BSE Shares Plunge 5% Following Jefferies’ Downgrade to Underperform: Key Factors Explained.

Shares of BSE experienced a significant decline, dropping as much as 5% to a low of Rs 3,283 following a downgrade by Jefferies. The brokerage has shifted its rating from Underperform to Hold, and notably reduced its target price from Rs 3,520 to Rs 2,940, implying a 16% downside from current levels. Jefferies has pointed out several risks to BSE’s revenue model, particularly emphasizing the potential impact of increased Securities Transaction Tax (STT), the Reserve Bank of India’s (RBI) revised bank guarantee norms, and concerns around the Closing Auction Session (CAS), all of which could adversely influence domestic proprietary traders who make up approximately 50-60% of the BSE’s equity options turnover.

Despite a bullish consensus on Sensex, Jefferies noted that BSE’s market share on expiry days has become comparable to that of the NSE, indicating challenges in capturing additional market presence outside of the T-0/T-1 trading days. Furthermore, the average daily turnover of Options (ADTO) for BSE has decreased by 12% in August compared to July. The report also identified a notable decline in ADTO during the second week of CAS, underscoring the negative trend in trading activity, which raises questions about sustained volume growth moving forward.

Jefferies has adjusted its EPS estimates for BSE for FY27-FY29 downward by 5-12%, reflecting expectations of decelerated ADTO growth compounded by increasing clearing costs. Additionally, the potential flatlining of BSE’s market share in the upcoming fiscal years could introduce further downside pressures of 2-5% on earnings. With the revised price target now set at Rs 2,940, the valuation multiple has been adjusted to 34x September 2028 estimated core EPS, which is below the previously anticipated fair multiple, reflecting growing anxieties surrounding turnover growth.

In the wake of these challenges, BSE has been proactive in executive appointments, entrusting Saurabh Shukla and Gopalan S. Raghavan with critical operational and regulatory functions. To mitigate revenue pressures, the exchange may consider increasing options and messaging fees, which could positively impact earnings per share (EPS) and profitability after tax (PAT). The company’s recent Q1 financials reflected robust growth, with a 62% year-on-year increase in net profit and a 63% rise in revenue from operations, emphasizing its potential for resilience even amid broader market challenges, yet investors will closely monitor how effectively BSE can leverage these strengths to navigate evolving market dynamics.

Source: The Economic Times

(Expert Note: This report was prepared by the Wealthova team.)