BOMBAY STOCK EXCHANGE LTD (BSE LTD) : IPO MUST SUBSCRIBE !!!

Price Band: Rs. 805 - Rs. 806.

Retail Discount : NA .

Face Value: Rs. 2.00.

Minimum Lot Size: 18 Shares.

Issue opens on: 23rd January 2017, Monday.

Issue closes on: 25th January 2017, Wednesday.

Listing Date on: 3rd February 2017.
Listing on: NSE only. Script Code: BSE

Total No. of Shares offered: 1,54,27,197 shares or 28.26 %.

Employee Reservation: NA. 

QIB Book: 77,13,598 shares or 50 % of issue. 

Non – Institutional Bidders: 23,14,079 shares or 15 % of issue.

Retail Book: 53,99,518 shares or 35 % of issue.

Equity Shares outstanding prior Issue: 5,45,88,172 shares.

Equity Shares outstanding post Issue: 5,45,88,172 shares.

Total Size of the Issue: Rs. 1,243.43 Crs - Rs. 1,241.89 Cr.

KEY FINANCIALS*	31 Mar 14	31 Mar 15	31 Mar 16	30 Jun 16
Total Income (₹ Crs)	266.79	361.14	426.54	113.02
Net Profit (₹ Cr)	135.19	129.74	122.53	41.40
Net Profit Margin (%)	25.50	20.80	18.60	23.30
EPS (₹.)	12.78	11.88	11.22	3.79
NAV (₹.)	224.11	225.33	224.27	228.06
Net Worth (₹.)	2,370.77	2,460.89	2,449.28	2,490.68
ROE (%)	5.80	5.40	5.00	6.70
ROCE (%)	9.70	8.70	8.20	9.70

*Standalone nos. & figures before consolidation of share capital from Re. 1 to Rs.2

BOMBAY STOCK EXCHANGE LIMITED: BSE was founded in 1875 and is Asia’s oldest stock exchange and is based in Mumbai, India. The company was formerly known as Bombay Stock Exchange Limited and changed its name to BSE Limited on July 2011. BSE Ltd incorporated itself as company limited by shares from the Association of person on 20th May 2005, under the demutualization scheme introduced by the market regulator SEBI (Securities and Exchange Board of India) whereby the 700 odd brokers shareholders surrendered their membership cards in exchange for the shares, whereby BSE members were alloted 10,000 Shares of Re.1 each against 1 membership right held. In November 2008, BSE gave handsome bonus in ratio of 12 new shares of Re.1 each for every 1 share of Re.1 held to its members. In 25th Novemeber 2016 company declared consolidation of Share capital by increasing the nominal value of Equity shares from Re. 1 per share to Rs. 2 per share. BSE was the first Exchange in India to be recognized as a Stock Exchange by the Government of India under the Securities Contracts (Regulation) Act, 1956. BSE Limited, together with its subsidiaries, provides market platform for trading in equity, debt instruments, derivatives, and mutual funds in India. It  also offers depository and record-keeping services to the securities industry that facilitate dematerialization of holding of securities and book entry settlement, clearing and settlement functions for trades reported on the debt and mutual fund segments of the company and for the currency derivatives segment on United Stock Exchange, as well as collateral management and risk management services for various segments of stock exchanges. In addition, the company provides education services through BSE Institute Ltd and IT solutions with focus on equity, stock, commodities, banking, and financial services markets that include a multi-asset online collateral management system; a clearing and settlement system for delivery-based derivatives; real time risk management system with integrated collateral management system software. Company has two prominent subsidiaries namely Central Depository Services (India) Ltd (CDSL), Indian Clearing Corporation Ltd (ICCL), Marketplace Technologies Pvt Ltd (MTPL), BFSI Sector Skill Council of India (BFSI), Marketplace Tech Infra Services Pvt Ltd, CDSL Ventures Ltd (CVL), Central Insurance Repository Ltd (CIRL) and lastly BSE Institute Ltd (BIL).

