NSE - Raging-Bull (CLSA Mar'23)

India Exchanges
Sector outlook
Piran Engineer Raging bull

piran.engineer@clsa.com Best play on the capital markets theme in the world’s 5 th largest economy
+91 22 6650 5006
India is the world’s fifth-largest economy and the fifth-largest by total equity
Shreya Shivani market capitalisation. With low financialisation of savings and capital markets
+91 22 6650 5056 penetration, the capital markets have a long runway for growth. Stock exchanges
Adarsh Parasrampuria are the best way to play the rising capital markets penetration theme, in our view.
+91 22 6650 5057 India is a duopoly market with the National Stock Exchange (NSE, not rated) being
Mohit Surana the largest derivatives exchange in the world by volume and among the top five in
+91 22 6650 5037 the cash equities segment. We believe stock exchanges offer resilient business
models with high free cash generation and low capital requirements.
17 March 2023 India: High-teens compounding in equity volumes over time
Cash equity volumes have grown at 17-18% Cagr over the past 10 years and 20
India years, meaningfully faster than nominal GDP growth. Derivatives (F&O), introduced
Financial services two decades back, have grown more than 50x over the past decade. The growth
trajectory of the two products have diverged – cash equity has shown long periods
of stagnant volumes followed by spikes, while F&O volumes have grown every year
Exchanges are high-RoE businesses
barring one (FY09). With GDP poised to grow to US$44trn by 2052 (CL est.), India’s
market cap (MCap) could cross US$40trn by 2052, even after assuming no further
increase in MCap/GDP ratio.
100m+ demat accounts; rising participation from tier-2 and lower cities
Typically, 40-45% of cash equity volumes come from FIIs and domestic institutional
investors while the rest is from proprietary trading and retail/HNI investors. The
number of retail investors has grown at a very strong pace, largely driven by new
customer additions from smaller cities. The number of demat accounts in India
crossed 100m in 2022 (note that an investor could have more than one demat
account). NSE has 70m unique customers, of which half are ‘active’ – ie, traded
once in the past year. The number of active customers has more than tripled in the
Note: Refer to page 28 for nomenclature past three years and has grown at a 30%+ Cagr over the past seven years .
Divergent growth and profitability trends between BSE and NSE
Mahalingam Committee Report Between the two players, NSE has consistently delivered stronger growth and
profitability over the past decade. In fact, its Ebitda margin (70%+) and RoE (38%
in FY22) are best-in-class when compared to global peers, too. We think long-term
growth for Indian exchanges will remain healthy. We note that most exchanges
globally trade at 20-25x PE (1-year forward) with HKEX an exception at 32x PE .
India is in the Top-5 in number of trades in equity and equity derivatives
www.clsa.com Source: CLSA, 2021 Note: Refer to page 28 for nomenclature
CLSA and CL Securities Taiwan Co., Ltd. (“CLST”) do and seek to do business with companies covered in its research reports. As such,
investors should be aware that there may be conflicts of interest which could affect the objectivity of the report. Investors should consider
this report as only a single factor in making their investment decisions. For important disclosures please refer to page 38.

Raging bull India Exchanges
Indian capital markets overview

US$3trn+ equity market capitalisation
India is a US$3.3trn economy poised to grow at 5-6% over the medium-to-long
term. The equity capital markets have grown by leaps and bounds over the past
three decades with financialisation of savings and emergence of ‘facilitators’ (asset
managers, discount brokers, fintechs). The Indian equity markets have also listed
new sectors over the past decade – insurance, capital markets players, affordable
housing financiers, REITs, fintechs, new economy companies etc. The total market
cap of companies listed in India has grown at a 10% Cagr in USD terms and currently
stands at US$3.1trn.
Figure 1
10% USD Cagr in India’s Indian market cap trend

market cap over the past
decade
Source: BBG, CLSA; Note: Figures are as of year-end
India’s MCap/GDP ratio in the middle of the range compared to peers

In terms of the market cap-to-GDP ratio, India is in the middle of the range when
compared to global peers in developed as well as emerging markets. This is despite
it having one of the strongest GDP growth rates, both historical as well as expected.
Figure 2
India’s MCap/GDP stands at Market cap-to-GDP ratio comparison with peers

94%
Source: BBG, CLSA
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17 March 2023 piran.engineer@clsa.com 2

Market cap could cross US$40trn by 2052

Our economist expects India’s GDP to overtake Japan’s by 2030 and grow to
US$25trn by 2047 and US$44trn by 2052. This is assuming 6%/7% growth, 5.5%
inflation and 2.5%/3.5% INR depreciation. Assuming its MCap/GDP ratio remains
stable, MCap could increase multi-fold and cross US$40trn by 2052. To put this in
perspective, China’s MCap is c.US$11trn today.
Figure 3 Figure 4
Our economist forecasts US$44trn GDP by 2052 India’s MCap could cross US$40trn by then
Source: CLSA Source: CLSA
If we assume that MCap/GDP shrinks to pre-Covid level (c.80%), India’s MCap

would still reach US$35trn by 2052.
Figure 5
India’s MCap should grow India’s MCap assuming MCap/GDP ratio reverts to pre-Covid level of 80%
at 9% Cagr assuming that
MCap/GDP ratio reverts to
pre-Covid level of 80%.
Source: CLSA
Greater participation from institutional and retail investors

The key success factors of the evolution of Indian capital markets include:
∑ Growing participation from domestic intuitional investors
∑ Change in Employee Provident Fund Organization’s (EPFO) investment strategy

in FY16 to include equity investments

∑ Rising retail and HNI investor participation
Domestic mutual funds have grown equity AUM strongly

Total equity assets under management (AUM) managed by domestic mutual funds
have grown at a 25% Cagr over the past decade to nearly US$250bn. This has been
driven by introduction of new schemes as well the growing trend of Systematic
Investment Plans (SIPs) in India. Indian retail investors invest US$1.6bn every
month, largely in equity schemes, via SIPs.
Figure 6 Figure 7
Equity AUM managed by funds crossed US$200bn in FY22… …driven by consistent and strong SIP inflows
Source: AMFI, CLSA Source: AMFI, CLSA
India’s employee retirement fund started investing in equities

EPFO started investing in equity markets in FY16, via the ETF route. Initially, the
allocation to equities was 5%, which was subsequently increased to 10% and later
to 15% of AUM. As per our calculations, the total AUM of EPFO invested in ETFs
has grown from scratch to Rs2.5trn over the past 6-7 years.
Figure 8
EPFO ETF AUM stands at Trend in ETF AUM by EPFO (Rs trn)
c.US$30bn
Source: BBG, CLSA
Retail investors on the rise

