'Over-optimistic assumption': Jefferies sees BSE shares tumbling; here's why
BSE's valuations at 40 times estimated FY26 earnings implies its market share rising from 13 per cent in the second quarter to 30-35 per cent, with 40-50 per cent share in weekly contracts.
- Oct 16, 2024,
- Updated Oct 16, 2024 2:33 PM IST
Jefferies in its latest note said BSE's recent run-up has been fuelled by hopes of large market share gains from spillover trades. Such an assumption may be over-optimistic, the foreign brokerage said as it believes the BSE valuations may not be capturing in near- and medium-term risks.
Assuming 25 per cent hit to overall market volumes, BSE's valuations at 40 times estimated FY26 earnings implies its market share rising from 13 per cent in the second quarter to 30-35 per cent, with 40-50 per cent share in weekly contracts.
"This appears stretched & fails to capture risks from higher impact on overall market, low spillover gains & further regulations. We see near-term risk-reward unfavorable and downgrade the stock to underperform," Jefferies said.
On Wednesday, shares of BSE were trading 3.59 per cent lower at Rs 4,581.75 on NSE. While Jefferies has raised its target price on BSE to Rs 3,500 from Rs 2,850, it still suggests a 23.6 per cent potential downside ahead for the stock.
Jefferies said SEBI's new F&O measures will lead to a calibrated tightening of the index derivatives market over 3-6 months, beginning November 2024. While the discontinued weekly products make up 40 per cent of market premiums, impact on overall market could be lower at 25-30 per cent) if there is a spillover of trades into the continuing weekly products.
Jefferies said the monthly contracts remain unaffected (30 per cent of market) under new F&O framework but BSE's market share is relatively lower (10 per cent) in this segment.
"Adjusting for this, current valuation may be implying a 40-50 per centmkt share for BSE in weekly contracts (weeks 1-3), which seems over-optimistic to us. This assumes a major shift in participant behavior, especially on non-expiry days," it said.
Jefferies said if the overall impact on market is lower than expected, regulatory risks remain elevated. Removal of calendar spreads, upfront margin collection for buyers could also marginally impact volumes, including weekly Sensex product.
The brokerage, meanwhile, has raised its FY25-27 earnings estimates by 15-17 per cent for BSE with higher-than-expected growth in 1HFY25 across segments and higher options ADTO for FY26 and 27E.
"At CMP, we feel the risk-reward has turned unfavorable with the risks (higher impact of regulations on market volumes, low spillover gains for BSE & more regulations) outweighing incremental gains. We revise our PT to Rs 3,500 (implied P/E of 40x FY26E) & downgrade our rating to underperform. We watch out for mkt impact & participant behavior changes post implementation of new framework," it said.
Jefferies in its latest note said BSE's recent run-up has been fuelled by hopes of large market share gains from spillover trades. Such an assumption may be over-optimistic, the foreign brokerage said as it believes the BSE valuations may not be capturing in near- and medium-term risks.
Assuming 25 per cent hit to overall market volumes, BSE's valuations at 40 times estimated FY26 earnings implies its market share rising from 13 per cent in the second quarter to 30-35 per cent, with 40-50 per cent share in weekly contracts.
"This appears stretched & fails to capture risks from higher impact on overall market, low spillover gains & further regulations. We see near-term risk-reward unfavorable and downgrade the stock to underperform," Jefferies said.
On Wednesday, shares of BSE were trading 3.59 per cent lower at Rs 4,581.75 on NSE. While Jefferies has raised its target price on BSE to Rs 3,500 from Rs 2,850, it still suggests a 23.6 per cent potential downside ahead for the stock.
Jefferies said SEBI's new F&O measures will lead to a calibrated tightening of the index derivatives market over 3-6 months, beginning November 2024. While the discontinued weekly products make up 40 per cent of market premiums, impact on overall market could be lower at 25-30 per cent) if there is a spillover of trades into the continuing weekly products.
Jefferies said the monthly contracts remain unaffected (30 per cent of market) under new F&O framework but BSE's market share is relatively lower (10 per cent) in this segment.
"Adjusting for this, current valuation may be implying a 40-50 per centmkt share for BSE in weekly contracts (weeks 1-3), which seems over-optimistic to us. This assumes a major shift in participant behavior, especially on non-expiry days," it said.
Jefferies said if the overall impact on market is lower than expected, regulatory risks remain elevated. Removal of calendar spreads, upfront margin collection for buyers could also marginally impact volumes, including weekly Sensex product.
The brokerage, meanwhile, has raised its FY25-27 earnings estimates by 15-17 per cent for BSE with higher-than-expected growth in 1HFY25 across segments and higher options ADTO for FY26 and 27E.
"At CMP, we feel the risk-reward has turned unfavorable with the risks (higher impact of regulations on market volumes, low spillover gains for BSE & more regulations) outweighing incremental gains. We revise our PT to Rs 3,500 (implied P/E of 40x FY26E) & downgrade our rating to underperform. We watch out for mkt impact & participant behavior changes post implementation of new framework," it said.