Company’s product Fastrade on Web allows investors to trade online on the company, as well as on NSE; BSE's settlement software handles settlement pertaining to various segments of the company and an end-to-end system helps for offer for sale; BSE StAR MF, an online mutual fund transaction platform; and a platform for trading in equities of small-and-medium enterprises. In Janaury 9, 2017, BSE inaugarated India's first International Exchange (INX), in Gujarat's International Financial Services Centre (IFSC) in Gujarat International Finance Tech (GIFT) City- Gujarat. India INX is a state-of-the-art facility, which will act as a gateway to raise capital for the country's infrastructure and development needs, it also provides cross broder opportunities of investment with a comparatively low cost of transaction in the world. India INX provides advantages in terms of Tax Structure and supportive regulatory framework - which includes No Security transaction tax, No commodity transaction tax, No dividend distribution tax, No long term capital gain tax and No Income tax for first five years. On February 19, 2013, BSE and S&P Dow Jones Indices announced an strategic partnership to calculate, disseminate and license the widely followed suite of BSE indices. Each of the BSE indices will be co-branded as "S&P" including the S&P BSE SENSEX, BSE 200, BSE 100. BSE Ltd is earliest and second biggest exchange from 22 stock exchanges in India with more than 5,600 stocks listed on its platform. It accounts for over two thirds of the total trading volume in the country. Approximately 70,000 deals are executed on a daily basis, giving it one of the highest per hour rates of trading in the world. BSE has 5,672 companies listed which makes BSE first exchange to have most of the listed companies around the globe and among these there are around 3,500 companies which have a serious trading volume. The combine market value of these companies is Rs. 99 trillion. This makes BSE 11th largest on planet. The BSE `Sensex' is a widely used market index and is a value-weighted index composed of 30 companies with the base of April 1979 = 100. In 2011, BSE improved its technology & its response time to each trade improved to 10 milliseconds against 200 milliseconds earlier. As a result it gained higher order to transaction ratio. The ratio was at 19:1 - means there were 19 trades against 1 transaction, this was much higher then the benchmark, this had provide ample liquidity and attracted algorithm trades. BSE in June 2013, bought a technology from Germany's Deutsche Borse to speed up its execution of trades on its exchange. This new technology helped BSE to execute 1 lakh orders per second as compared to 20,000 order per second currently. This technology has increased the speed response of BSE systems by 100 times from the currently around 10 milliseconds to 100 microseconds. At present BSE can handle 1,00,000 orders a second against 20,000 earlier. BSE is compared with MCX of India locally and Globally it is compared with Bursa Malaysia Berhad of Malaysia; Singapore Exchange Ltd of Singapore; Japan Exchange Group Inc of Japan; CME Group Incorporation, NYSE Euronext, Nasdaq OMX Group Inc.(The) and Intercontinental Exchange Inc of USA. 

Valuations:

The company has fixed the price band at Rs. 805-806 per share. FY16 consolidated total income increased 5 % YoY to Rs. 658 Cr, PBT before exceptional items was Rs. 238 Cr and PAT was Rs. 123 Cr. For H1FY17 the consolidated total income improved to Rs. 383 Cr and PAT came in at Rs. 105 Cr. BSE will sell 24 % in CDSL in IPO in FY17 which will reduce topline by about Rs. 120 Cr to BSE and reduction in PAT by Rs. 20 Cr for BSE in FY18. But, Bse will also get benefitted with no more expenses on Liquidity Enhancement scheme which was about Rs. 250 Cr and with SEBI now directing BSE not to transfer 25 % of its profit to settlement gurantee fund will boost bottomline forward. Based on FY16 annual EPS of Rs. 22.44 (post consolidation of share capital), BSE issue is priced at P/E of 35.87x on lower band and 35.91x on upper band. This is at a significant discount to peers like MCX which is trading at 47 times. BSE has consistently maintained high PAT margin with strong ROE of 34 %. It is a debt free company with consolidated Net-worth at Rs. 2,553 Cr which translates in Book value of Rs. 468 per share. BSE has cash and cash equivalents of Rs. 2,492 Cr which translates cash per share of Rs. 456.50. For BSE its 85 % of its revenue comes as trading fees and charges. BSE has a robust cash flows with fantastic return ratios.

Comparisons with Industry globally as on 20 Jan 2017 

Exchange	Currency	Price	O/S Shares (Cr)	MarketCap (Cr)	Basic EPS	NAV	P/E	RONW(%)
BSE	INR ₹	806	5.458	64.52	22.44	468	35.91	9.70
MCX	INR ₹	1193.15	5.10	89.41	25.79	272.92	46.31	3.50
CME Grp	US $	116.66	33.67	3,929	4.29	61.07	27.21	6.01
ICE	US $	57.40	11.344	3,425	2.44	25.06	23.49	9.38
ASX	AUD $	48.99	19.35	948	2.20	19.59	22.23	11.24
NZX	NZD $	1.06	26.83	28.441	0.03	0.29	30.42	37.52
LSG	GBP	3,018.38	0.35	1,057	0.68	790.15	44.26	9.85
SGX	SGD $	7.53	107.17	807	0.31	0.93	24.30	35.51
HongKong Exg	HKD $	185.50	122.43	22,711	4.99	25.34	37.18	31.15