110m+ demat accounts in The number of retail investors has grown consistently over the years, with a sharp
India uptick during Covid. This was driven by greater awareness as well as ease of
transactions (digital account opening, trading on the app) enabled by discount

brokers. The number of demat accounts (‘dematerialised’ accounts, which allow a

user to track all their assets electronically) has quintupled from 22m in FY14 to
113m today. Note that one person could have multiple demat accounts. However,
the number of unique ‘active’ customers has grown nearly 9x from 4m in FY14 to
34m. An ‘active’ investor is one who has traded at least once in the prior 12 months.
Figure 9 Figure 10
No. of demat accounts up 5x since FY14… …while no. of NSE active clients up nearly 9x
Source: CDSL, NSDL, SEBI, CLSA Source: NSE, CLSA
Discount brokers have facilitated retail investor participation

Discount brokers have been instrumental in widening retail investor participation
in India. For them, the majority of incremental customer acquisitions is happening
from tier-2 and lower locations. The number of NSE active clients with discount
brokers has grown from 1m in FY18 to 19m+ today. Consequently, their cumulative
market share jumped multi-fold from 11% to 57% over this time.
Figure 11
More than half of NSE Market share of discount brokers has increased from 11% to 57% in the past five years
active clients trade with
discount brokers today
Source: NSE, CLSA; Note: We have considered Zerodha, Groww, Upstox and Angel as discount brokers

Equity exchanges – a duopoly market

Incorporated in 1875, Bombay Stock Exchange (BSE, not rated) is the oldest stock
exchange in Asia. It is one of the largest exchanges in the world in terms of the
number of listed companies. On the other hand, NSE was incorporated in 1992 and
started operations in 1994. It was the first exchange to introduce screen-based
Equity derivatives were electronic trading. Despite being a late entrant in the cash equities segment, it
launched in the Indian rapidly gained market share to achieve the No.1 position. It also launched equity
markets in 2000 derivatives in 2000 and other products over the years.
Figure 12
Nearly three decades of NSE
Source: NSE
Figure 13
BSE – Oldest exchange in Asia
Source: BSE

Equities, the dominant trading product for exchanges

More than 95% of trading While world exchanges offers trading services across a number of categories
volumes on the exchange (equities, bonds, currencies, non-equity derivatives etc.), India is still more of an
come from cash and equity equity market. More than 95% of trading volumes on exchanges come from equities
derivatives
– cash and F&O. Other products do not yet have the volumes that equities have.
Between the two exchanges, NSE has 90%+ market share in cash equities and near
100% in equity F&O.
Cash volumes cyclical, but growing at a healthy pace

Cash equity volumes for the industry have been cyclical over the years, but have
grown at a healthy pace nevertheless. Volumes are up 5x over the past 10 years
(18% Cagr) and 22x over the past 20 years (17% Cagr). However, this does not mean
that volumes have grown consistently. In fact, there have been years of no growth
in volumes followed by sudden spikes in volumes.
Figure 14
High-teens Cagr in cash 17-18% Cagr over the past 10 years and 20 years
equity volumes, though not
steadily
Source: BSE, NSE, CLSA
NSE’s market share in cash equities has grown consistently over the past two
decades – from 63% in FY02 to 81% in FY12 and further to 93% in FY22.
Introduction of co-location facilities in 2009 led to a sharp spike in its market share
over the ensuing few years due to increased algorithmic (algo) trading.

Figure 15
NSE has maintained 90%+ NSE has consistently gained market share in cash equities over the years
market share in cash
equities for nearly five
years
Source: NSE, BSE, CLSA
Unlike the USA, China has seen volumes improve meaningfully over the past
decade.
Figure 16
China has shown growth in Equity traded volumes (US$trn)

traded volumes over the
past decade, unlike the USA
Source: World Bank
F&O volumes down only once in the past 20 years

Change in tax regulations, Equity derivatives were introduced in India in 2000. In the first decade, trading in
new product introductions, futures was more prevalent than in options. However, a change in taxation on
weekly option contracts options in 2008 turned the tables in favour of options (Securities Transaction Tax
and reduction in lot size
was levied on the option premium rather than the notional value). Other things such
helped boost option
volumes as new product introductions, commencement of weekly option contracts,
reduction in lot size, margin benefit to traders on hedged positions etc. also helped
boost volumes. In FY23-YTD, 99% of F&O trading was options trading. Overall F&O
volumes are up more than 50x over the past 10 years.

Figure 17
Timeline of new product introduction in equity derivatives
Source: NSE, CLSA
Figure 18
F&O volumes have grown F&O volumes have shot through the roof; declined only once in 20 years (FY09)
exponentially over the past
decade
Source: NSE, CLSA
Figure 19
99% of equity F&O trades F&O is dominated by options today, unlike 15 years back
are options trades
Source: NSE, CLSA
Option premium value has grown at a slightly lower pace than option notional value
(25x over the past decade vs 50x+ for notional value), due to factors such as
commencement of weekly options. This is relevant because, as explained in

subsequent chapters, exchanges earn revenue based on the premium value and not
the turnover value.
Figure 20
Option premium growth has Trend in option premiums

lagged option traded value
growth in FY23
Source: NSE, CLSA
NSE has been the largest NSE has a near-monopoly in equity F&O trading in India. For the past three years,
equity F&O exchange by it has been the largest exchange in the world in terms of number of F&O contracts
volumes in the world for the traded.
past three years
Who trades in options? A sneak peak…
The share of trading from individual investors has increased from pre-Covid levels
of 25-28% to 36% today. The share of proprietary traders declined over FY16-20
but increased thereafter. Note that mutual funds are not allowed to buy options but
are allowed to write options only under a covered call strategy.
Figure 21
Over 40% of trading in Share of client participation in index options premium turnover (%)
options comes from
proprietary (prop) traders
Source: NSE, CLSA
70m unique customers

There are 70m+ unique customers registered with exchanges. Of these, c.34m are
active, ie, have traded at least once in the past 12 months. The past three years of
Covid witnessed acceleration in active client count. A lot of customer acquisition is

from smaller towns and cities. In FY22, cities beyond the top 50/100 cities
accounted for 57%/43% of new investor registrations for NSE, indicating a
widening interest in equity markets. NSE’s management targets an overall customer
base of 100m by FY26.
Figure 22
34m active clients for the NSE active client count accelerated post Covid
industry
Source: NSE, CLSA
What else do exchanges offer?

