BSE's IPO is purely an offer for sale. This means that it does not intend to raise any fresh capital from the issue. Through this IPO, BSE's investors like Deutsche Boerse, Singapore Exchange, State Bank of India, LIC etc. are selling around 28 per cent stake in the exchange.

2) Established in 1875, BSE is Asia's oldest and is world's tenth largest exchange according to market capitalisation.

3) In FY2016, BSE had 15 per cent market share in the equity cash market segment and 6 per cent share in the equity derivative segment. In interest rate derivatives and currency derivative derivatives, it had a market share of 17 per cent and 36 per cent respectively.

4) BSE has a diversified source of revenue: In FY2016, 39 per cent of its revenues came from securities services, 26 per cent came from services to corporates, 4 per cent came from data dissemination fees and remaining 31 per cent came from investments and deposits.

5) BSE's revenues have grown at a CAGR of 3.5 per cent during FY2012-16 to Rs 616 crore. In the first half of FY2017, the exchange already generated revenue of Rs 353 crore. Most of its incremental revenues in last fiscal and current fiscal has come from corporate services like listing fees, which accounts for 21 per cent of its overall revenue and has witnessed a CAGR of 20 per cent during FY2012-16.

6) BSE's net profit however has remained sideways in last three fiscal because of its falling profit margins. In FY2016 its net profit was at Rs 123 crore, down from Rs 130 crore in FY2015. In the first half of the present fiscal, BSE's net profit was Rs 105 crore. BSE's net profit margin has fallen from 32.1 per cent in FY2012 to 19.9 per cent in FY2016 and its operating margin (EBITDA) has dropped to 41.9 per cent in FY2016 from 59.3 per cent in FY2012.

7) However, analysts are positive on the future revenue growth prospects of BSE as equity investment as a percentage of total savings in India is 5 per cent, which is very low compared to other countries. (14 per cent in China, 15 per cent in Brazil, 20 per cent in Indonesia and 42 per cent in USA).

8) At Rs 806, the upper end of the IPO price band, BSE's shares are valued at 20.6 times its FY2017 annualised earnings per share, which is a "reasonable" valuation, says Angel Broking. In comparison, Multi Commodity Exchange shares are trading at 44 times its FY17 estimated earnings per share. Angel Broking has a "subscribe" rating on the issue. Other brokerages like ICICI Securities, Geojit BNP Paribas also have a "subscribe" rating on the issue.

9) BSE currently holds 54.2 per cent stake in Central Depository Services Ltd (CDSL), which is a highly profitable venture for the exchange. As per regulatory guidelines, BSE is required to reduce its stake in CDSL to less than 24 per cent, which will create value for the exchange in the future, says Angel Broking.

10) BSE faces strong competition from market leader National Stock Exchange and MCX, which may put pressure on its future revenue growth and is a key concern, say analysts. Volatility in trading volume and technological changes are other key concerns in the business of BSE, analysts said.