As BSE navigates regulatory shifts, does its valuation leave room for an upside?

Investors flocked to trade in derivatives (futures and options) to profit from India’s bullish stock market. However, regulatory changes to curb derivatives volume and recent market corrections have slowed trading volumes.

With retail participation cooling off and derivatives trading becoming less accessible, how is BSE Ltd positioned in this shifting regulatory environment. To answer this, Mint’s Profit Pulse analysed BSE’s emerging market segments, which are expected to be big revenue drivers in the coming years.

Trading and clearing services

The Securities and Exchange Board of India’s recent crackdown on speculative trading in the derivatives segment has affected BSE’s trading and clearing services.

Sebi first rationalised weekly index derivative products, allowing exchanges to offer derivative contracts for only one of their indices with weekly expiries. It aims to also reduce excessive trading on expiry days by rationalising weekly index derivatives.

Sebi has also increased the lot size of index derivatives, increasing the contract value of derivatives to a minimum ₹15 lakh from ₹5-10 lakh earlier.

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In addition, Sebi has removed the calendar spread treatment on expiry days, which means offsetting positions at different expiries will not be available on the expiry day, thus increasing margin requirements.

Sebi’s measures have started hurting intermediaries, including brokerages and stock exchanges, which have seen a significant drop in trading volumes.

BSE typically earns about half of its revenue from transaction charges in the derivatives segment. So how will it fare in this changing regulatory landscape?

Benefitting from fewer weekly expiries

Transaction charges for BSE between FY20 and FY24 increased at a compound annual growth rate of 51% to ₹583 crore, driven by new product launches in the derivatives segment and increased activity in the cash market.

According to Nuvama, the cash segment contributed 36.6% of this revenue, and the equity derivatives segment about 24.9%.

In the first seven months of 2024-25 (April-October 2024), weekly equity index option contracts contributed 77.5% of BSE’s equity index option premium turnover, according to Nuvama. In this time, BSE had Sensex and Bankex weekly expiry products.

However, due to regulatory changes requiring only a weekly expiry, BSE retained Sensex derivatives as its only weekly expiry contract, moving the Bankex and Sensex 50 contracts to monthly expiry.

This should have affected BSE’s premium volumes. However, BSE witnessed a 9% growth in premium average daily turnover in December, driven by increased options trading on non-expiry days.

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Motilal Oswal Financial Services expects BSE’s premium turnover to grow at 30% in 2025-26 and 26% in 2026-27, and its transaction revenue to grow by 34% and 26%, respectively, in those two financial years. Since revenue is linked to premium turnover, an increase in premium-to-notional turnover would boost BSE’s revenue.

Moreover, trading volumes of monthly contracts are likely to decline as the expiration day has been consolidated to just one per week across every exchange. However, according to Nuvama, BSE is expected to remain insulated from this as it is still growing in this segment.

Challenges in the cash segment

BSE options’ nominal market share increased to 29.4% in December from 13.8% a year earlier, and its premium market share to 14.6% from 4.8%. Its revenue from equity derivatives surged from a mere ₹16 lakh in the first quarter of FY24 to ₹353 crore in the latest December quarter (the third quarter of FY25).

This growth was a result of BSE’s lower transaction fees, its aggressive outreach to brokers for derivatives enrollment, and NSE reducing its weekly expiry from four to one.

BSE’s market share is expected to increase further as it has shifted its weekly expiry from Friday to Tuesday, which creates a gap between Nifty’s Thursday expiry and Sensex’s new Tuesday expiry.

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Nonetheless, one concern remains: BSE’s market share in the cash segment declined to 6% in December from 8.5% at the end of 2023. BSE is actively taking steps to increase institutional participation, which could increase market share in the segment.

Also, rising household incomes and a preference for financial savings are expected to drive substantial growth in trading and clearing services. BSE is focusing on innovating and launching products in various segments to take advantage of this favourable environment.

Lower clearing charges = Higher margins

Exchanges pay clearing charges to clearing corporations for settlement of trades based on the number of contracts traded. Higher clearing charges may reduce exchange margins, while lower charges aid in margin expansion.

Sebi’s new rule to increase the contract size to ₹15 lakh will reduce the number of traded contracts. This is expected to reduce BSE’s clearing and settlement charges per every 10 million equity index options turnover to ₹734 in FY26 from ₹2,013 in FY24, as per Nuvama.

This massive reduction will likely aid BSE’s margins on earnings before the interest, tax, depreciation and amortization (Ebitda margins).

The co-location advantage

BSE initially launched its derivatives segment with 100 racks for trading firms to house their servers. However, these have been consumed due to strong demand. BSE’s management is now looking to build more racks to meet the growing demand.

Racks are physical server cabinets or enclosures that house a trading firms’ servers within an exchange’s data centre. These provide low-latency access to the exchange trading infrastructure, allowing firms to execute trades faster than competitors that are located farther away.

