by In this article, we will do a fundamental analysis of BSE Ltd, as usual, we will cover the company and the management of BSE Ltd, its competitors, its key risk, future growth prospects, and financials based on the analysis we will decide if the BSE Ltd is fundamentally strong or not then we will do the valuation analysis of BSE Ltd to decide if it is worth investing in the company at current levels or not.
Disclaimer: This article is only for educational purposes. I do not recommend buy or sell so please consult your advisor and do your own research before investing.
Introduction
Established in 1875, BSE Ltd. (formerly known as Bombay Stock Exchange Ltd. and established as “The Native Share and Stock Brokers’ Association”) is one of Asia’s fastest stock exchanges, with a speed of 200 microseconds and one of India’s leading exchange groups.
BSE is a corporatized and demutualized entity, with a broad shareholder base that includes two leading global exchanges, Deutsche Bourse and Singapore Exchange, as strategic partners.
BSE provides an efficient and transparent market for trading in equity, debt instruments, derivatives, and mutual funds. It also has a platform for trading in equities of small-and-medium enterprises (SME). Over the past 45 years, BSE has facilitated the growth of the Indian corporate sector by providing an efficient capital-raising platform.
More than 5000 companies are listed on BSE, making it the world’s top exchange in terms of listed members. The companies listed on BSE Ltd. command a total market capitalization of₹ 6,850.18 Cr as of September 2021. It is also one of the world’s leading exchanges for Index options trading.
The Bombay Stock Exchange is an Indian stock exchange located in Mumbai at Dalal Street. The BSE is the world’s 10th largest stock exchange with an overall market capitalization of more than 2.2 trillion dollars.
It was established in 1875 and is Asia’s oldest stock exchange initially it was only a native share and stockbrokers association but now it has diversified into many other financial services businesses.
As the ratings are based on long-term past performance they are relevant for at least three years in the future until FY2022.
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Fundamental Analysis of BSE Ltd
Fundamental Analysis of BSE Ltd is differentiated into different categories are as follows, all units are in millions except ratios and per share data.
Economic Model
- The company operates in the financial services sector where market dominance comes through scale reach and variety of product offerings directed towards target segments.
- BSE is the oldest stock exchange in India and has around 5439 plus companies listed on it.
- It is the second-largest stock exchange in India after the NSE that is National Stock Exchange.
- Today BSE provides an efficient and transparent market for trading in equity, currencies, debt instruments, derivatives, and mutual funds.
- BSE SME is India’s largest SME platform which has listed over 250 companies and continues to grow at a steady pace.
- Star MF is India’s largest online mutual fund platform which processes over 27 plus lock transactions per month and adds almost two plus lock new sips every month.
- Bse bond is an electronic book mechanism process for the private placement of debt securities.
- It is the market leader with more than Rs 2.09 lakh crore of fundraising from 530 issuances.
- This overall indicates the wide variety of services that the company offers which makes it one of the crucial elements of the Indian financial system.
- Hence this category gets four stars in BSE fundamental analysis.
Business Model and Management
- The business model of the company is such that it operates across four major verticals namely trading and clearing distribution services to corporate and other business
- In the first segment, the company is involved in trading and Clearing of Equity, Debt-Equity, Derivatives, Commodity, Interest Rate Futures SME, Startups, etc.
- Distribution services include mutual funds, book building services new bond platform, etc.
- Incorporate services, it is involved in the listing of equity debt and mutual funds for some of the largest corporations in the country.
- Indian clearing corporation limited is a wholly-owned subsidiary of BSE and acts as the central counterparty to all trades executed on the BSE trading platform.
- It also provides full novation and guarantees the settlement of all bonafide trades executed.
- BSE institute ltd is another fully owned subsidiary of BSE and runs one of the most respected capital market educational institutes in the country
- BSE popular equity index the SNP BSE.
- Sensex is India’s widely tracked stock market benchmark index
- It is traded internationally on the forex as well as leading exchanges of the BRCS nations that are Brazil Russia, China, and South Africa.
- Overall the business model is well diversified for the company.
Leadership
- Mr. Ashish Kumar Chauhan is the managing director and CEO of BSE.
- he is one of the founders of India’s national stock exchange NSE where he worked from 1992 to 2000.
- he represents BSE as the chairman on the executive board of the South Asian Federation of Exchanges.
- Mr. Nyan Mehta is the CFO of the company and has previously worked at the multi-commodity exchange of India.
- Overall the management is qualified and has no previous record of any principal-agent conflict.
- Hence this category gets five stars in the fundamental analysis of BSE.
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Company Financials
Company Financials of BSE LTD are as follows:
Growth Ratio
- The third growth ratio the company has a weak financial position due to the nature of its business.
- The clearing and trading business already has a cap on services charged.
- The mutual fund and IPO business are highly competitive and the company does not have a significant commissioning power.
- The working capital is also very high and exceeds the revenue the CAPEX is mostly used up in business activities and technology.
- Overall the company does not have a healthy growth trajectory.
- Therefore this category gets three stars in the fundamental analysis of BSE.
Profitability Ratios
- The margins have been fluctuating over the years and the company also does not have significantly high profitability in any of its businesses.
- The gross margin has also declined due to the increasing cost of services delivered.
