Shrewd strategy and a lucky break vault BSE to all-time high; what’s next?

Trading volume is the very foundation of a stock exchange. Exchanges undertake various activities to drive trading volumes. They introduce new products, make transactions easy and secure, encourage investing, and spread awareness about disciplined investing.

When more investors buy and sell on the exchange, more companies list their IPOs, more brokerages register with the platform, and more foreign institutional investors (FIIs) invest through the exchange. The exchange monetises this activity in various forms.

BSE’s Q3 FY25 Revenue by Business Segment. Source: BSE’s Q3FY25 Investor Presentation

● BSE monetises the trading activity by charging transaction fees for providing trading and clearing services. BSE revenues surged 94% year-over-year to Rs 835.4 crore, driven by a 157% jump in transaction charges to Rs 511.1 crore in Q3 FY25.

● The exchange also provides “Services to Corporates” such as listing of equity, debt securities, mutual funds, and commercial papers. There is a one-time registration and a recurring annual fee to retain membership. This segment’s revenue increased 67.6% YoY to Rs 150 crore, accounting for 11.5% of BSE’s revenue in Q3 FY25.

● It also earns revenue by sharing all types of share price data, Index Services, Software Services, and Training Services. This comes under the other operating income, which increased by 77% to Rs 64 crore in Q3 FY25.

BSE has been diversifying its revenue streams by launching new platforms such as India INX for International trade and the BSE Star MF platform for mutual fund distribution.

● BSE SME platform allows small and medium-sized enterprises (SMEs) to list and raise capital. SMEs that perform well and fit the criteria are shifted to the main platform.

● BSE’s subsidiary Indian Clearing Corporation Limited (ICCL) guarantees the settlement of all bona fide trades executed on the BSE platform by maintaining a treasury fund.

● BSE also offers co-location services wherein it allows brokers and their customers to host their servers near BSE’s trading platform for faster trade execution in return for a rack rent. It has seen a strong response from 0 to around 200 racks and a long waiting list.

● Other initiatives include Ebix Insurance distribution, Hindustan Power Exchange, BSE e-agricultural markets, and BSE Administration and Services Limited.

What drove BSE’s recent share price rally?

Most recently (February 20 to April 25), the BSE share price made a V-shaped recovery. First, the stock fell 36% in 20 days and then rose 70% in 45 days, making a new all-time high of Rs 6,595. Behind this V-shaped stock price momentum was a series of events, especially in the options space.

BSE share price V-shaped recovery. Source: Trading View

BSE’s fall before the rally

While we know that the National Stock Exchange (NSE) and BSE are exchanges to buy equity shares, equity options are where they earn most of their revenue. NSE leads the options market with 83.6% market share in December 2024. BSE earns 47% of its revenue from options trading despite having a smaller share of the options market.

On March 4, the NSE revised its index option expiry day from Thursday to Monday. It is one day before BSE’s expiry. Why does it matter?

Volumes mean everything to stock exchanges. NSE and BSE have a duopoly, but only BSE shares are publicly listed. Hence, BSE shares face both the good and the bad of the events that affect the exchanges.

In options, trading volumes spike up closer to expiry. By shifting the options expiry closer to that of BSE, NSE pulled the options volume to its platform. Nuvama cut BSE target price to Rs 5,160 (from Rs 7,250), saying that this will reduce trading avenues for retail traders and lower volumes for the industry.

Even before the NSE expiry date change, there was a bearish momentum as trading activity was slowing because of SEBI’s new rules on futures & options (F&O) trading and a slowdown in economic growth.

BSE’s 70% stock price rally

After the steep fall in February and early March, BSE shares reversed their course ahead of SEBI clarification on March 28 that all equity derivative contract expiries be restricted to either Tuesday or Thursday. This worked in BSE’s favour as its contract expiry is on Tuesday, whereas NSE delayed its plan to shift the contract expiry to Monday.

Analysts are optimistic about BSE

The recent volatility in BSE’s share price was primarily due to SEBI’s F&O rule change for index derivatives, where NSE has the lion’s share. The rule change came as most traders in index options were incurring losses.

Under the new F&O framework, exchanges will offer only one weekly index derivative contract. NSE had four and BSE had two weekly index options. BSE retained the weekly Sensex derivatives and moved Bankex and Sensex 50 contracts to a monthly expiry cycle. A longer expiry cycle increases options premium, but reduces the volume of contracts traded.

BSE earns revenue on the options premium and incurs regulatory and clearing costs on the options turnover. The rule change worked in BSE’s favour as it improved the premium-to-notional turnover ratio of index options. Its transaction revenue from options rose and regulatory and clearing costs fell.

If investors’ interest in options trading continues, the trading activity can transition from being concentrated on expiry day to being spread across tenures. BSE has introduced single stock options to aid product broadbasing and attract more investor participation.

Jeffries, Motilal Oswal Financial Services (MOSFL), and Nuvama believe that options trading will drive BSE’s revenue and profit in the coming two years. MOSFL expects BSE’s revenue to grow at a compounded annual growth rate (CAGR) of 44% during FY24- 27, led by 62% CAGR in transaction charges and 19% in other revenues. It expects net profit to grow at a 74% CAGR as lower regulatory and clearing costs drive profit margins.

Should you buy, hold, or sell BSE shares?

A series of fortunate events worked in BSE’s favour, helping it retain its trading volumes and improve options premiums. Among these events are:

● Another delay in NSE’s long-awaited IPO (original prospectus – December 2016).

● Announcement of second bonus issue of 2:1 on March 30, 2025, since its listing after a similar issue on February 8, 2022.

● Increased investor optimism due to major tax relief for the middle class from April 1, leaving more money in the hands of individuals to spend and invest.

However, the 70% jump in BSE’s share price has stretched its price-to-earnings (PE) ratio to 91.6x, way above its five-year median ratio of 38.8x. Trading around Rs 6,300, the stock has already come closer to the bullish price target of brokerages. This has reduced the upside for BSE stock in the short-term as investors have already priced in strong volume growth from options.

Brokerage Price Target for BSE (updated in January 2025)

While equity cash and equity derivatives market will be the key growth drivers of BSE’s share price, co-location and other revenue streams could be an interesting space to watch in the long term.

At Rs 4.7 lakh crore market cap, NSE’s valuation still dwarfs that of BSE, which is valued at Rs 85,693 crore, according to the latest Burgundy Private Hurun India 500 list. BSE still has a huge market share to tap. India’s capital market is still developing and BSE could play a key role in growing the market.

BSE’s share price could see volatility in the short term. However, the exchange’s long-term growth prospects remain bright, being the only publicly-listed stock exchange with no competition from the NSE IPO for some time.

Note: We have relied on data from http://www.Screener.in throughout this article. Only in cases where the data was not available have we used an alternate, but widely used and accepted source of information.

Puja Tayal is a seasoned financial writer with over 17 years of experience in the field of fundamental research.

Disclosure: The writer and his dependents do hold the stocks discussed in this article. The website managers, its employee(s), and contributors/writers/authors of articles have or may have an outstanding buy or sell position or holding in the securities, options on securities or other related investments of issuers and/or companies discussed therein. The content of the articles and the interpretation of data are solely the personal views of the contributors/ writers/authors. Investors must make their own investment decisions based on their specific objectives, resources and only after consulting such independent advisors as may be necessary.