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BSE could attract institutional investors by creating more racks, thereby increasing trading volumes for long-term options. This could lead to higher yields and lower clearing and settlement costs.

BSE does not charge for orders in this segment but levies a fee to recover the cost of the racks, which aligns with rents charged by the industry.

BSE StAR set to thrive

BSE leads the mutual fund distribution space among exchange-based platforms through its BSE StAR mutual fund distribution platform, holding an 85% market share in terms of transactions in FY24.

BSE StAR has witnessed exponential growth, with orders growing at a CAGR of about 48% to 411 million in the five financial years ended FY24. It processed about 146 million transactions in FY24, a 55% increase over the previous year.

This growth was led by increased mutual fund penetration, with about 165 million investors using the platform for placing orders and systematic investment planning.

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BSE StAR’s revenue growth has remained steady so far in FY25 as well, surging 97% to ₹170 crore in the first nine months of the financial year from ₹86 crore in the corresponding year-earlier period. Orders grew 87% to ₹48 crore.

The platform has high operating leverage and will benefit as the number of investors increases, contributing meaningfully to BSE’s total revenue and margin growth. Moreover, BSE is also launching StAR MF 2.0 to strengthen its position.

BSE acquires majority stake in Asia Index

BSE purchased a 50% stake in Asia Index Pvt. Ltd (AIPL) from S&P Dow Jones Indices (S&P DJI) in May last year, making AIPL a wholly owned subsidiary. AIPL, the erstwhile joint venture between BSE and S&P DJI, is best known for managing the Sensex index.

In 2024, AIPL launched five indices—BSE Select IPO, BSE Sensex Sixty, BSE Power & Energy, BSE Internal Economy, and BSE Capital Markets & Insurance—designed to support passive investment strategies and benchmark portfolio management services and mutual fund schemes.

BSE is experiencing a surge in demand for data subscriptions, especially for indices such as the S&P BSE 500, BSE Bankex and BSE Sensex. Under market data services, institutions, traders, and financial firms subscribe to real-time or historical market data.

APIL’s revenue increased 21% year-on-year to ₹65 crore in FY24, while its profit before tax increased 31% to ₹20.5 crore. Revenue from this segment is expected to grow at the current pace as demand for BSE’s data for analysis rises, according to Motilal Oswal Financial Services.

Catering to companies

BSE also provides services to corporations and charges annual listing fees (equity, debt, and mutual funds), listing processing fees, and other listing fees. It also offers book-building software, buyback facilities, reverse book-building software, etc.

The revenue from this segment is directly linked to the number of listed companies and the volume of corporate actions such as initial public offerings (IPOs), rights issues, and other listings.

BSE’s revenue from this segment grew at a steady pace of 8% CAGR over five financial years to ₹279 crore in FY24.

How BSE’s financials stack up

BSE’s revenue grew at a 20% CAGR over the previous five financial years to ₹1,618 crore in FY24, while its profit rose by 36% to ₹410 crore. Its Ebitda jumped 4.8% to ₹628 crore in FY24, with a margin of 39%, driven by strong profit growth that was propelled by record trading volume and the resurgence of BSE’s derivatives segment.

BSE also had a strong return on equity (RoE) of 23% in FY24, up from 8% in FY23. There is room for BSE’s RoE to grow as its profitability rises, given its asset-light business model.

Does BSE’s valuation justify an investment?

The BSE stock is trading at a price-to-equity valuation of 74x, which is significantly higher than its 5-year average P/E of 37.5x. While it has no relative peer, BSE is also trading at a premium of about 39% to the Multi Commodity Exchange of India’s (MCX) P/E of 54x.

BSE’s valuation is undoubtedly rich. However, Nuvama believes BSE’s valuation is reasonable considering the industry’s duopoly nature.

Motilal Oswal Financial Services believes BSE will compound its revenue and profit at 44% and 74%, respectively, during FY24-FY27, and has assigned a target share price of ₹6,500 apiece based on an estimated P/E of 45x on estimated earnings per share in September 2026.

However, this is a cyclical business, and BSE’s performance depends on capital market activity. Hence, any macro slowdown or prolonged market correction will significantly impact BSE’s performance. Moreover, this business is also primarily protected by regulations, so any adverse regulation will affect it as well.

 

For more such analyses, read Profit Pulse.

 

Note: Throughout this article, Profit Pulse has relied on data from www.Screener.in and Tijorifinance. Only in cases where the data was not available have we used an alternative but widely used and accepted source of information.

The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for education purposes only. 

Madhvendra has been a passionate follower of India’s equity market for over seven years and is a seasoned financial content writer, sharing his opinion on publicly listed Indian companies and macroeconomics.

Disclosure: The writer does not hold the stock discussed in this article.