NSE IPO: Can the Stock Exchange's 40 Million Active Users Help it Challenge BSE's Empire?

The National Stock Exchange of India (NSE), a dominant player in the Indian capital market, is gearing up for a potential Initial Public Offering (IPO).

This move comes after the company's initial attempt in 2017, when it filed a Draft Red Herring Prospectus (DRHP) with the market regulator.

While a concrete timeline hasn't been announced, recent developments suggest NSE is actively addressing past challenges and preparing for the public spotlight.

Earlier, the exchange's plans for an IPO were delayed due to concerns about corporate governance.

These include issues related to a former executive's role in a past market data access controversy and technological glitches experienced by the exchange.

In December 2023, the market regulator asked NSE to remain glitch-free for at least a year, enhance its technological infrastructure and corporate governance and resolve pending legal matters.

In 2021, NSE had to halt trading for several hours after its mainframe and disaster recovery sites malfunctioned, leading to intense scrutiny from the market regulator.

NSE has since addressed these challenges and is working diligently to ensure a robust and reliable trading platform.

Another factor alluding to the listing is that NSE underwent a successful change of guard.

Mr. Ashishkumar Chauhan, who brings a wealth of experience from his prior role as CEO of BSE during its IPO, assumed the role of Managing Director and Chief Executive Officer in July 2022. This leadership change signaled a renewed focus on transparency and growth.

This IPO, 'if approved by the market regulator', will mark a significant event in the Indian financial landscape. It would allow the exchange, which facilitates the trading of equities, derivatives and other financial instruments, to become a publicly traded company itself.

Let's take a look at the company's business and how it stacks up against its competitor BSE.

NSE: A Leading Player With a Proven Business Model

NSE offers a vast array of products and services, from equities and derivatives to debt instruments and currency trading.

It maintains a leadership position, standing tall as the world's largest derivatives exchange by trading volume and the third-largest in cash equities by the number of trades.

In the domestic markets, NSE enjoys a monopoly in the capital market and equity derivative segments, with a market share of 93% and near 100%, respectively.

NSE's market share in the currency options segment stood at 97%, while in the currency futures segment accounted for 68% in the financial year 2023.

NSE Market Share - December 2023

NSE caters to the needs of high-volume and high-frequency traders by providing co-location facilities for seamless algorithmic trading.

The platform's wide range, combined with its dominant position in several asset classes, allows it to be incredibly responsive to market demands.

High trading volumes create a virtuous cycle for everyone involved. More participants are attracted to the exchange, leading to efficient price discovery.

This active trading environment makes NSE a listing powerhouse, attracting companies and offering investors a wider choice of stocks.

Some of its flagship indices include the following :

NSE Indices

The robust ecosystem translates directly to NSE's financial health.

It explains the healthy revenue growth, 80% of which comes from transaction charges followed by a mix of co-location charges (4.8%) and the balance 15% from multiple fee sources such as listing, book-building and processing.

Sustainable Growth Driven by Supernormal Profits

NSE's growth trajectory is nothing short of phenomenal. Between 2019 and 2023, the sales have tripled while the net profits have quadrupled.

The business has not only multiplied swiftly, but it has also maintained its supernormal profit margins, thanks to its dominant position.

Over the last five years, the company's operating margins have been above 80% and net profit margins have been around 60%.

NSE Financial Snapshot (2019-23)

	2020-19	2020-20	2020-21	2021-22	2022-23
Revenues (Rs in m)	36,843	38,975	62,644	88,738	1,28,038
Revenue Growth (%)	21.50%	5.80%	60.70%	41.70%	44.30%
Operating Profit Margin (%)	87.10%	73.90%	85.00%	86.20%	87.20%
Net Profit Margin (%)	57.00%	53.70%	63.50%	64.20%	63.30%
Return on Capital Employed (%)	34.00%	30.80%	44.10%	52.00%	56.00%
Return on Equity (%)	22.60%	23.00%	35.30%	39.40%	41.80%

Data Source: Ace Equity

The growth in profits, over the years, comes from a potent blend of cost management excellence, surging revenue streams, and persistent operational efficiency.

