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Deep Dive into NSE's Business Model

NSE is a stock exchange; shares of a company can be listed on an exchange like NSE. The NSE has 2000 firms listed on it (of course, the first time you list, you file an IPO u2013 Initial public offering). Anyone with a demat account can buy and sell these products (shares, NCDs) after they are posted on the exchange. The exchange facilitates these buy/sell transactions through intermediaries known as members. In this post, we will take a deep dive into NSE and its business model. <br><br>Link to the blog post by Altius Investech- https://altiusinvestech.com/blog/why-nse-business-model-is-excellent/

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Deep Dive into NSE's Business Model

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  1. Webinar Topic NSE - A Proxy for Indian Capital Markets Exposure Prepared by Abhishek Ginodia CA, CFA

  2. Matters on the Docket A brief look at what we will discuss on this report 01 E-Pharma Industry Overview 02 PharmEasy and its revenue model Highlights - Financials, Revenue Mix 03 04 Co-location & GIFT City Opportunities 05 Valuation & Pre-IPO performance

  3. Under Penetration of Capital Markets INSIGHTS: More corporates expected to tap the financial markets Source: World Exchange Forum, Spark Capital Research, As of FY21

  4. India’s capital market - Sustained Growth Incremental Growth in Average Daily Turnover (ADTO) Sustained growth in ADTO over last one decade. Continued buoyancy in equities and new client additions led to ADTO hitting decadal highs. Equity market volumes registered strong YoY growth in FY22 despite tightening of margin norms. Source: SEBI, Company Data, Spark Capital Research

  5. Landscape of Exchanges in India INSIGHTS: NSE – undisputed domestic leader, competitive globally

  6. High F&O contribution Equity volumes see strong growth in FY22 despite tightening of margin norms The equity cash market grew 9 per cent and derivative volumes jumped 2.6 times Source: SEBI, Company Data, Spark Capital Research

  7. National Stock Exchange Market Leader NSE is an undisputed market leader in most of the asset classes Ranked among the top 10 global exchanges in various asset classes. Structural increase in activation level Highest growth rates in Demat account opening and NSE active clients in the last 2-years. Account activations, improved to 34-35% during FY21-22E, which was 20-22% during FY14-17 Classic operating leverage play Fixed costs such as employee and tech expenses constitute 50% of the total operating expenses EBIDTA Margin of ~67% during FY17-21.

  8. Equity Cash Segment Equity Cash Average Daily Turnover (ADTO) Market Share Movement of NSE and BSE Equity Cash ADTO Source: SEBI, Company Data, Spark Capital Research

  9. F&O Equity Future Average Daily Turnover (ADTO) Option market is driven by indices – NIFTY and Bank NIFTY are most traded contracts Source: SEBI, Company Data, Spark Capital Research

  10. Revenue Model Unlike global exchanges, NSE have high dependency on transaction charges: while BSE’s dependence is low due to poor market share Global exchanges generate revenue from data-related services; however,Indian exchanges are at nascent stages

  11. Revenue Breakup Rs in Cr. Segmental Breakup (FY 22) Particulars FY22 FY21 Other Segments 8.6% Trading Services 7,762.80 4,848.29 Index Licensing Services 2.1% Clearing Services 676.75 501.73 Data feed Services Clearing Services 6.9% 198.9 134.83 Index Licensing Services 206.25 150.99 Strategic Investments 140.37 147.78 Other Segments 847.33 477.44 9,832.40 6,261.06 Trading Services 79% Source: Company Data, Altius Investech

  12. Financial Highlights Rs in Cr. CAGR (%) 32.2% 32.6% 33.6% Source: Company Data, Altius Investech Platform

  13. Ratio Analysis Particulars YoY % Revenue growth 36% Particulars Multiple P/E 29.5x Cost to income ratio (%) 25% EV/ EBITDA 26x EBIDTA growth 42% ROE (%) 38.70% PAT growth 35% ROA (%) 16% EBIDTA margin 77% Dividend Yield (%) 1.35% PAT Margin 57% Source: SEBI, Company Data, Spark Capital Research

