BSE shares have zoomed over 280% in one year; Jefferies recommends buying the stock. Here is why

Share market news:  Shares of BSE Ltd, formerly known as Bombay Stock Exchange, have been on a rising spree in the past 12 months. The scrip has skyrocketed a whopping 282 per cent between November 28, 2022, and November 24, 2023, and there doesn't seem to be a saturation point anytime soon.

Global brokerage Jefferies has initiated coverage on BSE Ltd with a 'buy' rating and has set the target price of Rs 2,700. In its November 27 report, the brokerage wrote that Indian exchanges are benefiting from the financialisation of savings, rising equity participation (from digitisation of capital markets), growth in equities, product innovations, and stable fees as compared to other capital market platforms.

It added that BSE can leverage macro-tailwinds along with headway into derivatives to deliver a 150 per cent earnings jump in FY24E and double it over FY24-26E.

Given these multiple positive factors, the brokerage has given a buy call and sees a 24 per cent upside from the closing level of the November 24 session.

Reacting to the initiation coverage, shares of the exchange rallied as much as 9.17 per cent to Rs 2,369.90 apiece on the NSE. It eventually settled at Rs 2,367.00, up 9.04 per cent.

What Jefferies says 

Jayant Kharote, an equity analyst with Jefferies, along with Prakhar Sharma, also an equity analyst with the brokerage firm, notes in the report that Indian exchanges benefit from healthy GDP growth, rising mkt cap/GDP (India at 100% vs 130-200% for peers) along with financialisation of savings, and rising equity market participation (investor base up nearly 4x in 5 years). "Moreover, exchanges are insulated from the risks of compression in fees, unlike the debate between active and passive asset management companies (AMCs) as well as discount and full-service brokers," they wrote.

The analysts further note that derivatives are now the largest revenue stream for exchanges (nearly 65 per cent for market leader NSE), driven by a growing user base (nearly 10x in 5 years) and sachetisation of products to lower ticket sizes. The report adds that BSE's derivatives market share jumped to nearly 14 per cent (from <1%) in the last six months, led by new product launches.

"Continued growth and improved monetisation will lift the share of derivatives income to nearly 35 per cent of revenues in FY25E (vs 2% in 2Q24). Derivative ramp-up is the key driver for recent earnings upgrades and stock performance," the report adds. However, it notes that the key risk is higher competitive intensity from NSE.

Another reason why the analysts at Jefferies are bullish on the stock is its valuation. "Led by strong growth and margin upticks, BSE should deliver a 150 per cent earnings jump in FY24E and double it over FY24-26E. The stock trades at 31x 1-year fwd P/E vs RTAs’ 38x, AMCs’ 28x, depositary's 48x and distributors' 30x," it notes.