BSE Surges Globally, But Concerns Grow Over Valuation

The Bombay Stock Exchange (BSE) has become the top-performing listed exchange globally, driven by an impressive surge in its stock price and a record rise in investor participation. Over the past three years, BSE has experienced a dramatic rally, with its stock soaring 680%. The exchange’s success has been fueled by renewed interest in its futures and options contracts, as well as a significant increase in equity market participation.

In 2024 alone, BSE’s stock price has surged by 150%, significantly outpacing the 23.6% increase in the Nifty Midcap 100. As a result, BSE has emerged as the most expensive exchange in the market, with its price-to-earnings (P/E) ratio climbing to 91 times its trailing 12-month earnings and 63 times its one-year forward earnings.

In comparison, other major global exchanges are trading at far lower multiples. The London Stock Exchange, which has gained 53% over the past three years, is trading at a P/E ratio of 32 times estimated earnings for FY25. Similarly, Deutsche Boerse and Cboe Global Markets are trading at P/E ratios of 22 times, despite seeing gains of 43% and 48%, respectively.

However, analysts are raising concerns about BSE’s elevated valuations. Regulatory changes in India, particularly the Securities and Exchange Board of India’s (SEBI) new framework for index derivatives, could have a significant impact on market volumes. According to Jefferies, this could lead to a 25% drop in industry volumes in the second half of FY25, as the removal of weekly products, which account for 40% of market premiums, begins to take effect.

The brokerage firm has cautioned that BSE’s current stock price may be running ahead of optimism, with risks such as increased regulatory pressure and potential declines in market volumes outweighing the potential for further gains. “At current prices, the risk-reward has turned unfavorable,” Jefferies stated in a note to clients.

In December, BSE saw a 20% decline in notional volumes, with the exchange eliminating its weekly Bankex contracts and facing lower premium realizations. Around 95% of BSE’s derivatives volumes occur on expiry day, which typically generates lower premiums. Analysts at HDFC Securities believe the full impact of these regulatory changes will become clear in January 2024, when expiry shifts to Tuesday.

Despite these challenges, some analysts remain optimistic about BSE’s long-term prospects. Motilal Oswal recently upgraded its price target for BSE to Rs 6,500, citing factors such as market share expansion driven by smaller lot sizes for derivatives contracts, staggered expiries that differ from competitors, and aggressive outreach to brokers.

As of Monday, BSE shares ended flat at Rs 5,548 on the NSE.