BSE: A Mutlibagger in Making?

Recently, there's been a lot of buzz about a growing trend in India. You might have noticed news articles talking about a surge in the number of new Demat accounts being opened. Basically, these accounts are like digital lockers where people store their stocks and investments.

After the COVID-19 pandemic, more everyday folks started getting into the stock market game. With the market doing well, the option to work from home, and better internet access, it became easier for people to start investing. Many were looking for an extra source of income, and investing seemed like a smart way to go. This shift in the economy is being driven by regular people, not just big investors.

According to the latest numbers from NSDL & CSDL, the number of these Demat accounts in India has skyrocketed. Just in November 2022, 18 lakh new accounts were added, bringing the total to a whopping 10.6 crores. That's more than double what it was in March 2020!

Additionally, families in India have been pouring their money into mutual funds. According to RBI, there was a 2.5 times increase in investments in the last fiscal year. Over 10 million new investors jumped on board, pouring a total of ₹1.2 trillion into the market.

Surprisingly, this investing spree isn't just happening in the big cities. Smaller cities and towns are also catching on, with more than half of the new investors coming from outside the top 50 cities.

This trend is changing the way Indian households think about their savings and investments. It's like a powerful wind pushing the Indian stock market forward. Today, we'll be talking about a company that's right in the middle of this exciting change. It's like a key player in this transformation of the way people in India save and invest. Get ready to learn more!

BSE

BSE (formerly known as Bombay Stock Exchange Ltd.) was established in 1875. BSE owns and operates the first stock exchange in Asia. It is the 10th largest stock exchange in the world in terms of market capitalization and has the highest number of listed companies globally, i.e. 5477 as of 31st March 2021.

Though India has several exchanges, the Indian exchange business is a duopoly with the BSE and NSE being the two big players. BSE is the oldest exchange and has more companies than NSE, whereas NSE sees more market turnover in both Cash and F&O (futures & options), which means more trade is happening in the NSE exchange.

BSE is trying to open more avenues in business away from the traditional Equity trade. It has launched a few initiatives and platforms and is trying to create new markets which are promising and can be highly profitable in the future.

BSE has launched India INX, which is an international exchange, located at GIFT CITY IFSC in Ahmedabad. The exchange has a turn-around time of 4 microseconds and operates 22 hours a day and six days a week, starting when the Japanese markets open and close when the US stock exchange closes. 

This exchange allows traders from across the world to trade on the exchange. BSE intends to make it an international trade platform. BSE Star MF platform is India’s largest mutual fund distribution infrastructure, which according to BSE performs more than 82% of the transactions in the retail category of the mutual fund industry by FY2021. 

BSE sees the mutual funds segment as a key trading instrument in the future. BSE also has an SME platform, an exchange that serves small & medium-sized enterprises. It has 334 companies listed on the platform by 31st March 2021. This platform is dedicated to small & medium-sized enterprises, and it regularly promotes SMEs to the main platform when it sees fit. 

Indian Clearing Corporation Limited, a wholly-owned subsidiary of BSE, acts as the central counterparty to all trades executed on the BSE trading platform and provides full novation, guaranteeing the settlement of all bonafide trades executed.

Moats

Duopoly: As long as there is no new challenger to disrupt the duopoly the moat is as strong as it gets for now. There are very high entry barriers and government regulations. There are many other exchanges in the stock market but majority of the market is controlled by NSE & BSE only.

New Age Platforms: It has launched new age platforms such as India INX, Star MF, etc that contribute to its revenues & have huge market share in their respective segments. It also has a 20% stake in CDSL, which is the only listed depository in India. Its continuous initiative to launch tech platforms to cater to investors’ needs provides the first mover advantage.

Pros:

1. Technical Advancement : Bse is now reducing a lot of its technology costs by using open-source architecture for its systems/network. Due to this, management is now confident of advancing in new areas and expanding in the traditional areas. 
2. Healthy Financials: The company has a debt/equity ratio of 0, implying that the company is debt-free. ROE & ROCE stood at 5.19% & 7.04% for the past 5 years, which is satisfactory. The company has been maintaining a healthy dividend payout. 
3. Recurring Income: BSE earns by charging for transactions. Every company transaction related to the purchase or sale of listed security has a portion of charges directed towards exchange for carrying out a transaction. For every transaction carried out on BSE, BSE earns transactional charges from trading parties. Registered market participants , like brokerage firms, AMCs & trading houses also pay a one-time registration fee & annual fee to retain the membership to the BSE. 
4. Stable Income options: One time listing fee for Equity and debt securities of corporates on the BSE platforms. Listing of options, futures, warrants, bonds or any capital security on the exchange also incurs a one-time listing fee. Regardless of the exchanges, BSE will receive this listing fee as companies are listed in both exchanges. 

Cons: 

1. Recession may affect the business: The business is not recession-resistant. Any sudden fall or crash in market levels may impact the trading volume. Additionally, this also discourages new businesses which are planning to raise money through IPO. The industry is highly regulated. Regulatory decisions relating to business operation, BSE ownership structure, the ownership structure of its subsidiaries, and other external policies can impact its competitiveness.
2.  Highly Regulated Industry: The industry is highly regulated. Regulatory decisions relating to business operation, BSE ownership structure, the ownership structure of its subsidiaries, and other external policies can impact its competitiveness.
3. Listing of NSE may be a threat to the BSE: BSE enjoys a special valuation as it is the only listed exchange in India. But, once NSE gets listed, the comparisons will begin, and “the premium valuation” that they get won’t be there anymore. In terms of transactional income, NSE is way ahead of BSE. Not only this, NSE has more liquidity than BSE. Also, NSE has monopolized the derivative contract segment with Nifty.
4. No Pricing Power: The company does not have substantial pricing power, since the service is commoditized. BSE cannot charge in segments wherever NSE is charging minimally or not charging at all, as it will lose market share. But at the same time, BSE can charge fees in areas where it is a market leader like in the mutual fund platform

Though BSE operates in the duopolistic market, being the only listed exchange, it can lose its advantage when the second player NSE will be listed. Due to higher transaction volume, NSE earns more revenue as compared to BSE. But apart from NSE, there is no competitor which comes even close to them. In INX and BSE Star the company could sustain its moat due to technological advancement in terms of the speed of the platforms. It also has more market participants on these platforms. And with the growth in the stock market and the increasing retail participation, a lot of potential is still left in BSE