BSE Limited IPO: Should you subscribe?
The initial public offer of Bombay Stock Exchange (BSE) Limited, or BSE Limited, opens today for subscription. The exchange aims to raise up to Rs 1,243 crore from the IPO, which is priced at Rs 805 – 806 apiece. The shareholders will sell 15.43 million shares, estimated to be around Rs 1,243.44 crore at the
Mon, 23 Jan 2017
The initial public offer of Bombay Stock Exchange (BSE) Limited, or BSE Limited, opens today for subscription. The exchange aims to raise up to Rs 1,243 crore from the IPO, which is priced at Rs 805 – 806 apiece. The shareholders will sell 15.43 million shares, estimated to be around Rs 1,243.44 crore at the higher end of the price band.
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Bids for the issue can be made for a minimum of 18 shares and in multiples of 18 thereafter. Since rules do not permit self-listing, the stock will be listed on the National Stock Exchange (NSE).
Last week, BSE Limited raised Rs 373 crore by allocating shares to anchor investors at offer price of Rs 806 (upper end of the price band) per equity share.
Anchor investors, according to a BSE release, include Capital World, Sundaram MF, GP Emerging Markets, Massachussets Institute of Technology, University of Notterdam Du Lac, The Washington University, Calamos, IDFC MF, ICICI Pru MF, Goldman Sachs Asset Management, Citigroup Global Markets Mauritius Private Limited, Kotak MF, Bajaj Allianz, Principal MF, Eastspring, Canara HSBC OBC Life, HDFC MF, Reliance Capital Trustee Co Ltd, Birla Insurance, L&T MF, Kuwait Investment Authority Fund 224, FIL Investment (Mauritius) Ltd, DSP Blackrock Alternative Investment Fund, Birla Sun Life Trustee Company Pvt Ltd and SBI MF.
So, should you subscribe to the issue? Here is a quick compilation of what the leading research houses and brokerages across the country suggest.
BSE derives its revenues from transaction charges, depository charges, corporate fees, which account for 13%, 18% and 21% of the revenues respectively. In addition to this, it also earns revenues from data selling and treasury income from clearing and settlement funds accounting for 3% and 5% of the revenues, respectively.
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As per SEBI directive BSE will have to reduce its stake in CDSL from current 52%. Post this, BSE will not be able to consolidate CDSL revenues, but will be able to include proportionate profit as share of profit from associates. However, looking at the under penetration of Equity market in India, we believe a lower stake of 24% will also be able to create value for BSE in the long run. As per the RHP, the divestment of CDSL would have impacted the top line and bottom-line by 20.5% and 16.4% based on FY16 financials.
Its holding in CDSL and Clearing Corporation will continue to be value accretive in the long run. At the issue price, the stock is offered at 20.6x its FY2017E annualised EPS, which we believe as reasonably priced and hence, recommend SUBSRIBE to the issue.
Though BSE was the first stock exchange in Asia, incorporated in 1875, it remains behind NSE and had market share of 15% in cash segment (as on FY16) and negligible presence in the derivative segment.
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We feel with a market-cap of Rs 4,326 crore at the upper end of price band and free cash of Rs 2,681 crore, the enterprise value of Rs 1,646 crore is attractively priced considering the optional value of success of any new initiative. At the upper band of Rs 806, the BSE stock is being offered at 15.9x EV/EBITDA and 26.7x PE of H1FY17 annualised earnings. We recommend subscribing to the issue.
With capital market facing headwinds in last few years, turnover has been volatile especially in equity market and hence increasing innovative products are key to improve turnover and increase market share. BSE has been able to manage to introduce new products on its platform like derivatives especially in currency & interest rate, new exchange indices like the Shariah, IIEX in GIFT City and global tie-ups.
BSE’s EBITDA margins of +40% remain best in class on back of steady revenue momentum and better management of treasury. Even excluding the investment income EBITDA margins are at 22% in H1FY17. It also has been gracious in dividend payout which stands at 80% of profits. BSE derives most of value in its investments made in subsidiaries like CDSL, IIEL among others. BSE on consolidated basis at upper band of issue prices trades at 35x FY16 EPS, 23x CEPS & 1.8x BV which is fairly valued in our view and hence we recommend to Subscribe for long-term gains.
The valuation looks attractive compared to 43xFY17E & 31xFY18E estimated Bloomberg consensus estimates of MCX India Ltd. We believe that well-integrated and diversified business model coupled with robust financial strength will help BSE to invoke maximum investors’ interest.
Further, the BSE shareholders will also get incremental benefit from the listing of Central Depository Services (CDSL), in which BSE will offload 26.1% stake (out of 50.1% stake) in IPO through Offer for Sale. As we believe that the IPO is attractively priced, we therefore recommend SUBSCRIBE.
We believe that BSE Ltd provides good investment option in the form of 1) Right business and 2) Right valuation. Right business: First listed multi-platform stock exchange with strong business model, management, corporate governance, balance sheet and cash flow. Right valuation: We believe that the IPO has been attractively priced with PER of 35x on FY16 reported EPS vs. 56x for Multi Commodity Exchange (MCX IN) and cash per share of Rs 512 (64% of issue price). Further, there is likely to be value unlocking through listing of CDSL where BSE Ltd currently has 50.05% stake.
We believe that the stock exchange business has significant entry barriers. While BSE Ltd has significantly lower market share vs. the National Stock Exchange, it is currently the best option in the listed space.
At the higher price band of Rs. 806 per share, BSE’s share is valued at a P/E multiple of 25.6x (to its restated FY16 EPS of Rs. 31.5), which is in line with the global listed peer average of 25.1x.
Post the IPO of CDSL, BSE stake will reduce to around 24% and CDSL will cease to be the subsidiary of BSE. Without CSDL consolidation, BSE’s top-line and bottom-line are likely to get reduced. However, we are of the opinion, that growth across the existing business and additional revenue source coming in for BSE, are expected to partially offset the impact from the disinvestment of CDSL.
Over FY12-16, BSE has maintained a dividend payout ratio of around 35% and has guided to maintain the same in future. This might be one of the investment rationales for the investors. Considering the business outlook and attractive valuation demanded by the company, we recommend a “SUBSCRIBE” rating for the public issue.
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