However, the company's returns stand out the most. Much higher than its peers, the returns have been robust.

The Return on Capital Employed and Return on Equity have averaged at 43% and 32% over the last five years. BSE's 5-year average RoE stands at 5.1%.

Furthermore, being an asset-light company, NSE has fuelled its growth without relying on debt.

The company doesn't spend a lot on capital expenditure. Capex, if any, usually goes towards technological advancements, a strategic investment that positions it for long-term success.

For the first nine months of the financial year 2024, NSE's results have been promising. The company reported a 25% YoY rise in consolidated revenue at Rs 112 bn.

Operating margins came in lower at 67% vis-a-vis 82% reported in the last year. However, the net profit grew 10% YoY to Rs 58 bn, with a net profit margin of 52% (59%).

Apart from the regular business (trading revenue), the revenue growth was aided by other sources including data centre and connectivity charges, clearing services, listing services, index services and data services.

Peer Comparison and Valuations

NSE's competitor, BSE's revenues and returns are at a fraction of NSE.

NSE's stronger financial health comes on the back of the burgeoning leadership NSE enjoys across segments.

NSE Peer Comparison

	Revenue from Operations (2023) (Rs m)	Net profit (2023) (Rs m)	Operating Margin (2023) (%)	Return on Net Worth (%) 5-Yr Average	P/E (x)
NSE	1,28,038	75,019	87.20%	32.40%	NA
BSE	8,742	2,057	35%	5.10%	93

Data Source: Ace Equity and Equitymaster

In a duopoly-regulated business, the market share of BSE in the equity category is underwhelming.

The BSE index pales in front of its competitor, with less than 5% market share in the equity segment. It is barely present in equity derivatives, with NSE commanding a near 100% share.

The reason it lags is its late entry in single-stock derivatives as compared to NSE. This also has a bearing on the equity cash segment as well where NSE enjoys a dominant 93.6% share.

BSE's business growth has been dismal in comparison to NSE. Between 2019-2023, the sales and net profit have registered a CAGR of 6.8% and 1.2%, respectively. The returns have also been on the weaker side.

Despite this, the stock enjoys rich valuations.

At the current market price of Rs 2,800, the stock is trading at a price-to-earnings ratio of a whopping 92 times.

Compare that to its listing price of Rs 335 in 2017, with a P/E of 42 times. The current valuation is significantly higher than the 5-year median P/E of 31.5 times for BSE.

With NSE's potential IPO looming, it's anyone's guess at what valuation they might target.

Bright Prospects

The Indian economy is one of the fastest-growing major economies in the world, driven by a healthy banking system and a government pushing hard on infrastructure spending.

The private investment cycle has been doing well, led by increased capacity utilisation and healthier corporate balance sheets.

India's digital revolution is in full swing. The renewed focus on digitisation, formalising the economy, and making financial services accessible to everyone is projected to be a major growth driver for years to come.

This economic boom spells good news for NSE. While existing investment products like stocks and derivatives will remain popular, it's just the tip of the iceberg.

The recent surge in retail investor participation shows a clear hunger for new offerings.

NSE is perfectly positioned to cater to this growing demand with its array of innovative products and services.

Its leadership status and commitment to cutting-edge tech, in tandem with its robust risk management systems and a strong regulatory environment, positions it as a leader in the Indian securities sector.

This translates to a secure and efficient trading platform for investors, fostering further growth.

In conclusion

With the Indian economy on a tear and NSE at the forefront of the financial revolution, the future looks incredibly bright.

Their diverse product range, focus on innovation, and commitment to a secure trading environment make NSE a force to be reckoned with.

So, if you're looking to participate in India's exciting growth story, NSE is definitely a platform worth considering.

While an IPO is on the horizon, it's crucial to note that approval from SEBI is still pending.

Moreover, due diligence is essential. Wait for the full details of the potential IPO, including SEBI's decision, valuation, and plans before deciding if NSE aligns with your investment goals.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...