Brokerage firm Jefferies has initiated coverage on the shares of Bombay Stock Exchange Ltd. (BSE) with a "buy" recommendation, citing the digitisation of the Indian capital markets as the core investment thesis.

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Jefferies' price target of ₹2,700 implies a potential upside of 24% over the next 12 months and values the stock at 35 times September 2025 price-to-earnings estimates.

The brokerage expects BSE to leverage macro-tailwinds along with a headway in the derivatives market to deliver 150% earnings growth in financial year 2024 and double it over a period of financial year 2024 and 2026.

"Indian exchanges are benefitting from financialisation of savings, rising equity participation, growth in equities, product innovation and stable fees compared to other capital market platforms.

Last week, depository service provider CDSL informed the exchanges that it now has 10 crore demat accounts registered with it. That stock is also up 60% so far in 2023 and is nearing a record high.

The Derivatives market has now become the largest revenue stream for exchanges, according to Jefferies, driven by a growing user base. Derivatives now form nearly 65% of market leader National Stock Exchange's (NSE) overall topline.

"Continued growth in equity investor base, higher share of derivative users and new low-ticket products should keep the derivatives growth in the fast lane," the note said.

BSE's shares have been on the rise since July this year and after it launched newer products. Its derivatives market share has grown to nearly 14% from less than 1% six months earlier. Jefferies expects derivatives to contribute to 35% of BSE's revenue in financial year 2025.

"Derivatives ramp up is key driver for recent earnings upgrades and stock performance," Jefferies said, further saying that addition of the derivatives segment will improve the already healthy long-term growth outlook for BSE.

The brokerage also does not see a systemic risk from the higher derivatives turnover growth as it masks the lower underlying premium growth.

Shares of BSE recently made an all-time high of ₹2,475. They ended Friday's trading session with gains of 2.7% at ₹2,180. The stock has gained 292% so far in 2023, making it the best calendar year performance for the stock since it listed in 2017.

First Published:Nov 27, 2023 11:49 AM IST