IPO Note BSE LTD IIFL Investment Ideas

Issue Opens: 23rd Jan 2017 Issue Closes: 25th Jan 2017 Price Band: Rs.805-806 Subscribe Company Overview BSE Ltd is ’s largest and world’s 10th largest exchange in terms of market capitalization (~US$1.7 tn) of the companies listed on its platform. It also has the maximum number of listed companies on its platform. Its income comes Issue Details from four streams i.e. securities services (~37%), services to corporate Face Value: Rs. 2 (~24%), data dissemination fees (~3%) and income from investment & Public Issue 1.54 cr Shares deposits and other income (~35%). Its consolidated revenues grew ~11% Price Band : Rs.805-806 CAGR over FY14-FY16. In FY16, BSE had an average of ~28.5 cr orders and Issue Size ~Rs 1241 cr ~0.155 cr trades in equity shares per day, making it as the 12th most active 100% Book Issue Type: building exchange in the world. Post Issue Market Cap: ~Rs 4,400Cr Objective of the offer % Pre IPO Public 55% It is an offer for sale (OFS) by existing share holders and the offer would act Trading Members & as a route to monetize assets for some of existing investors. As per regulatory 45% Associates requirement BSE Ltd will only be listed on National (NSE). Source: www.bseindia.com,RHP

Share Reservation % of Issue Our view BSE Ltd has an integrated business model and has presence across segments QIB 50 NII 15 from trading and listing of securities to clearing and settlement. Its BSE StAR Retail 35 MF and BSE SME products are market leaders. The upcoming innovative products like BSE Hi-Tech, index based products, an exchange in precious Company metals, gems, a consumer sentiment index and a high-frequency data on

Management unemployment will incrementally improve its market share. Improving Mr. Sudhakar Rao Chairman market share in certain products and improving market activities improved its Mr. Ashishkumar MD & CEO Chauhan annualised FY17 revenues (based on H1FY17) by ~16.5% yoy. At the upper end of the issue price band, i.e. Rs.806, the stock is available at a P/E multiple Issue Manager of 20.6x on FY17E annualized earnings as compared to MCX, which is trading Edelweiss Capital, at P/E of ~40x. We believe the valuation demanded by the company is Axis Capital, Jefferies, Nomura Int., Motilal justified and hence recommend a ‘SUBSCRIBE’ to the issue. Oswal, SBI Capital BRLMs Mkts and SMC Capital

Financial Summary Karvy Computershare Rs Cr. FY14 FY15 FY16 FY17E* Registrar Pvt. Ltd Total Revenue 530 625 658 383 EBITDA 287 305 301 193 EBITDA Margin % 54 49 46 50 Net profit 135 130 123 105 P/E (x) 30.9 33.3 35.3 41.2 P/BV (x) 1.8 1.8 1.8 1.7 ROE (%) 6.7 6.2 6.5 4.9 ROCE (%) 9.7 8.7 8.2 5.5 Analyst-Saurabh Rathi Source: Company, IIFL research [email protected] * Annualised FY17 numbers based on H1FY17 actual numbers

January 19 2017

IIFL Investment Ideas

Key Positives

Market Leader in key products BSE is Asia’s first stock exchange and being the oldest has helped it to gain brand recognition over decades. The strong brand helped the company to attract large number of companies to get listed besides having significant trading volumes. The volatility in market, stock exchange volumes, no of listings and depository services are linked with country’s economic activity. Since, India is becoming an attractive investment destination largely led by reform oriented government, we are sanguine about the future outlook of the company. Taking into account the client’s requirement and increased focus on mutual funds, the company has developed its own branded products named BSE StAR and BSE SME. Both these products have seen good acceptance with more than two third market share. In fact, BSE StAR MF is the largest distributor of mutual fund schemes in India with ~6303 MF schemes.

Integrated business model to improve revenues BSE follows an integrated business model which includes companies listing & trading, clearing & settlement of companies listed & traded on the BSE, depository services, data dissemination services, IT services & solutions, and training. This model aids it to improve revenue as it support the market participants throughout the entire life-cycle of a trade which lowers the cost for market participants. BSE has recently developed the GIFT City international exchange, which will help it in entering global financial markets. Also, it is developing new product BSE Hi-Tech, a platform for listing and trading in shares of young & fast growing companies. The upcoming product offerings include index based products, an exchange in precious metals, gems and other related goods, a consumer sentiment index and a high- frequency data on unemployment in India. These initiatives would aid it to attract market participants and hence improve its revenues in years ahead.

Sensitivity Analysis

We have done a sensitivity analysis under which we have correlated change in couple of important parameters and its impact on FY17E annualised EPS. 1) % change in avg. no. of trades in BSE per day and its impact on FY17E annualised EPS 2) % change in avg. securities service charges/trade for BSE and its impact on FY17E annualised EPS

Base case parameters Parameters FY17 Avg. no. of trades per day in cr. 0.33 Avg. securities services charges/ trade Rs 910

Impact of % change in securities service charges on FY17E EPS % change in securities service charges Sensitivity 10% 20% FY17 Annualised EPS Rs -10% -20% FY17E EPS Rs 44.7 50.2 38.4 33.5 27.9

Impact of % change in avg. no. of trades per day on FY17E EPS % change in avg. no. of trades per day Sensitivity 10% 20% FY17 Annualised EPS Rs -10% -20% FY17E EPS Rs 43 47.6 38.4 33.8 29.1

IIFL Investment Ideas

Key Risks

Fall in market activity will impact company’s business adversely Adverse macro economic factors could substantially impact BSE’s trading volumes and listing activities. Also depository fees for shares are calculated based on their listed companies market price, so any prolong correction in stock market will lead to lower income from this division.

Financial crisis, can negatively impact the company’s business The company’s operations and investments are directly correlated with the health of the Indian as well as world economy, so any financial crisis would substantially hamper the company’s operations and financials.

Disclaimer IIFL Investment Ideas

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