Jefferies Downgrades BSE: 16% Downside Seen

Jefferies has downgraded BSE Ltd to ‘underperform’ from ‘hold’, setting a new price target of Rs 2,940. This represents a 16% reduction from its previous target of Rs 3,520 and implies a 16% downside from current levels.

The brokerage attributes this revised outlook to a “triple whammy” of factors impacting BSE’s revenue. These include a hike in the securities transaction tax (STT), stricter bank guarantee norms from the Reserve Bank of India (RBI), and the introduction of the Closing Auction Session (CAS).

Proprietary Traders Face Revenue Pressures

Domestic proprietary traders are a significant force in the market, contributing 50-60% of equity options notional turnover. Conversations with futures and options traders suggest that the new Closing Auction Session is leading to higher losses for these crucial participants.

Consequently, BSE’s options average daily turnover (ADTO) experienced a 12% month-on-month decline in August. While the RBI’s tightened bank guarantee norms are not expected to have an immediate impact, they could reduce premium turnover by up to 10% over the next year.

Revised Market Share and Earnings Estimates

Jefferies expressed concern that current consensus estimates for BSE’s options ADTO in FY27 and subsequent years may be overly optimistic. The brokerage believes these estimates are pricing in market share gains for the Sensex that might not materialise at the anticipated pace.

A slowdown in BSE’s market share gains outside of T-0 and T-1 days has been observed, with ADTO remaining below Rs 27,000 crore for the past three months. This trajectory led Jefferies to cut its FY27-29 earnings per share (EPS) estimates for BSE by 5-12%, reflecting slower ADTO growth expectations and increased clearing costs.

Navigating Management Transition and Growth Levers

The report also highlighted a pending management transition, as BSE’s managing director and chief executive officer approaches the upper age threshold in June 2027. Despite potential resistance to SEBI’s proposal to raise the age limit, BSE has proactively appointed two executive directors to critical operational and regulatory roles.

BSE possesses potential levers to offset some of this revenue pressure. Raising option fees could add 6-7% to EPS, while increasing messaging fees for its colocation facility might contribute 8% to both EPS and profit after tax.

However, Jefferies cautioned that investors might be overvaluing volume-led growth compared to the more stable, fee-based revenue levers. This suggests a need for careful consideration of future growth drivers for the exchange.