BSE Ltd: The exchange’s blue ocean strategy is yielding results

Paperless MF investing – it’s something taken for granted by a digital native, but for a digital immigrant like me its nothing short of a miracle of technology. I shortlisted a few MF schemes for investment, but they were spread across different AMCs; I want the Direct plan, bypassing the agents; this means a visit to the MF offices; not an escapade I was looking forward to.

And then I read about the crop of new fintech companies – Scripbox, FundsIndia, Groww, Fisdom, PaytmMoney, ETMoney and others, that enable paperless investing in MFs and some of them permit Direct plans. I joined Groww and to ensure SIP each month, the last step in the process was adding BSE as the Biller in my net banking. Why and how did BSE become involved in MF SIPs?

The story so far:

  • BSE (Bombay Stock Exchange) is Asia’s oldest stock exchange, one of the major stock exchanges in India, established in the year 1875, located in Mumbai.
  • BSE has 5,137 companies listed as on 30 Jun 2019 making it the largest in terms of the number of companies listed.
  • The S&P BSE Sensex composed of 30 BSE listed prominent companies in India, serves as a benchmark index.
  • BSE ranks #10 by market capitalization with $2.2 trillion among global stock exchanges, as on 30 Jun 2019.
  • For over 115 years, till the setting up of the NSE  (National Stock Exchange) in 1994, the BSE reigned supreme.
  • NSE launched derivatives in the year 2000 while BSE held back and this single move made NSE the market leader till today in equity cash trading and derivative trading.
  • BSE severely lags NSE in the trading volumes and the resultant lower transaction fees.
  • To boost revenues, BSE kick started a host of new services they clubbed as blue ocean business and they are yielding fruits.
  • BSE caters to all asset classes – equity, mutual fund, currency, interest rate futures, commodities, earning it the title of an universal exchange.
  • Central Depository Services Ltd. (CDSL), associate company of BSE, is one of the two depositories in India.
  • The exchange along with PTC India and ICICI Bank has filed a petition with Central Electricity Regulatory Commission (CERC) for grant of licence for setting up a new power exchange.
  • The BSE IPO took place in Jan 17 and got listed at Rs. 806/- per share, with a face value of Rs.2/- per share.
  • CMP Rs. 527.65/- on NSE, Oct 18,2019
  • In the latest shareholding disclosure, Pabrai Investment Funds holds 2.43% in BSE as on 30 Jun 19.

The Blue Ocean Strategies:

Market share in the new businesses - Source : Company website
Market share in the new businesses – Source : Company website

BSE’s new business initiatives include the BSE StAR MF platform, BSE SME Platform, BSE Bond, a subsidiary India INX ( India’s first International Exchange) and the most recent Startups platform.

BSE StAR MF platform

  • BSE StAR MF platform has become the largest mutual fund distribution infrastructure.
  • AMCs pay service charge for transactions processed on the BSE’s MF platform. 
  • With the introduction of the paperless Internet based SIP (ISIP), wherein BSE is the Biller with the bank, the BSE StAR MF platform is the back-end for the fintech companies serving as financial advisors and sell MFs.
  • Single ISIP mandates can be used across all schemes of different AMCs, the facility is available only on BSE
  • On the BSE StAR MF platform, as on Jun 2019, there are 25,537 mutual fund distributors and 23.9 million registered investors.
  • Leveraging on technology, the BSE StAR MF Platform is yielding exponential returns.

    BSE StAR MF Platform performance -  Source - Company website
    BSE StAR MF Platform performance – Source – Company website

BSE Bond

  • BSE launched a platform for electronic book mechanism – a web based portal for online bidding of private placement of debt securities which are proposed to be listed on exchanges above INR 200 crores.
  •  BSE is the market leader in this business.

BSE SME Platform

  • BSE SME Platform was launched on March 2012.
  • BSE SME IPO Index was launched on December 2012 with 100 as the base. On March 31, 2019 the value of this index reached 1757.83.
  • During FY 2018-19 the SME platform has a market share of over 59.92%.
India INX
 
  • India INX is India’s first international exchange located in Gujarat (GIFT City); operating as a subsidiary of BSE.
  • The exchange offers a single segment approach for all asset classes – equities, currencies, commodities, fixed income securities providing significant cost advantages, favourable tax structure.
  • For global participants, India INX offers an opportunity to trade 22 hours a day

Startups platform

  • BSE has started the Startups platform on December 2018.

Among all the above initiatives, it’s the BSE StAR MF platform that is leading the way in exponential revenues.

Weakness: 

  • BSE has lower turnover in equity cash segment and derivatives; the competitor NSE is the market leader. There is no action in the equity trading segment; which translates to doom for any exchange.

    BSE Market share in the traditional businesses - Source - Company website
    BSE Market share in the traditional businesses – Source – Company website
  • The blue ocean initiatives have to pick up significantly to drive the revenue from operations. The revenue from BSE StAR MF platform for Q1 FY20 was Rs. 119/- mn. which constitutes only 34% of the transaction charges and 11% of revenue from operations.
  • The securities services which includes transaction charges; treasury income and other income like network charges from members constitute 42% of revenue from operations and 28% of the total income – dependent on market activity – low compared to NSE

Investment Rationale:

  • 72% of the total income (Q1 FY 20) is recurring in nature.
    • The securities services – dependent on market activity, constitute only 28% of the total income.
    • Service to Corporates and Data dissemination fees account for 58% of revenue from operations and 40% of total income, is recurring in nature.
    • Income from investments and deposits and Other income which includes rent and training is 32% of total income and is again recurring in nature. 
  • Net profit margin at 25% for Q1 FY20 from consolidated revenue of Rs.1,660/- mn; though reporting a fall of 19.8% in net profit yoy from Rs. 515/- mn to Rs.413/- mn, margins are high.
  • Consolidated revenue was marginally up from Rs. 1585/- mn to Rs. 1660/- mn for Q1 FY20
  • Dividend payout of over 90%; the dividend yield has increased, but not a true picture as the share price has more than halved from its highs after listing.
  • Leveraging on technology, the BSE StAR MF Platform is yielding exponential returns. It serves as the back-end for most of the fintech companies selling MFs.
  • The net margin for the BSE StAR MF Platform revenue is 50%-60%
  • Overall you must understand that our’s is a fixed cost business. We have fixed cost of doing a business and all of that put together, any new business, marginal cost is pretty close to zero.”  CEO, Mr. Ashishkumar Chauhan.
  • Low on debt and currently trading lower than book value
  • P/E(TTM) is 12.56, while the industry P/E is 22.99; while NSE is not listed, MCX India (a commodity exchange) is trading at a P/E (TTM) of 24.96 and IEX (an energy exchange) is trading at P/E (TTM) 27.01.
  • Since it’s listing in 2017, BSE has conducted 2 buy-backs giving a boost to its EPS

Cautiously optimistic, I have purchased the stock and awaiting the Q2 FY20 results out next month.

Till next post, take care !!

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