Apart from listing, trading and settlement, here are some business
products/segments that exchanges deal in:
Co-location is a key source ∑ Co-location services: NSE launched its co-location services in 2009 and
of revenue BSE in 2012 to allow traders and brokers to establish their IT systems within
the exchange’s premises. This led to a boom in high-frequency trading (HTF)
over the years. The exchange generates revenue from leasing rack space for
co-located servers and connectivity charges related to high-frequency
trading through co-location facilities.
∑ Index services: Exchanges sell data products based on their SENSEX/NIFTY

indices on a subscription basis. This are used by stock exchanges, AMCs,
ETF issuers, insurance companies and other financial institutions.
NSE also earns from data ∑ Data services: Exchanges distribute real-time and proprietary market
feed and index licensing information to global data vendors, financial institutions, financial websites,
services mobile apps etc. Our industry interactions suggest that data feed is a much
larger share of revenue for global exchanges than local exchanges.
∑ Platform services: BSE has its ‘StAR MF’ online platform for transactions in
mutual fund units. Likewise, NSE has its ‘NMF’ platform for the same.
∑ Technology services: NSEIT Ltd, a step down subsidiary of NSE, is a

provider of business IT solutions for third parties such as banks, account
aggregators and a clearing corporation. Likewise, BSE Technologies is the
technology solution provider for International Bullion Exchange at GIFT
City.

∑ GIFT City initiative: BSE launched India International Exchange Ltd, India’s
first international stock exchange, located in GIFT City, a Special Economic
Zone in 2017. Likewise, NSE International Exchange (NSE IFSC)
commenced operations in GIFT City in 2017 and had 49 registered trading
members as of FY22. Traded asset classes include global stocks, equity
index derivatives, Indian stock derivatives, commodity derivatives, currency
derivatives etc. The aggregate turnover in FY22 for the latter was
US$243bn.
∑ Investor education/training: Both exchanges have subsidiaries (NSE

Academy/BSE Institute of Research Development & Innovation) that
promote financial learning as a necessary life skill within schools, colleges
and professional learning spaces.

Understanding the revenue model

In this chapter, we discuss the various sources of revenue and their contribution to
the overall revenue of the company.
Trading services account for Trading services, the key revenue source
75%+ of total revenue from Exchanges charge a transaction fee on trades they execute. The fee, paid by the
operations for NSE trading member (broker), depends on the product and the size of the trade. Trading
services make up the lion’s share of total revenue from operations, accounting for
more than 75% of the latter in the previous two fiscal years (average of 66% over
the past decade) for NSE. Given that volumes on BSE are much lower than those
on NSE, transaction revenue accounts for 40-45% of total revenue for the company.
NSE is more competitively priced vs BSE on transaction charges in cash market

trades. However, in derivatives, NSE’s transaction charges are significantly higher
than that of BSE. Yet that does not seem to have dented NSE’s market share.
Figure 23
NSE’s transaction charges NSE vs BSE transaction charges (Rs*)

are similar to BSE’s in the NSE BSE
cash market but much Cash market 32.0-34.5 37.5
higher in equity F&O trades Equity futures 18.5-20.0 5.0
Equity options 25,000 up to first Rs30m premium and 330-530 thereafter 250.0
Source: NSE, BSE; *Note: Prices mentioned above are for every Rs mn of traded value for cash market per month
and equity futures and for every Rs mn of premium written for equity options per month; Note that as the size of
the trades increase, NSE charges a lower per-unit cost
The fee structure for cash and derivative trades remains largely stable. NSE last
revised it in Dec-20 due to its requirement to build a corpus of Rs15bn for the
‘Investor Protection Fund.’ On the other hand, BSE revised its charges in Dec-22.
Figure 24
Marginal upward revision in NSE transaction charges structure (Rs*)

trading fees across Old fees (Rs) Revised fees (Rs)
categories in Dec-20 Cash market 30.0-32.5 32.0-34.5
Equity futures 17.5-19.0 18.5-20.0
Equity options 25,000 up to first Rs30m premium 25,000 up to first Rs30m premium
and 300-500 thereafter and 330-530 thereafter
Source: NSE; *Note: Prices mentioned above are for every Rs mn of traded value for cash market per month and
equity futures and for every Rs mn of premium written for equity options per month; Note that as the size of the
trades increase, NSE charges a lower per-unit cost
Figure 25
Revision in BSE’s transaction charges effective 1 Dec 2022 (Rs*)

BSE Old fees Revised fees
Cash market (Group A, B and common scrips) 32.0-34.5 37.5
Source: BSE, CLSA; *Note: Price mentioned is per Rs mn of traded value
Rising share of options-trading revenue

Given the surge in options trading post Covid, we believe two-thirds of
transactional revenue could be coming from it for NSE. For BSE, given that it is an
insignificant player in derivatives, most of the transactional revenue should still be
from cash equity trading.

Figure 26 Figure 27
NSE’s trading services revenue split for FY22, as per our estimates Our estimate of transactional revenue for NSE (Rs bn)
Source: CLSA Source: CLSA
Given the sharp surge in option trading volumes, more than two-thirds of NSE’s
trading revenue accrues from it, as per our calculations. Pre-Covid, this number was
25-30%. On the other hand, the dependence on the cash market has fallen
significantly over the years.
Figure 28
Options trading comprised Sharp increase in share of transactional revenue from options, in our view
more than two-thirds of
trading revenue, as per our
math
Source: CLSA
Co-location and data feed – steady revenue growth drivers

Apart from trading services, key sources of revenue include co-location charges
(data centre charges) and data feed services.
Co-location charges include • Co-location charges: Exchanges charge their members rental fees on the
rental fees on the rack rack space for co-located servers and connectivity charges related to high-
space for co-located servers frequency trading through those facilities. For example, NSE has four data
centres, 1,200+ racks and 3,000+ leased lines. The initial setup cost of a full
rack is Rs100k and the annual rental is Rs1.2m. The annual charges for
message categories vary from Rs50k to Rs2.5m depending on the speed.
• Data feed services: Exchanges offer services related to dissemination of

price, volume and other data relating to securities and various indices to the

ecosystem. The services provided are in multiple categories or levels. For

example, for NSE, Level 1 provides best bid and ask price, Level 2 provides
market depth data up to 5 best bid and ask prices and Level 3 provides
market depth data unto 20 best bid and ask prices. On the other hand, tick-
by-tick (TBT) data offers the full order book. The company typically charges
an annual fixed fee for various trading products (capital markets, F&O,
currencies etc) and the fee varies across end users. The charges also vary,
depending on whether the feed is real-time or with a lag.
Tech services – Good revenue source for NSE, not as much for BSE
NSE also provides NSE operates in this segment through its wholly owned step-down subsidiary,
technology consultation NSEIT. Its services include technology consultancy and development services for
and other services to the financial services industry. Some areas it works in include digital transformation,
financial services players
cloud infrastructure solutions, data analytics and business consultancy. In addition,
it also provides online examination services used in governmental, corporate and
educational testing performance evaluations. On the other hand, tech services is
not a meaningful revenue contributor for BSE.
Listing and licensing services are stable ‘cash cows’

