BSE is likely to contest the 'Sell' report issued on the exchange by foreign research firm Investec on December 29. BSE's large shareholders have complained to the exchange that Investec's report has many factual inaccuracies in its analysis, sources told BusinessLine . BSE’s share price witnessed sharp volatility ahead of and after the Investec report was published.

Shareholders have pointed out to BSE that Investec analysts have undervalued BSE's holding in Central Depository Services (CDSL) by nearly ₹2,800 crore even after applying a 25 percent holding company discount. The shareholders said it impacts BSE's SOTP (sum-of-the-parts valuation) by ₹462 per share considering which BSE's price target could get revised to ₹2182 instead of ₹1720 given by Investec.

Shareholders have told BSE to ask Investec to correct its anomalies or withdraw the report since it was wrong on basic facts, the sources said.

The Investec report had lowered BSE's price target compared to its current market price on the logic that BSE was at the cyclical peak of its valuations and earnings. At around ₹1,920, the BSE has a total market-cap of ₹8,600 crore and a price-to-earnings (PE) multiple of 48.

"BSE currently trades at a significant premium to global peers, most of which are market leaders in their respective markets, making current valuations untenable. We increase our estimates for FY (financial year) 2023e and value the company using SOTP to arrive at a target price of ₹1,720 and downgrade to ‘Sell’. Revise FY22e EPS by 110 per cent to reflect the higher volumes," Investec report said.

BSE shareholders have asked the exchange to challenge Investec's logic on SOTP valuations calling it inaccurate.

In the listed Indian exchange space the Indian Energy Exchange, which is much smaller in terms of volumes and business mix and segments than the BSE, enjoys a PE of 83 with a market-cap of over ₹22,600 crore. Commodity exchange MCX had a PE of 52 and market-cap of ₹8,092 crore. In the unlisted space, the NSE enjoys a PE of more than 70 and a market-cap of more than ₹1 lakh crore considering the past few private deals. BSE promoted CDSL had a market-cap of more than ₹15,000 crore and a PE of 61. BSE holds a 20 per cent stake in CDSL. On November 23, AUM Capital had said that BSE's stake in CDSL was valued at ₹3,140 crore at the then prevailing current market price.

Shareholders have further told BSE that Investec was stealing the credit from the exchange for the profit growth that it has registered in the past several quarters and attributed the rise in the share price mainly to the impending NSE listing.

Growth

The Investec report notes that BSE has witnessed more than 54 per cent year-on-year growth in revenues for first half of FY 2022 and 65 per cent growth in EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation. But it also says that valuations have re-rated substantially in anticipation of NSE listing.

"In addition to the fact that earnings have increased substantially, BSE has benefitted due to the sharp rerating of its 20 per cent stake in CDSL (up 6.5x from lows of Mar’20) and re-rating of its core EBITDA multiple from 15x to 35x and headline EBITDA to 25x in anticipation of listing of NSE at closer to 35x multiple," Investec said.

The report also says that over the last two years, BSE seems to have gained 10 per cent market share in both equity and commodity derivative markets over incumbents NSE and MCX. "However, most of this is the notional value of options traded in deep out of the money contracts where the actual premium traded/capital at risk is still very low. We believe this is not a true representation of the actual market activity and liquidity, thus restricting BSE’s ability to monetise these volumes," Investec said in justifying its sell rating on BSE.

In November AUM Capital had said that BSE continued to enjoy debt-free status and its dividend payout ratio was pretty strong. In second quarter of FY22, its revenues flourished 50.5 per cent to ₹189 crore and operating profit jumped 87 per cent to ₹90 crore underpinned by strong operating leverage leading up to an invariable growth in consolidated net profit to ₹65 crore.

Emails sent to Investec remained unanswered and efforts to reach its analysts on phone numbers given in the research report did not yield results. BSE refused to comment.

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