Outlook and My views on IPO:
According to me one should look for subscribing for BSE IPO as it enjoys to be in the oligopoly nature, high operating leverage, robust cash flow and is in business which has high entry barrier. BSE will be second listed company after MCX - the National stock Exchange of India  is unlisted. Most of the BSE's revenue comes from retail traders. About 10 % of revenue comes from Institutions, about 25 % from Algorithmic trading and the rest comes from Retail traders. 85 % of its revenue coming from rating business which earns better margins is thus being offered to public at very attractive valuation. BSE has a market share of 39 % in the currency derivates segment and 14 % in equity cash segment whereas NSE remains the leader with market share of 56 % and 86 % respectively. BSE distributes 85 % of its profit as dividend and plans to continue with high dividend in future, BSE has filed IPO for its subsidiary CDSL and would be dilute 26 % stake in the IPO. The Information and data services of BSE contributes 4 % to 5 % as compared to 10 % to 25 % in other economies. They gre at 14 % CAGR over 5 years, for BSE there is ample of scope and should grow annually by atleast 15 %. Revenues from Index services can grow if it is expanded its offering beyond equities and hence revenue from Index Services should grow at 15-20 % over the next 5 years (as per DRHP). The best way to participate in the growth of a nation is to own a piece of its stock exchange, because the best and most profitable commercial ideas eventually become publically listed companies. Exchanges in India are still in development phase and has ample headroom for growth in retail participation. Equity as percentage of financial savings in India ia at a remarkably low level of 5 % in contrast with 14 % in China, 15 % in Brazil, 20 % in Indonesia and 42 % in USA. This will increase as goverment is mulling to boost equity investment in India via allowing EPFO to invest in equity, new products like REITs. India is a fantastically diverse country with an unrivalled entrepreneurial culture. Listing on the BSE, which hosts more than 5,300 companies than any exchange in Asia, provides the capital to empower those businesses to expand. Exchanges are almost the perfect business models with limited competition, high operating leverage and robust cash flows. Stock exchanges in particular have strong correlation to underlying economic activity. In India only two exchanges accounts for nearly 99 % market share in equities trading. Across a number of macroeconomic and broad market factors the Indian capital markets are at a “multiyear to multi decade low”. Stock exchanges would benefit substantially from the anticipated improvement in overall economic activity there by leading to high earnings growth over the next few years. NSE the Unlisted and BSE also Unlisted along with the MCX-SX which is also unlisted but directly related to MCX will be one of the best investments to play the impending recovery in economy and capital markets. India is already seeing initial signs of volume recovery with last two months & cash market volumes are up 100 % YoY. At current levels the velocity is in-line with eight year average of 60 %. Moreover with a number of new products having high potential (such as Interest Rate Derivatives, Corporate Debt, Volatility Index) in their nascent stages, exchanges would have robust volume growth over the medium term. 

Globally, Exchanges trends to trade at average of 5 times their book value and at 18-20 times their earnings. Indian stock exchanges are comparable to their Asian peers than their western peers. Western market exchanges are not vertically integrated (Depository and Clearing Corporation not part of the exchange) and hence do not have the float income enjoyed by vertically integrated exchanges. Emerging market Asian exchanges such a Hong Kong stock Exchange and SGX trade at 25x 1 year forward P/E & 13x EV/EBITDA. It can be safely assumed that NSE could command similar valuation given its market leadership, track record in launching new products and potential for growth. BSE is at a cusp of a turn-around, with the all the ingredients such as focus on increasing market shares in various segments, innovation, technology, infrastructure and management in place. It can be noted that a small shift in market share is adequate for BSE to have sharp increase in earnings. The Top 5 subsidiaries of BSE which are CDSL- 50.1 %; ICCL-100 %; Marketplace Technologies-100 %; CDSL Venture- 100 %; BSE Institute-100 %, and all are profitable. At the IPO price of Rs. 806, BSE will have Market cap of Rs. 4,399.80 Cr (5,45,88,172 shares x Rs. 806) which means a P/E of 35.87 times for FY16 and P/E of 21 times for FY17E. BSE to have enterprise value of Rs. 1,907 Cr at upper price band of Rs. 806. Thus, on valuation excluding cash & value of CDSL holding BSE's stock exchange business is available at Rs. 1,100 Cr which is attractive pricing & with new business coming up in INDIAINX in gift city strong fundamentals with good institutional holdings the Long term investors should look into subscribing the IPO for good opportunity. Short term investor can subscribe for listing gains.

*As the author of this blog I disclose that I do hold BSE LIMITED at pre ipo in my investment portfolio.

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Disclaimer: 

This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 

As a Disclosures I Confirm that : 
I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article. 

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