- This also indicates that the company is not able to pass down its increasing costs to its customers.
- This overall shows weak profitability for the company.
- Therefore this category gets two stars in the Fundamental Analysis of BSE.
Cash Flow Ratios
- The net income margin is fluctuating and the CAPEX as a percentage of sales has almost remained flat.
- The free cash flow as a percentage of net income has been fluctuating and the free and operating cash flow growth has seen a slight improvement.
- This overall shows a stable cash flow position for the company.
- Therefore this category gets three stars in the fundamental analysis of BSE.
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Liquidity and Solvency Ratios
- The company has a small interest-bearing debt in its capital structure.
- The financial leverage and debt to equity ratios are hence flat over the years.
- The company does not have any significant concerns about its solvency.
- The current ratio is above the minimum threshold of one which indicates a surplus of current assets over current liabilities.
- The quick ratio has also improved significantly over recent years.
- This overall indicates a good liquidity position for the company.
- Therefore this category gets four stars in the fundamental analysis of BSE.
Efficiency Ratios
- The business efficiency has deteriorated over the years due to the increasing scale and competition in various lines of business for the company.
- The payables period has declined from 190 to 88 days and the receivable period has almost been stable.
- The cash conversion cycle has increased from minus 150 days to minus 51 days but it is still negative.
- This overall shows weakening cash flow and working capital management.
- Therefore, this category gets three stars in BSE fundamental analysis.
ROE and ROCE Analysis
- If you look at the profitability of the company.
- The latest ROE for FY21 is 4.47% and ROCE is 5.35%.
- The leverage ratio and asset turnover ratio have been flat over the years.
- The operating margin is very small and declining over the years.
- The interest burden ratio is high due to low-interest payments and is expected to remain constant in the near future.
- The return on equity overall is stable due to interest burden and tax efficiency.
- Therefore this category gets three stars in the fundamental analysis of BSE.
- If you look at the shareholding pattern.
- Its promoter has more than 0% stake in the company.
- Foreign institutions hold a 10.1% stake.
- Domestic institutions hold 4% stake.
- General public holds a 10.64% stake.
Strengths and Limitations
Strengths and Limitations are as follows:
Strengths
- Company has maintained a good ROA of 5.23% in last 3 years.
- The company is trading at 1.18 times the book value.
Limitations
- Promoters shareholding is low at 0%.
- PAT margin has shrunk by 15.42%.
- The company has delivered poor profit growth of -5.08% over past 3 years
- The company has delivered poor Operating Income growth of -5.08% over past 3 years.
- Promoter holding has decreased from 29.02% to 0%.
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Future Growth Prospects
- Some insights for the coming years from the analysis management discussions and conference calls are as follows.
- The company has a market share of 73% in listed securities, 33% in currency derivatives 20% in interest rate derivatives.
- 38% in fixed income and 7% in equity cash segment.
- However, are the red ocean businesses for the company and each segment has its competitors.
- The blue ocean businesses include star MF, SME, BSE, Bond, etc.
- All of them have more than 50% market share.
- The company can benefit from the interoperability of the clearing corporations.
- This can lead to an increase in arbitrage turnover due to the clearing of all trades by one clearing corporation.
- The implementation of the best price execution software by various brokers.
- BSE has to reduce its stake in CDSL by 15% over the next three years in order to comply with regulations.
- As part of this, it monetized a 4% stake in CDSL in November 2019.
- The company is getting strong traction in star MF.
- The total number of mutual funds registered now stands at 40 with around 28 million registered.
- Investor’s realizations for the platform remain flat but the company is able to charge higher because of the superior services they offer.
- Recently a subsidiary of BSE get approval from RBI for TReDS ( Trade receivable discounting system) for MSME as reported by zee business.
- Overall the company has weak fundamentals but can see some improvement in revenue growth and balance sheet positions due to financial inclusion and formalization of the economy.
- The shares however are not expected to attract higher multiples in the near future.
- Therefore this category gets three stars in BSE fundamental analysis.
Valuation
- The company has started trading at higher multiples in recent years due to some fundamental industry factors like increasing financial awareness, inclusions rising per capita income, etc.
- Overall has increased the addressable market size for the company due to the variety of its offerings.
- The industry is getting highly price competitive and margins are declining.
- There might not be any significant increase in the net income for the company in the near future.
- The BSE Ltd is currently trading at a price of 1,184 at a PE of 52.27.
- Although at current levels It is looking slightly overvalued I think that BSE Ltd has a bright future and it will continue to grow at a very good rate. So it is worth investing in the company.
- A better strategy would be to invest periodically or buy on dips.
- Therefore this category gets three stars in BSE fundamental analysis.
The overall rating is arrived at by taking the average of the above 10 category ratings and round it up if it is above 0.5 and rounded down if it is below 0.5 overall fundamental rating BSE shares 3.2 5. therefore it is a three-star stock.
Conclusion
Overall if we conclude BSE ltd has an excellent business and its management, strong competitive advantage and solid financial, and a very bright growth prospect which makes it a fundamentally super strong company.
It is currently available at a fair valuation. What is your take on BSE Ltd have you invested in it do let me know in the comment box. I hope you find this analysis useful, and if yes please share it with your friends and family.
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