Other key revenue streams include listing and index licensing services. Both these
revenue streams are fairly stable and have grown at 10-13% Cagr over the past five
years for NSE.
Companies that list • Listing services: Companies that list their securities on the exchange pay
securities on the exchange one-time initial listing fees (Rs50k for NSE, Rs20k for BSE), book building
pay a ‘listing’ fee fees and processing fees at the time of listing. The initial listing fee is a fixed
amount that is reviewed annually, while book building and processing fees
are determined based on the size of a company’s proposed securities
offering. In addition, companies pay a recurring annual listing fee based on
total paid-up shares, bond or debenture capital as well as market cap. We
note that the annual fee for NSE is significantly higher than that for BSE.
Exchanges charge a fee for • Licensing services: NSE/BSE charge a fee for licensing their NIFTY/SENSEX
licensing their indices to stock exchanges, financial institutions, asset managers, brokers,
NIFTY/SENSEX indices to investors and other enterprises.
various financial institutions
Other revenue streams
Other revenue streams include clearing and settlement services, test enrolment
services, income on investments etc. Clearing and settlement is done by their
respective wholly-owned subsidiaries. In FY20, SEBI introduced the interoperability
framework among clearing corporations, which allows market participants to
consolidate their clearing and settlement functions at a single clearing corporation,
irrespective of the stock exchanges on which the trades are executed. Test
enrolment services include online training programs in various aspects of banking,
financial services, financial markets and financial literacy.
c.Rs90bn revenue from NSE: 34% revenue Cagr over the past five years
operations in FY22 Total revenue from operations stood at c.Rs90bn in FY22, having grown at a strong
34% Cagr over the prior five years. Trading services comprised 78% of the total
revenue, at Rs70bn. Revenues from data feed, co-location services and tech
services grew at a 25-40% Cagr over FY17-22, while those of listing and licensing
services grew at a slower 10-13% Cagr, as discussed earlier.

Figure 29
Seventy-eight percent of Revenue mix (FY22)

revenue in FY22 came from
trading services
Source: NSE, CLSA; Note: Numbers are consolidated
Figure 30 Figure 31
34% Cagr in revenue from trading services (Rs bn) 21% Cagr in revenue from all other services (Rs bn)
Source: NSE, CLSA Source: NSE, CLSA
Share of revenue from BSE: Dependence on transactional revenue lower but listing revenue higher
trading services at 45% for Compared to NSE, BSE has a much lower dependence on transactional revenue as
BSE vs 78% for NSE overall volumes on its exchange are much lower than those on NSE’s. However, as
BSE has more companies listed on its exchange, its listing fee, in absolute terms, is
higher than that of NSE. This is despite listing charges for BSE being lower than
those for NSE.

Figure 32 Figure 33
BSE’s revenue trend Higher share of revenue from securities services in FY22 for BSE
Source: BSE, CLSA Source: BSE, CLSA
Figure 34
BSE generates more
revenue from listing and Listing and book-building fee comparison between BSE and NSE (Rs m)
book-building services than
NSE
Source: NSE, BSE, CLSA
NSE’s long-term targets on revenue

Diversifying the revenue • Develop capabilities to generate 50% of revenue from non-transaction
mix is a long-term target for sources (similar to BSE).
NSE
• Further, within transaction revenue, one-third to come from non-equity/
equity derivatives.

Financial performance divergent

Revenue resilience different for both players
Revenue cyclicality We note a difference in cyclicality of revenue for the two exchanges. NSE’s business
different for both players has demonstrated much more resilience to cyclicality compared to what one would
expect from a capital markets player. Revenue has grown year-over-year in nine of
the past 10 years (21% 10-year Cagr). While YoY growth comparisons may be a bit
volatile, looking at a three-year Cagr makes sense, in our view. When we look at the
prior three-year revenue Cagr for NSE over the past eight years, it was sub-10% in
only one phase, FY12-15. In most other years, it ranged between 13% and 19% and
in the past two years, it has been 29%/44%. What this means is that while there
may be growth fluctuations year-on-year, over a three-year period, there is a high
probability of double-digit revenue Cagr in this business model.
Figure 35
Twenty-one percent NSE - In the past decade, revenue declined only in FY13
revenue Cagr over the past
decade
Source: NSE, CLSA
Figure 36
Over a three-year period, Even on a three-year Cagr basis, revenue growth has been sub-10% only once – FY12-15
revenue typically grows at
mid-teens Cagr
Source: NSE, CLSA

On the other hand, BSE has had a fair number of years with a YoY decline in revenue.
Figure 37
BSE’s revenue Cagr over the BSE’s revenue trend

past decade is 4%
Source: BSE, CLSA
NSE: Costs are not as ‘fixed’ as one would imagine

Regulatory fees are variable While one would expect an exchange to have a largely fixed cost structure such
while most other expenses that operating leverage plays out, it does not seem to be the case for NSE over the
are fixed long term. Yes, in certain periods of growth spurts, the company has shown
operating leverage, but in the long term, that does not seem to be the case. Opex
has grown at an 18% Cagr over the past decade, only marginally lower than the 21%
Cagr in revenue from operations.
Note that for an exchange, a key variable cost is its regulatory fee – SEBI and IFSCA
regulatory fees. Other expenses like employee and tech expenses are more
discretionary – managements can choose whether to cut back on those expenses.
Figure 38
Sharp spike in opex in FY22 NSE total opex has grown at an 18% Cagr over the past decade
Source: NSE, CLSA

Figure 39
Opex has grown in line with NSE opex growth vs revenue growth
revenue in the long term
Source: NSE, CLSA
Expenses are pretty broad-based

Employee expense was 25% No expense line item accounts for a large portion of total opex. The largest
of total opex in FY22 expenses are employee, D&A and tech expenses.
Figure 40 Figure 41
NSE number of employees trend Apart from employee cost, no other cost is large
BSE: Opex has grown more moderately than NSE, due to lower revenue growth
Contrary to NSE, we note that BSE’s opex has grown at a more moderate pace. We
believe opex growth would have been curtailed due to lower revenue growth.

Figure 42
BSE’s opex has grown at a BSE’s opex trend

moderate 6% Cagr over the
past decade
Source: CLSA; Note: Opex includes Liquidity Enhancement Scheme expenses but not contribution to core SGF
NSE: Stronger and more consistent Ebitda margin delivery

NSE delivered an average of 65% Ebitda margin historically, ie, pre-Covid. With the
spike in trading volumes post Covid and consequent jump in revenue, Ebitda
margins improved to 73-74% in FY21 and FY22. Margin further increased to 76%
in 9MFY23.
Figure 43
Ebitda margin shot up 8- NSE: Ebitda margin has historically been in the ‘60s’ and now in the ‘70s’
10ppt post Covid
Source: NSE, CLSA; Note: Ebitda calculation does not factor in contribution to Settlement Guarantee Fund (SGF) or
‘other income’ earned by the company
On the other hand, given its smaller scale, BSE’s Ebitda margin has always been
lower than NSE’s. In FY22, it crossed 30% for the first time in a decade.

