BSE IPO: Why NSE investors will be celebrating exchange listing (Comment)

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Shishir AsthanaMoneycontrol Research

Asia’s oldest bourse BSE (Bombay Stock Exchange) listed at a hefty premium to the offer price on Friday. Against the offer of Rs 806, the stock was listed at Rs 1,085 a 35-percent premium. It hit a high of Rs 1,200 in early trade.

A huge over-subscription to the issue ensured that the IPO would give good listing gains to the lucky few who got a firm allotment. The issue was oversubscribed 51.22 times.

A look closer at the applications shows that qualified institutional buyers segment was oversubscribed by 49 times while the non-institutional investor’s portion was oversubscribed nearly 160 times. The retail segment was oversubscribed only 6.5 times. It’s clear then that there was more interest for high-value investors who would jump in on the day of the listing.

Thus it was no surprise that nearly 3 percent of shares bought in the IPO were quickly disposed of in the first hour of listing.

Being the first stock exchange that has tapped the market, BSE had a novelty element attached to it. But more than that were the strong fundamentals of company. Though on a comparative basis it is inferior to NSE in terms of market share, BSE still has enviable financial ratios and by itself deserves a good valuation. Stock exchanges are a good addition to a portfolio as they are considered a proxy for the economy.

However, for an investor who wants to hold only one stock exchange in his portfolio NSE would be a better bet. Until then, holding BSE stock is a good option.

Around 90 percent of the combined volume in the two exchanges takes place in the index and equity derivative segments. Within the equity segment, derivatives volume is 14 times that of cash segment. NSE is a clear leader here capturing all the volume in this space. BSE did try to make a dent by launching the liquidity enhancement incentive programmes (LEIPs) but met with little success and the programme is now being wound up after 5 years of its launch.

In the cash segment, BSE’s share is a meagre 14 percent. Despite having 5,911 companies listed on BSE as compared to 1,808 on NSE, volume is higher on the NSE. This is because nearly two-thirds of the volume is in the top 50 stocks, which are common to both the exchanges. When it comes to pure size of business, NSE wins hands down.

In terms of profit margins, while NSE earns a net profit margin of 49 percent, BSE works with 20 percent margins. NSE earned a consolidated revenue of Rs 1,863.5 crore in FY16 as compared to Rs 658.3 crore for BSE. While growth for NSE since FY12 stood at 36 percent in absolute terms those for BSE was at 13 percent. In growth and financial terms, too, NSE is the leading exchange.

Further, the huge premium at which BSE is listed makes its valuation a little on the higher side. Annualizing its first half EPS (earning per share) of Rs 19.5, the stock is presently trading at 28.6 times.

Shareholders of NSE who will be offering their shares during its IPO would be rubbing their hands in glee watching the listing price of BSE. NSE IPO can now be expected to come at much higher valuation.