On Wednesday, October 16, shares of the Bombay Stock Exchange (BSE), one of the oldest stock exchanges in Asia, dropped 7% during intraday trade to ₹4,419 a share. The stock saw a decrease after a downgrading by international broking Jefferies, which downgraded the stock from ‘hold’ to ‘underperform,’ citing an adverse risk-reward profile going forward.
The broking feels that the risks, which include potential further controls, limited profits for BSE, and increased impact of rules on market volumes, exceed any incremental gains at the current market pricing.
Jefferies increased its target price for the stock to ₹3,500 despite the downgrade, which still represents a 21% decline from the firm’s current trading price. It was in April of this year when Jefferies lowered BSE from ‘buy’ to ‘hold,’ lowering its price objective by ₹3,000 to ₹2,900.
Recent months have seen an increase in the company’s shares, driven by SEBI’s new framework that restricts weekly contracts to a single sub-index per exchange, hence limiting the volume of options trading.
In a similar development, the National Stock Exchange (NSE) declared that weekly derivative contracts for Nifty Bank, Nifty Midcap, and Nifty Financial Services will cease to exist on November 20, 2024, and will be replaced with monthly contracts.
Investors anticipate that this change will help BSE by drawing more trading activity to its platform, which will raise transaction volumes and generate more income. Jefferies does not, however, expect BSE to achieve a sizable market share.
“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.
The Committee feels that this prediction is very optimistic, nevertheless, because it fails to take into account the risks of a large impact on the market as a whole, the likelihood of more regulations, and the minimal spillover gains.
According to Jefferies, the new F&O framework would not impact monthly contracts, which account for 30% of the market. BSE’s market share in this category is very modest, at 10%. Given this background, current prices appear to suggest that BSE would reach a 40–50% market share in weekly contracts (weeks 1-3), which Jefferies believes is an unduly optimistic prediction.
Moreover, regulatory risks will persist if the overall effect on the market is less than anticipated. The broking further stated that trading volumes, including those for the weekly Sensex product, maybe slightly impacted by the elimination of calendar spreads and the requirement for purchasers to pay upfront margin.
Stock up over 950% in 19 months.
The company’s shares started their bull run in March 2023 and have been rising ever since. They have gained an amazing 955%, rising from ₹430.95 to the current trading price of ₹4,540.
Only four months of this period’s performance were negative for the stock; the other fifteen months concluded in positive territory. Notably, it saw the largest monthly rise of 43% in October 2023, and then a 33% gain in November 2023.
