Indian Exchanges: Strong operational performance

8 Jan 2024 , 11:46 AM

Indian Exchanges, across asset classes, have seen strong volume growth in Q3FY24. Analysts of IIFL Securities note that BSE (second largest equity exchange) continues to gain market-share in the Equity Option segment, with the launch of Bankex contract. Its Derivative segment is likely to be profitable with the tariff increase taken in Nov’23. MCX (largest commodity exchange) too, is seeing traction in the Option segment; however, the onetime technology pay-out of Rs1.25bn to 63 Moons is likely to report a loss in Q3. While IEX (largest spot power exchange) is seeing a volume recovery driven by strong power demand and favourable regulatory change. Based on Q3 operational performance, we upgrade BSE’s FY25-26 EPS by 5-7%, and maintain MCX and IEX estimates. Analysts of IIFL Securities increase TP across exchanges, as they roll over target multiple (no change) to FY26 EPS. Maintain their positive view on BSE and MCX. On IEX, though analysts of IIFL Securities see an upside in the near term, given ongoing volume growth, there are concerns of uncertainty around the market coupling regulations. 

BSE: Equity Derivatives turns profitable; upgrade estimates: 

In Q3FY24, analysts of IIFL Securities estimate BSE’s reported profits to grow sharply – up 161% YoY and 12% QoQ to Rs1.35bn, driven by: 1) Strong volume growth in the Equity segment (cash + derivatives – aided by launch of Bankex option contracts). 2) Tariff hikes in the Equity Option segment (blended tariff estimated to increase by ~5x). BSE’s Notional Option T/O grew by 2.5x QoQ to Rs46.2trn and its market share (MS) jumped by 800 bps QoQ to 12.1%. On the Option Premium (relevant for revenues) – the ADTO grew by 230% QoQ to Rs25.5bn and MS has increased by 300bps QoQ to 4.3%. Post the tariff increase, analysts of IIFL Securities expect the Options segment to turn profitable (revenues of Rs600mn and Ebitda of Rs150mn); however, margins are likely to be lower than other segments. In Equity Cash – BSE’s ADTO is up 57% YoY to Rs66bn; gaining MS by 20bps YoY to 7.6%. Analysts of IIFL Securities upgrade their FY24-26 EPS by 5-7% to account for strong operational performance. They increase their SOTP-based TP to Rs2,500 and maintain BUY. 

MCX: Strong operational performance; final payment to 63 Moons to weigh on Q3 profits: 

In Oct’23, MCX successfully migrated to the new trading platform allaying concerns around business uncertainty. Volume growth, too, has remained strong with option volumes growing by 144% YoY and 10% QoQ to 945bn ADTO. The premium option turnover grew faster QoQ (+23%) as premium-tonotional ratio improved from 1.84% to 2.05% QoQ. Resultantly, MCX revenues are likely to grow by 28% YoY to Rs1.8bn; still, the company is likely to report a loss of Rs166mn. The loss is on account of: 1) Final payment to 63 Moons of Rs1.25bn. 2) Increase in costs due to additional SGF contribution and depreciation on capitalisation of new technology platform. Analysts of IIFL Securities value MCX at 35x FY26 EPS and reiterate BUY with TP of Rs3,375 

IEX: Volume recovery is a key positive; uncertainty around regulatory risk a dampener: 

IEX reported 14% YoY growth in power volume in Q3FY24 on strong underlying demand and favourable regulatory changes. Post the change in GNA rules, volumes have started to shift from TAM/bilateral market to DAM segment, where IEX enjoys 100% MS. Resultantly, IEX’s MS jumped by 10ppt to 91.5% in Q3. Analysts of IIFL Securities estimate Q3FY24 profits to grow by 22% YoY to Rs871mn, driven by recovery in power and REC volumes (up 17% YoY on combined basis). They expect volume growth to continue in the near term, especially given the impending Union Elections. However, uncertainty around marketcoupling regulation is a key overhang. Analysts of IIFL Securities value IEX at 25x FY26 EPS, with TP of Rs140 and maintain ADD.