Figure 44
BSE delivered 33% Ebitda BSE: Ebitda margin trend

margin in FY22
Source: NSE, CLSA; Note: Ebitda calculation does not factor in contribution to Settlement Guarantee Fund (SGF) or
‘other income’ earned by the company; Ebitda margin in FY20 was impacted by a one-off provision for additional
contribution to ISF and IPF as guided by regulatory directions
High Ebitda margin implies sensitivity to PAT is minimal

The good thing about a high-Ebitda margin business, such as NSE’s, is that the
sensitivity to PAT is low. Every 100bp change in Ebitda margin would have affected
PAT by only 1.3% in FY22. This means that if Ebitda margins were to, hypothetically,
decline from 75% to 70%, the PAT impact would be only 6-7%.
Figure 45
100bps change in Ebitda PAT sensitivity to change in Ebitda margin minimal for NSE
margin impacts PAT by only Ebitda margin (%)
1.3% 100bp lower Actual 100bp higher
PAT (Rs bn) 50.4 51.1 51.7
Change (1.3%) 0.0% 1.3%
Source: NSE, CLSA; Note: Numbers as of FY22; Ebitda calculation does not factor in contribution to Settlement
Guarantee Fund (SGF) or ‘other income’ earned by the company
NSE - PAT has more than tripled over FY19-22; 35%+ RoE
Given NSE’s strong revenue growth and improvement in Ebitda margin post Covid,
it delivered a greater than three-fold spike in PAT to Rs52bn over FY19-22. Profits
have grown consistently every year, barring FY16, when the company had to make
a large contribution to the Core Settlement Guarantee Fund (CGSF).

Figure 46
PAT has grown every year NSE trend in PAT growth

except FY16, which was
impacted by a one-off
Source: NSE, CLSA
Figure 47
RoE crossed 35% in the past NSE RoE trend (%)

two years and 40% in
9MFY23
Source: NSE, CLSA
BSE - PAT has grown at a slower pace

Over FY19-22, BSE’s PAT grew at an 8% Cagr to reach Rs2.4bn. In our opinion, its
negligible market share in F&O (which has grown multifold during Covid) is a key
reason for the divergence in profit trajectory versus NSE over the past three years.

Figure 48
BSE’s PAT was Rs2.4bn in BSE PAT trend (Rs bn)

FY22
Source: BSE, CLSA; Note: Post exceptional items
Invested Rs6bn in capex in Capex historically equal to 12-15% of PAT for NSE
FY22, up 4x from FY17 NSE has to invest in technology to keep up with growing volumes. Over the past
levels five years, capex has increased 4x to Rs6bn, ie, 12% of PAT.
Figure 49
NSE trend in capex
Source: NSE, CLSA
High liquidity on the balance sheet

NSE has nearly Rs300bn (US$3.5bn) worth of cash and investments on the balance
sheet. However, if we were to exclude what is related to settlement obligations,
CSGF contribution and current liabilities, the company would still have Rs100bn+
of ‘free’ cash on the balance sheet. Similarly, BSE has Rs22bn liquidity on the
balance sheet.

Figure 50
Liquidity on the balance NSE: trend in balance sheet liquidity

sheet increased from
Rs73bn to Rs104bn
Source: NSE, CLSA; Note: We compute liquidity as cash and investments less deposits, CSGF and current liabilities
Figure 51
BSE has c.Rs22bn cash on BSE: trend in liquidity on the balance sheet
the balance sheet
Source: BSE, CLSA; Note: We deduct CSGF liability and margin money from members to calculate free cash on the
balance sheet

Summary financials
Figure 52
NSE – Summary financials (Rs m)

Consolidated FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Income Statement
Revenue from operations 17,231 18,635 21,043 26,091 29,974 35,079 56,248 89,295
Growth (%) 27 8 13 24 15 17 60 59
Other Income 5,524 4,956 5,764 4,234 5,172 3,896 5,775 5,702
Total Income 22,754 23,592 26,807 30,326 35,146 38,975 62,023 94,996
Growth (%) 19 4 14 13 16 11 59 53
Total expenses 6,586 7,209 8,836 9,579 12,151 14,228 17,102 27,686
Growth (%) 12 9 23 8 27 17 20 62
Operating profit 16,169 16,383 17,970 20,747 22,994 24,748 44,922 67,311
Growth (%) 23 1 10 15 11 8 82 50
Share of profits in associates 647 912 1,117 1,223 1,070 1,126 659 903
Less: contribution to core SGF 1,700 7,615 1,341 0 0 621 (621) 0
PBT 15,116 9,679 17,746 21,970 24,065 25,253 46,202 68,213
Tax 4,846 3,371 5,558 7,356 8,682 6,405 8,916 17,140
Exceptional & other items (5) 0 0 0 1,697 0 (1,552) 910
Profit after tax 10,265 6,308 12,188 14,615 17,080 18,848 35,734 51,983
Growth (%) 6 (39) 93 20 17 10 90 45
Balance Sheet
Cash 51,043 50,288 112,312 93,597 107,470 133,092 150,075 166,121
Investments 47,229 63,958 58,143 62,771 61,246 60,963 93,625 128,573
Other assets 20,685 22,164 24,488 25,892 31,068 47,648 48,357 61,377
Total Assets 118,958 136,410 194,943 182,261 199,784 241,703 292,056 356,070
Equity share capital 450 450 495 495 495 495 495 495
Reserves and Surplus 61,950 68,227 71,601 73,001 77,374 85,718 115,864 153,609
Total networth 62,400 68,677 72,096 73,496 77,869 86,213 116,359 154,104
CSGF + IPF 6,952 16,831 19,755 24,337 30,577 34,268 37,929 42,552
Deposits 16,636 16,752 18,033 19,159 18,914 18,840 19,804 23,236
Other liabilities 32,971 34,150 85,059 65,269 72,424 102,383 117,964 136,177
Total Liabilities 118,958 136,410 194,943 182,261 199,784 241,703 292,056 356,070
Ratios
Ebitda 11,578 12,516 13,388 17,769 19,243 22,660 41,407 64,993
Ebitda margin (%) 67 67 64 68 64 65 74 73
EBIT 10,645 11,427 12,206 16,513 17,823 20,852 39,147 61,609
EBIT margin (%) 62 61 58 63 59 59 70 69
ROE (%) 17 10 17 20 23 23 35 38
Source: NSE, CLSA

Figure 53
BSE – Summary financials (Rs m)

