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Fundamental Analysis of BSE Ltd

31 December 2021
5 minutes

BSE Ltd, listed in 2017, is not just a multibagger stock but is considered to be the cash cow for its investors. On a year-to-date basis, the stock has yielded a 206.98% return in one year. The stock is continuously registering fresh lifetime highs since October 2021. And appears to continue to make big bullish candles one after another. 

Currently, BSE Ltd finds itself in a sweet spot operationally. However, things weren’t always this smooth. It is one of the world’s leading stock exchanges and is the fastest stock exchange (with a trade speed of 6 milliseconds). It was dragged down to Rs 275 in March 2020. This is at a time when the outbreak of the pandemic shattered the stock markets globally. 

Since then, this exchange has continued to add to its track record with strong innovation. BSE has expanded its State-of-the-art infrastructure and technology and established interactive relationships with the market participants. The resurgence in the stock was predominantly driven by the diversified yet unique business model of the company. 

Decoding BSE’s business model

Belonging to the finance sector, BSE Ltd owns and manages the Bombay Stock Exchange. It provides transparent market and trading opportunities across various segments including equities, debt, derivatives, currency, and commodities. It has close to 6,000 listed companies. BSE provides a wide range of services to capital market participants including clearing settlement, risk management, market data services, and investor education and certifications.

Why is the stock of BSE on the rise?

  • Bonus issue

BSE is one stock that doesn’t lack volumes and reacts actively to every small development in the company. On December 28, 2021, the stock opened 10% higher to Rs 2,000 per share against its previous close of Rs 1,835. This sharp spike was propelled by the BSE Board’s decision to consider and approve the quarterly and 9-month unaudited financial statements. And also to consider bonus issues of shares. 

The market picked this development as a positive cue because bonus issues will drive liquidity in the stock and will make it cheaper for the investors in terms of acquisition cost. 

  • Rollover to T+1 settlement

The recent SEBI’s move aims to infuse more liquidity and trading turnover in the market, at the same time reduce settlement risk and broker defaults. BSE in tandem with all other exchanges in India has decided to switch to the T+1 settlement cycle. Approved by SEBI, the T+1 settlement cycle will be implemented in a phased manner. It is expected to start with the bottom 100 stocks by market capitalization from February 25, 2022.

Should the T+1 settlement cycle turn out to be a success, it would prove to be a massive trigger for the stock. This system clearly incentivizes domestic investors over foreign portfolio investors with shorter settlement cycles. 

Moreover, even a developed market like the US is yet to adopt the T+1 settlement cycle. With this move, India will be the first to implement a T+1 Settlement system in its stock exchanges.

Financials

Constant focus on increasing operational efficiency helped BSE Ltd register a 39% YoY rise in net profits in the quarter ended September 2021. The net profits of the company stood at Rs 65.14 crores at the end of September 2021 as against Rs 46.81 crores in the same quarter last year. 

The surge in revenue from operations was even more prolific. The revenue from operations grew 51% to Rs 188.73 crores in September as against Rs 125.38 crores in the same quarter a year ago. 

Showing positive participation, the average daily turnover of the exchange from the equity segment rose by 53% to Rs 5,622 crores in the quarter under review from Rs 3,685 crores a year ago. 

The company rewards its shareholders with a decent dividend yield of 1.09%. The company, however, comes with extremely expensive valuations. 

The stock of BSE Ltd currently trades at a PE ratio of 47.45. Moreover, the Price-to-Book Value of the company is 3.46. The company is presently yielding a healthy Return on Equity of 7.3% and the stock is consistently outperforming the sector. 

Likely positive triggers for BSE 

In addition to the bonus and T+1 settlement, there are a few other positive triggers for BSE. 

One, BSE is a net zero-debt company. And debt-free companies with such attractive valuations are hard to spot. 

Two, BSE Ltd holds a 20% stake in CDSL. And CDSL, being just one of two depositories in India,  is also performing wonderfully both in terms of its performance as well as shareholder returns. 

Lastly, NSE’s Initial Public Offer (IPO) with a valuation of whopping Rs 87,000 crores is round the corner. 

NSE with just over 2000 companies listed has been awarded a valuation of Rs 87,000 crores. While BSE is having a modest market capitalization of Rs 8,888 crores. This is likely to present a cheaper valuation for BSE.  This could lead to investors acquiring more of BSE. 

Likely negative triggers for BSE

The stock is showing no signs of weakness and is trading not very far from its recently registered all-time high of Rs 2,373. 

However, one evident area of concern to take note of is the declining shareholding trend of both FIIs and DIIs. Foreign investors have reduced their stake in the stock from 13.97% in the quarter ended June 2021 to 10.41% in the quarter ended September 2021. This amounts to a net decline in shareholding of 3.56%. Much of this is due to an increase in the interest rates in the US. And also the beginning of tapering of the economic relief packages. Similar is the case with DII’s where we saw a marginal decline of 0.03% in the shareholding. 

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