Synopsis:
SEBI plans to consult on shifting from weekly to monthly expiries, aiming to reduce volatility; BSE faces potential revenue and profit declines across four scenarios outlined by Jefferies.
During Friday’s trading session, shares of Asia’s first Stock Exchange and one of India’s leading exchanges, located on Dalal Street in Mumbai, surged nearly 3 percent on NSE, following Jefferies’ analysis of four expiry scenarios that could affect the company’s profitability.
With a market cap of Rs. 89,640 crores, the shares of BSE Limited closed in the green at Rs. 2,204 on NSE, up by around 2 percent, as against its previous closing price of Rs. 2,162.8. The stock has delivered multibagger returns of over 130 percent in the last one year, but has fallen by around 7 percent in the last one month.
What’s the News
In Thursday’s trading session, BSE shares declined by 5 percent following reports that the Securities and Exchange Board of India (SEBI) is expected to release a consultation paper within the next month. The paper will seek stakeholder feedback on the possibility of phasing out weekly expiries and moving towards monthly expiries in derivatives trading.
According to sources, the consultation paper is likely to outline a structured transition plan to shift from weekly to monthly expiries, aimed at mitigating short-term risks and reducing volatility in the F&O market. This initiative aligns with remarks made by SEBI Chairman Tuhin Kanta Pandey, who recently suggested extending the duration and maturity of derivative contracts to enhance market stability.
Brokerage firm Jefferies highlighted that today’s SEBI board meeting will be closely monitored by investors and analysts alike. In its latest research note, Jefferies presented four possible scenarios for BSE’s future, considering different combinations of expiry cycles – weekly, fortnightly, and monthly – with and without same-day expiries, depending on the regulator’s final decision.
Scenario I: Fortnightly Expiry on Separate Days
If the expiries are moved to a fortnightly schedule with separate settlement days for NSE and BSE, Jefferies projects that the industry’s notional Average Daily Turnover (ADTO) for index options could decline by 55 percent, while the premium ADTO may drop by 45 percent. Despite this, BSE’s market share is expected to hold steady at 29 percent through August.
However, the exchange’s options-related revenue could shrink by 38 percent in FY27, resulting in an overall 22 percent decline in revenue and a 21 percent reduction in net profit.
Scenario II: Fortnightly Expiry on the Same Day
Under this scenario, where both exchanges move to a fortnightly expiry occurring on the same day, Jefferies anticipates similar declines in turnover, 55 percent in notional ADTO and 45 percent in premium ADTO, as in Scenario I.
Nevertheless, the exchange’s market share could fall sharply to nearly 20 percent, which may lead to a 57 percent drop in options revenue in FY27. This decline would translate into a 33 percent decrease in revenue and a 35 percent reduction in net profit for the following financial year.
Scenario III: Monthly Expiry On Separate Days
If expiries shift to a monthly format with separate settlement dates for BSE, Jefferies estimates a steep fall in turnover, with notional ADTO decreasing by 80 percent and premium ADTO by 70 percent. Although the exchange’s market share is expected to remain stable, its options revenue could see a 67 percent decline in FY27. This would negatively impact revenue by 39 percent and net profit by 41 percent.
Scenario IV: Monthly Expiry on the Same Day
In the event that both exchanges adopt a monthly expiry on the same day, Jefferies estimates that BSE’s notional ADTO could drop by 80 percent, while the premium ADTO may decline by 70 percent. Furthermore, BSE’s market share is projected to shrink to about 18 percent, resulting in an 80 percent fall in options revenue in FY27. This would significantly affect the exchange’s financials, with total revenue expected to decrease by 46 percent and net profit by 50 percent, according to the Jefferies note.
Market Reaction and Valuation Outlook
Since these reports first surfaced, shares of both BSE and Nuvama have corrected sharply, declining by 15 percent to 30 percent from their respective highs. Jefferies notes that if Scenario I (fortnightly expiries with separate settlement days) materialises, most of the downside risk is already priced in.
However, should Scenarios II through IV come to pass, further share price declines are likely. Despite the potential downside, BSE’s shares are currently trading at 38 times FY27 price-to-earnings, which Jefferies considers reasonable and therefore does not anticipate a significant valuation correction.
Written by Shivani Singh
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