Consolidated FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Income Statement
Revenue from operations 3,611 4,265 3,737 5,072 4,503 4,505 5,014 7,432
Growth (%) 35 18 (12) 36 (11) 0 11 48
Other Income 2,636 2,317 2,446 1,917 2,371 1,795 1,533 1,204
Total Income 6,248 6,583 6,183 6,989 6,874 6,300 6,547 8,635
Growth (%) 18 5 (6) 13 (2) (8) 4 32
Total expenses 3,873 4,199 4,093 4,256 4,918 5,525 5,245 5,714
Growth (%) 15 8 (3) 4 16 12 (5) 9
Operating profit 2,374 2,383 2,090 2,733 1,957 775 1,301 2,921
Growth (%) 23 0 (12) 31 (28) (60) 68 124
Share of profits in associates 0 0 11 199 292 267 432 642
Less: contribution to core SGF 258 174 1 226 68 7 62 291
PBT 2,116 2,209 2,100 2,707 2,181 1,035 1,671 3,273
Tax 438 324 107 555 234 149 109 823
Exceptional & other items (165) (294) (208) (5) (5) 320 (145) 0
Profit after tax 1,514 1,592 1,785 2,148 1,942 1,206 1,417 2,449
Growth (%) (5) 5 12 20 (10) (38) 17 73
Balance Sheet
Cash 12,957 12,993 24,030 19,826 15,481 16,092 19,269 35,117
Investments 23,170 21,148 19,962 24,416 23,797 21,320 18,440 19,681
Other assets 5,976 8,292 7,838 5,739 5,762 7,346 8,562 7,056
Total Assets 42,103 42,434 51,830 49,981 45,039 44,758 46,271 61,854
Equity share capital 107 107 108 107 104 90 90 271

Reserves and Surplus 25,265 25,122 26,516 30,699 29,182 24,161 24,976 26,275
Total Networth 25,372 25,229 26,624 30,806 29,286 24,251 25,066 26,545
CSGF 1,113 1,761 2,045 3,585 4,016 4,354 5,391 6,409
Current financial liabilities 11,061 10,859 16,710 13,413 9,759 13,080 11,579 23,504
Other liabilities 4,557 4,585 6,451 2,178 1,978 3,073 4,235 5,396
Total Liabilities 42,103 42,434 51,830 49,981 45,039 44,758 46,271 61,854
Ratios
Ebitda 332 690 156 1,281 105 (485) 450 2,422
Ebitda margin (%) 9 16 4 25 2 (11) 9 33
EBIT (255) 73 (347) 826 (406) (996) (128) 1,939
EBIT margin (%) (7) 2 (9) 16 (9) (22) (3) 26
ROE (%) 6.2 6.3 6.9 7.5 6.5 4.5 5.7 9.5
Source: BSE, CLSA

Global exchanges – peer comparison

In this chapter, we analyse some of the most prominent exchanges in India and
globally in terms of size, profitability and valuation. Note the following
abbreviations:
∑ MCX – Multi Commodity Exchange of India
∑ ICE – Intercontinental Exchange (owns NYSE)
∑ CME – Chicago Mercantile Exchange
∑ CBOE – erstwhile Chicago Board Options Exchange
∑ HKEX – Hong Kong Exchange
∑ LSEG – London Stock Exchange Group
∑ JPX – Japan Exchange Group
∑ B3 SA – Brasil Bolsa Balcao
∑ DB – Deutsche Boerse
∑ SGX – Singapore Exchange
LSEG, ICE, CME and HKEX are among the largest exchanges in the world
We look at what are the largest exchanges in the world – be it in terms of revenue,
profit or market capitalisation. Across all parameters, we note that LSEG, CME, ICE
and HKEX stand out as the largest exchanges in the world.
Figure 54
LSEG is the largest Revenue comparison (US$m)

exchange in terms of
revenue ($9bn+ in 2022)
Source: BBG; Note: As of FY22

Figure 55
CME earned a profit after PAT comparison (US$m)

tax of US$2.5bn+ in 2022
Source: BBG; Note: As of FY22; CBOE incurred large goodwill impairment, adjusted for which, PAT would have
been US$600m+; ICE incurred one-off losses, adjusted for which PAT would have been US$2.2bn
Figure 56
CME, ICE and HKEX Three exchanges have a market cap greater than US$50bn
command a market cap of
~US$50-65bn
Source: BBG
Who are the most profitable?

We look at profitability in terms of Ebitda margins and RoE. Ebitda margins for most
players is 50%+, LSEG and BSE being exceptions. ICE and HKEX have Ebitda
margins around 80%. The RoE profile of exchanges varies significantly, with a few
players near 10%, whereas NSE and SGX stand out with 30%+ RoE.

Figure 57
ICE delivered 80%+ Ebitda Most players have an Ebitda margin north of 50%
margin in 2022
Source: BBG; Note: for FY22
Figure 58
NSE delivered an RoE of Healthy RoE for most players – FY22

38% in FY22
Source: BBG; CBOE had low RoE in FY22 due to goodwill impairment, adjusted for which, it would have been 17-
18%; LSEG has low RoE due to the acquisition of Refinitiv due to which it issued equity; ICE incurred one-off
losses, adjusted for which RoE would have been 10%
Who are the fastest growing?

The table below highlights the Cagr in PAT for the past three fiscal years as well as
the next three, based on Bloomberg consensus estimates.

Figure 59
Profit growth rates divergent across segments

PAT Cagr Past 3 years Next 3 years
NSE 45% NA
BSE 8% 3%
MCX (1%) 29%
ICE 27% (11%)
CME 10% 5%
Nasdaq 37% 3%
CBOE 8% 10%
HKEX 10% 4%
LSEG 87% (19%)
JPX 1% (2%)
B3 SA 31% 5%
DB 14% 13%
SGX 5% 5%
Source: BBG; Note: there could be one-offs in the PAT number
Valuation multiples
Most exchanges are trading at 20-25x PE (one-year forward). HKEX is an exception,
trading at 32x PE, while B3 SA at around 15x PE.
Figure 60
Most players trade at 20- PE ratio (1yr forward)

25x PE
Source: BBG

Corporate details
Shareholding pattern
As of FY22, LIC of India was the largest shareholder of NSE, with c.11% stake.
Temasek Holdings, via its subsidiary, was the second-largest shareholder, owning
5%. Around 45% of the company is held by foreigners.
Figure 61
Forty-five percent foreign Shareholder mix as of Mar-22

shareholding in the
company as of Mar -22
Source: NSE
The top 10 shareholders own 43% of NSE.
Figure 62
Top 10 shareholders as of Mar-22

