COMMENT: NSE IPO issue will have some losers too

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26 Aug, 2025 12:21

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SBI, IDBI Bank and IFCI would be ruing their decision to sell shares in National Stock Exchange of India Ltd (NSE). In April, when the bourse was valued at Rs 11,770 crore, IFCI and IDBI Bank sold their 3.55 percent and 2 percent holdings respectively. SBI was luckier. The bourse was valued at Rs 18220 crore in July when SBI sold its 5 percent stake for Rs 911 crore. But not lucky enough.

Barely six months later, the largest stock exchange in the country is going public at a valuation of Rs 40,000 crore.

The sellers may have had their reasons, but they got their timing horribly wrong. More so, since they had held the shares patiently for many years.

Also, NSE’s valuation was not too pricey in April when it was trading at 11.7 times its annual profit and 18 times in July.

Prospective IPO investors need not be worried about the sales by these long term as NSE’s growth story is intact. With an 85 percent market share in the cash segment and 94 percent market share in the equity derivatives segment, NSE is a proxy for capital market in the country.

NSE’s juicy operating margins would make the bosses of other industries sigh with envy. In FY16, NSE grossed Rs 1,863.54 crore and had an operating profit margin of 53 percent. The nature of business of NSE, which provides a marketplace for various participants and collects a fee for every transaction, plus fees for membership of the exchange as well as usage of data places the company in a position of strength.

And its dominant market share means that it enjoys a high liquidity, meaning traders get the best prices when they come to sell or buy. Over the years, this has resulted in a virtuous cycle for the NSE, where liquidity attracts more players, and in turn makes the market more liquid.

It does not require too much of an effort from the part of NSE to generate high turnover and profits, given that the company has established a robust infrastructure for the market place. This is reflected in employee cost of only Rs 218 crore in FY16 generating revenue of over Rs 1,800 crore.

The high level of cash flow generated by the exchange adds to a regular stream of other income which has been steady at roughly Rs 500 crore. This is generated from its investment portfolio of over Rs 8,000 crore (including bank deposits and cash). Other income amounts to nearly 30 percent of the profit before tax of the company and more than covers all major expenses of the company.

Given its strong financial and a high cash flow generating business model, it is surprising why investors would like to sell their stake in the company, unless some investors feel valuations may be close to their peak. Reports suggest that the ‘offer for sale’ route used to list NSE will give exit to some existing investors at a valuation of 40 times its FY16 profit.

Wonder what made SBI, IFCI and IDBI Bank sell part of their stake cheaply?