BSE IPO to open today; here's what you should do

Stock market operator BSE is set to launch its Rs 1,500 crore initial public offering (IPO) on Monday. The shares of the exchange will be listing on its rival National Stock Exchange on or around February 3.

The stock exchange will offer offer up to 15,427,197 equity shares under the issue at a price band fixed between Rs 805- Rs 806 per equity shares (including a share premium). 

The IPO will close on January 25, 2017. 

Last week, BSE chief Ashish Chauhan had said that he has been looking to list BSE's shares for nearly a decade now. 

Companies like Edelweiss Financial Services, Axis Capital, Jefferies, Nomura Finance, Motilal Oswal, SBI Cap, SMC Capital, Spark Capital and IIFL will act as the lead managers for this IPO.

On September 9, 2016, it had filed a draft red herring prospectus (DRHP)  with the market regulator for the IPO. But, last month capital market regulator Securities and Exchange Board of India (Sebi) had given final nod to BSE for the IPO. 

Should you be investing?

Brand name: BSE is one of the most recognizable brand names in India considering it is the oldest exchange in Asia. 

As of June 30, 2016, BSE is world's largest exchange by number of listed companies and India's largest and the world's 11th largest exchange by market capitalization, with $1.52 trillion in total market capitalization of listed companies, as pointed out by SPA report. 

Financial results: Last week, Chauhan had said, "In FY16, BSE's profit margins rose to 50.4% and its return-on-capital employed grew to 11%. While Return on Average equity has recorded growth of 8.4%."

As per the SAP report, in FY16,  revenue from operations (comprised of revenue
from securities services, services to corporate and data dissemination fees), income from investments and deposits and other income comprised of 64.8%, 28.8% and 6.4% of total
revenue, respectively. In Q1FY16, revenue from operations, income from investments and deposits and other income comprised of 63.4%, 26.5% and 10.1% of total revenue, respectively. 
 
Further, BSE’s turnover from the interest rate derivatives market grew from Rs 26 billion in FY14 to Rs 1,141 billion in FY16. 

Profitability risk: According to a report by ICICI Direct, a  major proportion of BSE’s revenues is dependent on trading volumes and price level; primarily in equity segment, which is volatile in nature. 

Kanjal Gandhi, Research Analyst, ICICI Securities in a research report said, "On the expenses front, substantial proportion including employee expense and infrastructure maintenance expense are fixed in nature. Consequently, operating expenses may not be quickly adjustable to compensate volatility in revenues, which may have a material impact on the financial condition, cash flows and results of operations. 

Diversified products: BSE operates a diversified and integrated business model including trading, clearing and settlement of products listed and traded on the BSE, as well as
the provision of data products, IT services and solutions, index products and training. By providing such integrated services, BSE supports its members throughout the entire life-cycle of a trade, as per a report by Dolat Capital. 

Recently, the exchange had also launched India International Exchange (INX) at International Financial Service Centre (IFSC), Gujarat International Finance Tech (GIFT) City, Gujarat. 

The international exchange offers a product portfolio spanning across (i) equity and index derivatives, including single stock futures and index futures, (ii) currency derivatives and (iii) commodity derivatives, but not including agricultural commodities.

Giving this IPO as 'Subscribe' recommendation, SAP Group said, "At the upper end of the price band, the stock is available at P/E of 21.3x based on FY17E earnings. It’s nearest comparable MCX is trading at P/E of 39x based on FY17E earnings. We recommend SUBSCRIBE to the issue with long term perspective".

Having similar view, Dolat in its report said, "BSE has a 17% market share in Equities and derivatives trading way below NSE’s market share and 40% market share in currency derivatives segment. Given the under penetration of equities as an investment vehicle, it should be able to cling to its market share. It had a payout ratio of 41% in FY16 and we expect it will go up once it gets listed. Hence this should be subscribed by long term investors who are looking to own defensive plays."