Entity Shareholding (%)
Life Insurance Corporation of India 10.7
Aranda Investments (Temasek Holdings) 5.0
Stock Holding Corporation of India Ltd 4.4
SBI Capital Markets Limited 4.3
Veracity Investments Limited 3.9
State Bank of India 3.2
Crown Capital Limited 3.2
PI Opportunities Fund I 3.0
MS Strategic (Mauritius) Limited 2.6
Acacia Banyan Partners 2.5
Source: NSE
BSE’s shareholding has more retail investors as well as its trading members. The top
10 shareholders own 19% of the company

Figure 63
Public and trading members BSE shareholding structure

own 90% of BSE
Source: BSE, CLSA
Figure 64
Key shareholders of BSE (%)

Entity Shareholding (%)
LIC 5.6
Zerodha 3.7
Siddharth Balachandran 3.5
MSPL Ltd. 1.3
S Gopalkrishnan 1.2
Jupiter India Fund 0.9
Akshay Mehta 0.8
Vanguard 1.4
Poonawalla Constructions LLP 0.5
Source: BSE, CLSA

Appendix
Regulations & other issues
Here are some of the key regulations that have come in the past decade –
∑ SGF/CSGF related – The history of Settlement Guarantee Fund/Core

Settlement Guarantee Fund is rather complicated. The essence of these funds
is to settle trades in case a clearing member fails to settle its obligations.
o Until 2014, as per regulations, exchanges were required to transfer 25%

of profits to an SGF.
o In 2014, another regulation stated that clearing corporations must

maintain a CSGF, the quantum of which was specified by a complex
formula. The clearing corporation and the stock exchange were
required to contribute at least 50%/25% to the quantum of the CSGF.
With this regulation, stock exchanges discontinued the 25%
contribution of annual profit to SGF.
o In May 2016, the regulator stated that the requirements of contribution

to SGF and CSGF were mutually exclusive. This meant that exchanges
and clearing corporations would have to comply with the requirement
of 25% contribution of the prior two years to the SGF.
o However, in August 2016, the regulator amended the regulation to

remove the provision that required the 25% contribution of profits to
the SGF.
o As of FY22, NSE had a CSGF corpus of Rs35bn+ outstanding.
o Accounting – The contribution to CSGF by the parent (NSE) is recorded

as an expense in the consolidated P&L, while the contribution of NSE
Clearing Ltd is recorded as an appropriation from the group’s retained
earnings in the consolidated balance sheet. The appropriations to the
retained earnings in the past three years has been minimal.
∑ In FY20, interoperability between clearing corporations was implemented,

allowing market participants to consolidate their functions at a single clearing
corporation, irrespective of the exchange at which the trade takes place.
∑ As per the European Market Infrastructure Regulations, a CCP in a third country

can provide clearing services to a European bank only if it is recognised by
European Securities and Markets Authority (ESMA). In 2022, ESMA
derecognised six Central Counterparties (CCP), including NSE Clearing Ltd.,
because ESMA wanted to supervise these CCPs, while RBI was not in favour of
that. This derecognition would impact European banks dealing in forex
derivatives, interest rate derivatives and other products.
Details of NSE’s co-location issue details

In 2015, SEBI forwarded certain complaints it had received about NSE’s co-location
facility and unfair access provided to certain trading members. It later asked a team
headed by IIT Bombay professors to examine the complaints and submit a report to
SEBI. The report submitted by the team revealed the following:

∑ NSE’s TCP-IP based tick-by-tick (‘TBT’) architecture was prone to market

abuse by providing quicker order dissemination to those who managed to
login early
∑ One of the members consistently logged in early and crowded out other
members
∑ Certain members were given preferential access to the backup servers of

the TBT system
∑ NSE was not fully cooperative with the team in providing complete and/or
timely responses
∑ NSE was in violation of its internal policy by permitting entities that are not
internet service providers to lay fibre optic cables at its co-location facility
While NSE denied these observations, SEBI took note of the same and asked NSE
to initiate a forensic examination of the above-mentioned points by an external
agency as well as place all revenue from the co-location facility in a separate bank
account. The forensic examination by the external agency also confirmed that the
TCP-IP-based TBT architecture was prone to abuse and that some brokers were
given preferential treatment. As a result, SEBI levied penalties of Rs10bn+ on NSE,
which were contested by the latter legally with the Securities Appellate Tribunal
(SAT). SAT, in a recent verdict, set aside the SEBI order, but levied a penalty of Rs1bn
plus interest on NSE for lapses in policies and procedures.
What are the most traded symbols in derivatives?

Interestingly, BANKNIFTY options are traded more than NIFTY options.
Figure 65 Figure 66
Top traded futures (FY22) Top traded options by notional value (FY22)
Which are the largest global exchanges?

In 2021, NSE was the largest derivatives exchange in the world by number of
contracts and the fourth largest in the capital market segment by number of trades.

Figure 67 Figure 68
NSE on top in derivatives… …and in fourth position in capital markets
Source: NSE, CLSA; Data as of 2021 Source: NSE, CLSA; Data as of 2021

Important disclosures India Exchanges
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Companies mentioned
Angel One (N-R)
B3 SA (N-R)
Bombay Stock Exchange (N-R)
Brasil Bolsa Balcao (N-R)
CBOE (N-R)
Central Depository (N-R)
CME (N-R)
Deutsche Boerse (N-R)
Groww (N-R)
HK Exchanges (388 HK - HK$326.20 - BUY)
ICE (N-R)
ICICI Bank (ICICIBC IB - RS823.5 - BUY)
International Bullion Exchange (N-R)
Japan Exchange (N-R)
Korea Exchange (N-R)
LIC of India (N-R)
London Stock Exchange (N-R)
MCX India (N-R)
MSPL Ltd (N-R)
Nasdaq (N-R)
NSDL (N-R)
NSE (N-R)
Osaka Exchange (N-R)
Poonawalla Constructions LLP (N-R)
Refinitiv (N-R)
Reliance Industries (RIL IB - RS2,226.1 - BUY)
Shanghai Stock Exchange (N-R)
SHCI (N-R)
Shenzen Stock Exchange (N-R)
Singapore Exchange (N-R)
State Bank of India (SBIN IB - RS524.5 - BUY)
Tata Steel (TATA IB - RS105.0 - O-PF)
Upstox (N-R)
Zerodha (N-R)
Analyst certification
The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect my/our
own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will
be directly or indirectly related to the specific recommendation or views contained in this research report.

