BSE IPO Review @ Rs. 805-806 – Subscribe or Not?

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Asia’s oldest stock exchange, Bombay Stock Exchange or BSE, is coming out with its Initial Public Offer (IPO) of Rs. 1,243 crore from today. The issue comprises of an offer for sale of around 1.54 crore shares by its existing shareholders in a price band of Rs. 805-806. Like all other IPOs, this issue will also remain open for three days to close on January 25.

Before we analyse some of its fundamental attributes, let us have a take a look at some of the salient features of this IPO:

Price Band – BSE has fixed its price band in a very tight range to be between Rs. 805-806 per share and no discount or special preference will be given to the retail investors.

Size & Objective of the Issue – This issue is an Offer for Sale (OFS) by some of the BSE’s existing shareholders and thus no fresh issue of shares is involved. Singapore Exchange, Quantum (M) Limited, Atticus Mauritius Limited, GKFF Ventures, Caldwell India, Acacia Banyan Partners and Bajaj Holding and Investment are a few of the 302 shareholders selling their stakes in this offer either fully or partially.

These shareholders will sell approximately 1.54 crore shares and raise around Rs. 1,243 crore in this offer at Rs. 806 per share. These shares represent 28.26% of the total outstanding shares of BSE.

Retail Allocation – 35% of the issue size is reserved for the retail individual investors (RIIs) i.e.  approximately 54 lakh shares out of 1.54 crore shares. 15% of the issue size is reserved for the non-institutional investors and the remaining 50% shares will be allocated to the qualified institutional buyers (QIBs).

No Discount for Retail Investors – BSE has decided not to offer any discount or any other special treatment for the retail investors in this IPO.

Anchor Investors – Out of 1.54 crore shares to be issued, BSE has already issued around 46 lakh shares to some of the big anchor investors at Rs. 806 per share. Investment form these investors would amount to Rs. 373 crore. These investors include Smallcap World Fund, ICICI Prudential Mutual Fund, Goldman Sachs India, HDFC Trustee Company, Reliance Trustee Company, FIL Investments (Mauritius) and Kuwait Investment Authority Fund, among others.

Bid Lot Size & Minimum Investment – Investors in this offer need to bid for a minimum of 18 shares and in multiples of 18 shares thereafter. So, you as a retail investor would be required to invest a minimum of Rs. 14,508 at the upper end of the price band and Rs. 14,490 at the lower end of the price band.

Maximum Investment for Retail Investors – Individual investors investing up to Rs. 2 lakh are categorised as retail individual investors (RIIs). As a retail investor, you can apply for a maximum of 13 lots of 18 shares @ Rs. 806 i.e. a maximum investment of Rs. 1,88,604 or @ Rs. 805 i.e. a minimum investment of Rs. 1,88,370. Investors opting for the “Cut-Off Price” option should apply for a maximum of 13 lots of 18 shares.

Listing – As BSE itself is a stock exchange, as per SEBI regulations, it cannot go ahead and list itself on its exchange. So, it will have to get itself listed on the National Stock Exchange (NSE). Allotment and listing will happen within 6 working days after the issue gets closed on January 25. These shares are expected to list on February 3 on the stock exchanges.

Here are some of the important dates for this IPO:

Issue Opens – On January 23, 2017

Issue Closes – On January 25, 2017

Finalisation of Basis of Allotment – On or about January 31, 2017

Initiation of Refunds – On or about February 1, 2017

Credit of equity shares to investors’ demat accounts – On or about February 2, 2017

Commencement of Trading on the NSE – On or about February 3, 2017

Financials of BSE Limited

BSE has four sources of revenues — Securities Services, Services to Corporates, Data Dissemination Fees and Income from Investments and Deposits. As you can check from the table below, around 39% of BSE’s total revenues in the first six months of the current financial year have come from its securities services, 29% from investment income and 21% from services to corporates. Rest of its revenues are derived as data dissemination fees.

Note: Figures are in Rs. Crore, except per share data & percentage figures

BSE reported an EPS of Rs. 19.22 for the period ending September 30, 2016 and on an annualised EPS of Rs. 38.44, this issue is valued at 20.97 times at the upper end of its price band. As per the SEBI regulations, BSE is required to reduce its stake in CDSL from 50.05% to 24% and whenever that happens, it would result in a one-time healthy jump in its EPS. If you consider that, this issue would look less expensive to you.

MCX is the only other listed exchange here in India and it is currently trading at around 32 times its estimated FY 2017-18 earnings. However, MCX is a growing exchange and commands leadership in the commodities derivatives market with close to 90% market share. That is why it would be unfair to offer such a high price multiple to BSE.

While BSE’s market share in the equity derivatives segment is less than 1%, it has been declining steadily in the equity cash segment as well and currently stands at 13.37%. It has resorted to liquidity enhancement initiatives in the past in order to attract brokers to trade more on its platform, but that has not resulted in a sustained gain in market share for the exchange.

Market Share of NSE and BSE in Equity Cash Segment – Rs. 000 million

At Rs. 806 a share, I think BSE’s valuation is not greatly expensive and if the market sentiment remains positive post budget, it should ideally get listed at a premium. But, the issues with the exchange are fundamental in nature. Why is it that the exchange is losing market share to the NSE in the equity cash segment and why has it failed to retain its market share in the derivatives segment after its liquidity enhancement initiatives got discontinued?

Also, though the exchange is not going to get any cash out of this IPO, but are there any plans the management is working on to utilise the cash the exchange currently has in order to increase its revenues and profitability on a sustainable basis? If you look at the growth in its revenues and profits in the last 4-5 years, it seems every effort made by the exchange to increase its market share and add value to the shareholders has failed to do so.

I think as a risk taker you can apply to this IPO and expect some listing gains. But, in the long run, I think the exchange will have to work very hard on its strategy to gain market share on a sustainable basis. Investors can hold on to their shares till the time NSE comes out with its IPO and gets its shares listed on the BSE. But post that, they need to push BSE’s management to do it differently this time to gain a sustainable market share.