  14. Subsidaries & Group Companies of NSE

  15. Peer Comparision Market Cap (USD mn) Net Income Margin % Peer Comparision EV/EBITDA PEx EV/Sales NSE Ltd. 154800 (in Cr) 26 29.5 57% CME Group Inc 82,342 24.8 31.2 53.50% 31 Intercontinental Exchange Inc 77,322 19.1 24.8 41.90% 24.5 Hong Kong Exchanges & Clearing 73,760 10.2 36.8 64.00% 36.5 London Stock Exchange Group PL 53,096 13.4 22.4 24.00% 22.1 Nasdaq Inc 35,112 20.6 27 36.50% 26.4 Source: SEBI, Company Data, Spark Capital Research

  16. Co-location Opportunities Colocation contributes ~47% of total turnover in F&O

  17. GIFT City - Opportunities Gujarat International Finance Tec-City (GIFT) can be a huge potential opportunity Any Indian recognized stock exchange or foreign stock exchange can form a subsidiary to provide the services of stock exchange in IFSC Permitted to offer trading in securities in any currency other than the Indian rupee Equity shares of companies incorporated outside of India Depository receipts, Debt securities of eligible issuers Currency, Index, Interest rate Non-agriculture commodity derivatives and all categories of exchange traded products

  18. Co-location Controversy Timeline NSE commissions Ernst & Young for forensic audit into equity and currency segment; SEBI issues two adjudication orders against NSE, Ravi Narain, Chitra Ramkrishna and OPG Securities imposing fines on all SEBI issues showcase notice to 14 NSE officials and others in May; Ravi Narain resigns in June; Vikram Limaye appointed MD & CEO in July SEBI passes orders in Colo scam against NSE’s top officials, orders disgorgement. Whistle-blower’s letter in June on irregularities in Colocation BSE complains about NSE’s anticompetitive practices to SEBI CBI registers an FIR on NSE Colo scam in May; SEBI issues show cause notice to NSE on dark fibre issue in July. SEBI issues ‘broad guidelines’ on algo trading on 30th March. In April, post SEBITAC submitting reports, SEBI revamps NSE board of directors; Deloitte Touche Tohmatsu India LLP submits its forensic report; Chitra Ramkrishna resigns in December SEBI issues new show cause notices in Colo scam and NSE’s earlier investments, in February NSE starts high frequency trading or Algo trading and Colo services in January 2022: Court sends Chitra Ramkrishna to judicial custody under the money laundering act

  19. IPO Roadmap SEBI barred NSE from accessing the capital markets for 6 month in relation to Algo Trading Scandal DRHP Filed Charges framed against senior NSE officials & was ordered to pay INR 1000 cr. NSE’s MD and CEO Vikram Limaye approached SEBI to seek its approval for IPO, Premature petition filed for stay on IPO in madras court, denied as NSE didn’t apply again IPO is expected in 2023

  20. Valuation NSE is available in the Pre-IPO Markets at ~Rs 3000/share, valuing the company at ~Rs 1,52,000 Cr. Particulars NSE BSE MCX 28x 35.5x 28x P/E Ratio 1.35% 2.05% 1.25% Dividend Yield NSE is trading at a 6x cheaper valuation compared to BSE.

  21. Pre-IPO Stock Performance NSE is available in the Pre-IPO Markets at ~Rs 3100/sh. Dec '21 Rs 3800/sh Jul '22 Rs 3100/sh Aug '21 Rs 2400/sh Jun'20 Rs 1400/sh Jan '21 Rs 1700/sh Dec '19 Rs 800/sh The share price of NSE has been consistently on an upward track from Rs 800/share in Dec 2019 to an all time high of Rs 3800/sh in Dec 2021. There has been a 25% correction from the highs in the CMP

  22. Do you have any questions? Website www.altiusinvestech.com Mobile No Email Address +91 6289225026 nikunj@altiusinvestech.com

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