Important disclosures
Recommendation history of Hong Kong Exchanges & Clearing Ltd 388 HK
Date Rec Target Date Rec Target

13 Feb 2023 BUY 425.00 06 Dec 2021 BUY 574.00
03 Jan 2023 BUY 406.00 27 Oct 2021 BUY 640.00
19 Oct 2022 BUY 355.00 23 Aug 2021 BUY 687.00
18 Aug 2022 BUY 410.00 11 Aug 2021 BUY 665.00
16 Mar 2022 BUY 460.00 23 Jul 2021 BUY 696.00
25 Feb 2022 BUY 503.00
Source: CLSA

Recommendation history of Tata Steel Ltd TATA IB

08 Feb 2023 O-PF 125.00 17 Jun 2021 BUY 136.20*
17 Jan 2023 O-PF 135.00 07 May 2021 BUY 135.00*
01 Nov 2022 SELL 90.00 23 Apr 2021 BUY 115.00*
17 Aug 2022 U-PF 110.00 29 Mar 2021 BUY 95.00*
27 Jul 2022 U-PF 99.50* 11 Feb 2021 BUY 86.00*
23 May 2022 U-PF 112.00* 07 Jan 2021 BUY 84.00*
05 May 2022 BUY 164.50* 14 Dec 2020 BUY 75.00*
08 Feb 2022 BUY 175.00* 17 Nov 2020 BUY 58.50*
19 Jan 2022 BUY 182.00* 29 Sep 2020 O-PF 40.50*
13 Nov 2021 BUY 194.20* 17 Aug 2020 SELL 34.00*
13 Aug 2021 BUY 195.00* 01 Jul 2020 SELL 28.50*
02 Aug 2021 BUY 175.00* 10 Jun 2020 SELL 30.40*
07 Jul 2021 BUY 145.00* 06 May 2020 U-PF 29.00*
Source: CLSA; * Adjusted for corporate action

Recommendation history of State Bank of India SBIN IB

05 Feb 2023 BUY 725.00 26 Feb 2021 BUY 600.00
07 Nov 2022 BUY 750.00 04 Feb 2021 BUY 560.00
17 Sep 2022 BUY 680.00 08 Jan 2021 BUY 385.00
07 Aug 2022 BUY 660.00 02 Dec 2020 BUY 360.00
20 Jun 2022 BUY 615.00 05 Nov 2020 BUY 330.00
15 May 2022 BUY 660.00 21 Aug 2020 BUY 310.00
04 Nov 2021 BUY 750.00 03 Aug 2020 BUY 270.00
22 May 2021 BUY 650.00 20 Apr 2020 BUY 240.00
Source: CLSA
Recommendation history of Reliance Industries Ltd RIL IB

24 Oct 2022 BUY 2,970.00 25 Oct 2021 O-PF 2,820.00
24 Aug 2022 BUY 3,180.00 28 Jul 2020 O-PF 2,250.00
31 Jan 2022 BUY 2,955.00 04 May 2020 BUY 1,753.38*
24 Jan 2022 O-PF 2,850.00 17 Apr 2020 BUY 1,485.91*
Source: CLSA; * Adjusted for corporate action

Recommendation history of ICICI Bank Limited ICICIBC IB

03 Jan 2023 BUY 1,175.00 26 Jul 2021 BUY 940.00
24 Oct 2022 BUY 1,200.00 25 Apr 2021 BUY 825.00
15 Sep 2022 BUY 1,150.00 31 Jan 2021 BUY 800.00
24 Jul 2022 BUY 1,040.00 08 Jan 2021 BUY 675.00
20 Jun 2022 BUY 950.00 07 Dec 2020 BUY 625.00
22 Mar 2022 BUY 1,050.00 02 Nov 2020 BUY 560.00
23 Jan 2022 BUY 1,125.00 27 Jul 2020 BUY 500.00
24 Oct 2021 BUY 1,100.00 22 Jun 2020 BUY 480.00
16 Sep 2021 BUY 1,000.00 20 Apr 2020 BUY 460.00
Source: CLSA
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NSE - Raging-Bull (CLSA Mar'23)

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NSE - Raging-Bull (CLSA Mar'23)

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India Exchanges

Piran Engineer Raging bull

India is in the Top-5 in number of trades in equity and equity derivatives

www.clsa.com Source: CLSA, 2021 Note: Refer to page 28 for nomenclature

Indian capital markets overview

10% USD Cagr in India’s Indian market cap trend

Source: BBG, CLSA; Note: Figures are as of year-end

India’s MCap/GDP ratio in the middle of the range compared to peers

India’s MCap/GDP stands at Market cap-to-GDP ratio comparison with peers

Source: BBG, CLSA

17 March 2023 piran.engineer@clsa.com 2

Market cap could cross US$40trn by 2052

Source: CLSA Source: CLSA

If we assume that MCap/GDP shrinks to pre-Covid level (c.80%), India’s MCap

Greater participation from institutional and retail investors

∑ Growing participation from domestic intuitional investors

∑ Change in Employee Provident Fund Organization’s (EPFO) investment strategy

17 March 2023 piran.engineer@clsa.com 3

∑ Rising retail and HNI investor participation

Domestic mutual funds have grown equity AUM strongly

Source: AMFI, CLSA Source: AMFI, CLSA

India’s employee retirement fund started investing in equities

Source: BBG, CLSA

Retail investors on the rise

17 March 2023 piran.engineer@clsa.com 4

brokers. The number of demat accounts (‘dematerialised’ accounts, which allow a

Source: CDSL, NSDL, SEBI, CLSA Source: NSE, CLSA

Discount brokers have facilitated retail investor participation

17 March 2023 piran.engineer@clsa.com 5

Equity exchanges – a duopoly market

Nearly three decades of NSE

BSE – Oldest exchange in Asia

17 March 2023 piran.engineer@clsa.com 6

Equities, the dominant trading product for exchanges

Cash volumes cyclical, but growing at a healthy pace

Source: BSE, NSE, CLSA

17 March 2023 piran.engineer@clsa.com 7

Source: NSE, BSE, CLSA

China has shown growth in Equity traded volumes (US$trn)

Source: World Bank

F&O volumes down only once in the past 20 years

17 March 2023 piran.engineer@clsa.com 8

Timeline of new product introduction in equity derivatives

Source: NSE, CLSA

Source: NSE, CLSA

Source: NSE, CLSA

17 March 2023 piran.engineer@clsa.com 9

Option premium growth has Trend in option premiums

Source: NSE, CLSA

Source: NSE, CLSA

70m unique customers

17 March 2023 piran.engineer@clsa.com 10

Source: NSE, CLSA

What else do exchanges offer?

∑ Index services: Exchanges sell data products based on their SENSEX/NIFTY

∑ Technology services: NSEIT Ltd, a step down subsidiary of NSE, is a

17 March 2023 piran.engineer@clsa.com 11

∑ Investor education/training: Both exchanges have subsidiaries (NSE

17 March 2023 piran.engineer@clsa.com 12

Understanding the revenue model

NSE is more competitively priced vs BSE on transaction charges in cash market

NSE’s transaction charges NSE vs BSE transaction charges (Rs*)

Marginal upward revision in NSE transaction charges structure (Rs*)