NSE could get a market cap of Rs 40,000 crore

On listing, National Stock Exchange (NSE) could get a market capitalisation of Rs 40,000 crore, going by the price-earnings (P/Es) ratios of global stock exchanges.

The Hong Kong Stock Exchange trades at a P/E of 29 times its trailing earnings (profits) while the CME group, which runs derivatives exchanges in the US, trades at 28 times. Nasdaq and London Stock Exchange Group trade at about 25 times.

"Indian stock exchanges, especially NSE, are likely to get a premium valuation compared to global peers, thanks to higher growth potential in India. Besides, the financial ratios of NSE are closer to those of FMCG (fast-moving consumer goods) companies, which top P/E charts," said G Chokkalingam, chief executive, Equinomics Research & Advisory. He gives a P/E multiple of 30 for the NSE stock when it lists. FMCG companies have a P/E of 30-60.

Tirthankar Patnaik, India strategist at Mizuho Bank, agrees with Chokkalingam in valuing NSE like FMCG companies. He says, "Exchanges could be valued like FMCG stocks because you don't have too many exchanges and very steady earnings (profits)."

Mauritius-based Veracity Investments recently acquired a stake of five per cent in NSE from State Bank of India for Rs 911 crore, valuing the exchange at Rs 18,200 crore.

Based on NSE's adjusted net profit of Rs 1,200 crore in FY16, and a P/E of 30, the valuation works out to Rs 36,000 crore. Add the Rs 6,000 crore of cash on its books and its market value crosses Rs 40,000 crore. It had a net worth of Rs 5,279 crore at the end of FY16.

BSE had an adjusted net profit of Rs 169 crore in FY16. Using the same P/E, it would get a market valuation of Rs 9,000 crore, which includes Rs 4,000 crore of cash.

In FY16, the profitability of both exchanges was hit by a Securities and Exchange Board of India (Sebi) rule that required exchanges to transfer 25 per cent of their annual profit to a settlement guarantee fund (SGF). NSE's net profit was Rs 439 crore while BSE's was Rs 97 crore in FY16. Sebi has done away with the requirement, and SGF will be replenished only in case of a shortfall. This will improve the exchanges' bottom line.

India's only listed exchange, Multi Commodity Exchange, had debuted in stock market at a P/E of 37 and is currently valued at 67. "MCX did get decent valuations a few years ago when commodity prices were high, even with lower volumes. When commodities collapsed, the value reduced to almost half. But, we can still look at MCX's peak valuations as a benchmark. When NYSE (New York Stock Exchange) was listed, investors were quite exuberant. But, look at how asset prices have moved. Equity is not that much of a sunshine asset globally as it is in India," said Tushar Pradhan, investment chief, HSBC Global Asset Management. "Worldwide valuations of most listed exchanges depend on two things: The volumes of securities traded on the exchanges and the commissions and other fees that exchanges generate. In case of India, average trading volumes are much lower than what you would find in the listed Asian exchanges," says Manishi Raychaudhuri, head of Asia excluding Japan equity strategy at BNP Paribas Securities.

HSBC's Pradhan says, "The key question is around trading volumes on the exchanges, which may not move up in a rush. It would thus be difficult to imagine why these high valuations will sustain."

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