BSE shares tumble 7% after Jefferies downgrades rating to ‘underperform’ on expensive valuations

Shares of the Bombay Stock Exchange (BSE), one of Asia's oldest stock exchanges, fell 7% in intraday trading on Wednesday, October 16, to ₹4,419 each. This decline followed a downgrade by global brokerage Jefferies, which lowered its rating on the stock from 'hold' to 'underperform,' citing an unfavourable risk-reward profile in the near term.

At the current market price, the brokerage believes that the risks—such as the higher impact of regulations on market volumes, limited spillover gains for BSE, and potential additional regulations—outweigh any incremental gains.

Despite the downgrade, Jefferies raised its target price for the stock to ₹3,500, which still indicates a 21% downside from the current trading price. Earlier this year, in April, Jefferies had downgraded BSE from 'buy' to 'hold,' slightly reducing its price target from ₹3,000 to ₹2,900.

The company's shares have experienced an upward trend in recent months, fueled by SEBI's new framework to limit options trading activity by restricting weekly contracts to just one sub-index per exchange.

In a related move, the National Stock Exchange (NSE) announced that starting November 20, 2024, weekly derivative contracts for Nifty Bank, Nifty Midcap, and Nifty Financial Services will be discontinued and converted into monthly contracts.

Investors view this shift as beneficial for BSE, expecting it to attract trading volumes to its platform, resulting in higher transactions and increased revenue. However, Jefferies does not anticipate significant market share gains for BSE.

"Assuming a 25% decline in overall market volumes, BSE's valuation (based on a P/E ratio of approximately 40x for FY26E) suggests its market share could increase from around 13% in Q2 2025 to 30-35%, with an estimated 40-50% share in weekly contracts," said Jefferies.

However, the brokerage believes this projection appears overly optimistic, as it does not adequately consider the risks associated with a significant impact on the overall market, limited spillover gains, and the possibility of further regulations.

Jefferies noted that monthly contracts, which represent 30% of the market, will remain unaffected under the new F&O framework, while BSE's market share in this segment is relatively low at 10%. Given this context, current valuations seem to imply that BSE could achieve a 40-50% market share in weekly contracts (weeks 1-3), a projection that Jefferies considers overly optimistic.

Furthermore, if the overall impact on the market is less than expected, regulatory risks will remain high. The removal of calendar spreads and the requirement for upfront margin collection from buyers could also slightly affect trading volumes, including those for the weekly Sensex product, the brokerage added.

Stock up over 950% in 19 months

The company's shares began their bull run in March 2023 and have continued on this upward trend, rallying from ₹430.95 to the current trading price of ₹4,540, resulting in an impressive gain of 955%.

Throughout this period, the stock experienced only four months of negative performance, while in the remaining 15 months, it ended in positive territory. Notably, in October 2023, it recorded the highest monthly gain of 43%, followed by a 33% gain in November 2023.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.