Indian Stock Exchanges: A Play On The Financialization Of Savings
Published by Sharekhan Education | December 4, 2023
Amit Pathak | Sharekhan Education
A stock exchange is a marketplace where financial instruments, mainly stocks, bonds, and currencies, are traded. It acts as an intermediary, facilitating the trading of shares and ensuring transparent and fair transactions. It facilitates companies in raising capital through public share issuance and enables traders to buy and sell shares.
Indian stock exchanges are benefiting from the financialization of savings, rising equity participation, growth in equities, and product innovations. Rising smartphone and internet penetration, easy eKYC through public digital infrastructure, and a healthy supply of private funding are enabling digital discount brokers to rapidly onboard a large customer base. Digital derivatives tools are driving high Future & Options traffic.
Indian companies have a history of high promoter holding structure, leading to lower free float and, in turn, inferior turnover velocity. However, after SEBI’s initiative to raise the minimum public shareholding to 25%, promoters’ holding has witnessed a decline. Indian listed companies’ free float has increased but is still below the levels of developed countries.
Indian exchanges will benefit from healthy GDP growth and a rising Market cap/GDP ratio. The outlook for the Indian economy remains strong. It is expected to become the third-largest economy in the world by 2030. India’s household savings data indicate that equity holdings and annual savings are still less than 5% of household assets. Reallocation within the savings pie is enough to sustain retail flows in the share market. Exchanges are insulated from global mega-trends like a shift from Active to Passive investing and disruption from discount brokerage, hence offering a superior long-term play.
Let us discuss the Bombay Stock Exchange (BSE) in this space. The company is the oldest stock exchange in Asia, with more than 5300 listed companies. It provides a marketplace for trading in equity, debt, derivatives, and mutual funds. It also offers risk management, clearing and settlement, market data services, and educational services. Its derivatives market share has jumped to ~14% from less than 1% in the last 6 months led by new product launches. As per Jefferies’s report, a surge in options income and new offerings like colocation services would lead to a revenue CAGR of ~45% over FY23-26E. Operating margin expansion would be led by an uptick in treasury income, cost-saving initiatives, strong growth in the MF platform business, and improved realizations in the currency business. It is a Free Cash Flow generating entity with little balance sheet risk.
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