Bombay Stock Exchange: Listing of a bourse

At 118 metres, Phiroze Jeejeebhoy Towers or the BSE Towers as it is now popularly known is no more the tallest in downtown Mumbai, which it was when it was ready for occupation in the last 1970s. But the 29 storey building on Dalal Street has been the nerve centre of stock markets for years, which is why when it goes into listing next week, it draws up emotions and nostalgia among some investors in the exchange who are looking at avenues to exit and many others who want to own a part of the legendary BSE. 

The issue size can be gauged by the fact that the BSE is selling around 15.4 million shares through an IPO, with a face value of Rs 2 each. This is an offer for sale from existing shareholders and in that sense is not an IPO as one is aware of. What this means is that the BSE will not be using the money it raises for its internal use as the listing actually provides an opportunity for exiting investors such as Deutsche Boerse, Life Insurance Corporation (LIC), and State Bank of India among others to exit.

Issue specs

The price band for the IPO is Rs 805 to Rs 806 per share, which opens on January 23 and closes on January 25, 2017 and will be listed on the NSE because market regulator the Securities and Exchange Board of India (Sebi) doesn't allow self-listing of shares. The issue constitutes up to 28.26 per cent of the fully-diluted post offer issued share capital of BSE to raise Rs 1,200 to Rs 1,300 crore. The issue is awaited more for the brand power of brand BSE than just financials and the BSE valuation looks competitive if not very attractive.

Over the years, the BSE has lost to rival NSE on almost every count, especially in the derivatives market and most of the cash market. The NSE accounts for 85 per cent of trading in the equity cash segment and almost all derivatives trading in India. That the BSE grew its revenues by just 5 per cent over the past five years does not infuse confidence. It has also not made money from its core operations like listing fees and trading activities, making it not a very attractive IPO. But there are positives too: The move to set up an international exchange in GIFT city, Gujarat is a master stroke that could play out in its favour.

Should you invest?

Going by the financials, the BSE generated a 4-year average return on equity of 5.3 per cent and return on capital employed of 6 per cent. Operating cash flow was negative last year but it is a debt free company, which is understandable given its nature of business – it is a service provider, which does not depend on a high level of working capital for its day to day affairs. At Rs 806, the stock is priced at around 22-24 times expected consolidated earnings for FY17. BSE can be a good long-term investment based on potential market penetration and their ability to embrace technology.

“We need to work on increasing market share in some products, at the same time we are in the compliance business and that has to be on the top,” said Ashish Chauhan, CEO, BSE at the press conference announcing the IPO. Considering there is little room for new companies to come and operate in this space, the BSE has an edge as entry barriers exist. New business segments like the BSE StarMF platform and the India International Index are looked upon as long-term growth drivers. As rival NSE looks at coming up with its own IPO, how the BSE listing fares will set the tone for its listing.

himali@outlookindia.com