PL Capital has initiated coverage on BSE Ltd, a listed stock exchange, on a day larger peer NSE filed draft papers with market regulator SEBI for what is seen as the largest initial public offer (IPO) on Dalal Street. PL Capital said India’s stock exchange ecosystem functions within a tight regulatory framework governed by SEBI, with the industry operating as a near-duopoly --- NSE and BSE together accounting for the entire share of equity cash, derivatives, and debt market turnover.

The  domestic brokerage said the sector has seen multiple regulatory changes from H2FY25, especially in the derivatives market, as regulators are focused on protecting retail investors. These changes include restricting of all exchanges to a single weekly expiry contract per benchmark index has impacted NSE more, as it previously had four weekly expiries compared to two for BSE, PL Capital said while suggesting 'Buy' and a target of Rs 4,850 on the BSE stock. The target suggests 21 per cent upside over Thursday's trading price of Rs 4,010 apiece. 

"Both exchanges run fully electronic, high-throughput platforms across equities, debt instruments, and derivatives," PL Capital said. 
  
The brokerage said Indian exchanges like BSE and NSE have a significant proportion of operating revenue coming from transaction income, 79 per cent for both BSE and NSE in FY26). This attributes higher sensitivity to market volumes and trading cycles. In contrast, global peers like ICE, NASDAQ, LSE, JPX and HKEX have diversified toward annuity-like revenue streams. PL Capital said 20-60 per cent of their revenue comes from transaction income and 50-80 per cent from data, technology and information services. This results in a more stable earning profile compared to volume-driven Indian exchanges, it said.

PL Capital noted that data, technology and colocation services contribute to 10 per cent of NSE’s revenue, while their contribution is negligible for BSE. 

"However, both exchanges are taking steps to diversify. For example, they are ramping up colocation services with capex plans. We expect colocation income to provide an additional revenue stream for both. Other areas to focus on include index data services and electricity derivatives/ futures," PL Capital said.

The brokerage said when it compares consensus estimates of Indian exchanges with that of listed global peers, it sees significantly higher growth expectations, along with superior return ratios. This implies that Indian exchanges trade at higher multiples due to disproportionately higher growth expectations compared to their global counterparts, it said. 

BSE: Reason behind 'Buy' rating

PL Capital said BSE has emerged as a strong player in the equity derivatives segment post the relaunch of Sensex and Bankex weekly contracts.  During FY23-26, BSE saw a jump in operating revenue, 80 per cent-plus CAGR, led by the ramping up of index options. Improved liquidity, expiry positioning, and higher participation translated into premium market share of 28 per cent and premium-to-notional of 10 bps in FY26, it said.

Further, initiatives such as smart order routing (SOR) and common contract note (CCN) are likely to boost BSE's market share in the cash segment, PL Capital said. 

"Over the past five years, BSE has undergone a continuous re-rating, supported by market share gains and improving profitability, trading at 49 times 1-year forward P/E (BBG). We expect valuation to sustain at these levels, supported by structural factors such as (1) duopolistic market structure with high entry barriers (2) healthy profit growth (~27% CAGR over FY26-FY28E) and (3) optionality from new derivative products/ colocation revenues. We value BSE using a Residual Income framework, with a target of Rs 4,850 (50x FY28E P/E)," PL Capital said.