NSE -Q2 FY25 Review & Comparison Analysis with BSE

 

The financial data compares the key performance indicators for Q2 FY25 against Q1 FY25, revealing notable changes in the company’s financial health.  India's largest bourse National Stock Exchange (NSE), which is gearing up for its IPO next year, on Monday announced that its Q2 consolidated profit after tax jumped 57% year-on-year (YoY) to Rs 3,137 crore due to an 8% drop in expenses.

Let’s break down the key metrics to understand the underlying factors. 

 

1. Revenue Analysis

• Revenue (QoQ):
• Q2 FY25: ₹4510.16 crore
• Q1 FY25: ₹4509.70 crore
• % Change QoQ: 0.0%

Analysis:
Revenue has remained flat, showing no substantial movement QoQ. This could indicate that the company is experiencing stable top-line performance but lacks significant growth momentum. Potential factors for flat revenue could be market saturation, competitive pressures, or a strategic focus on cost optimization over revenue expansion.

 

2. Other Income

• Other Income (QoQ):
• Q2 FY25: ₹513.07 crore
• Q1 FY25: ₹440.60 crore
• % Change QoQ: +16.4%

Analysis:
The 16.4% rise in other income suggests better returns from non-operational sources, such as investments or asset sales. This could provide a cushion to the overall financial performance, especially when core revenue remains stagnant. Other income growth is positive but could also signal a reliance on non-core activities for profitability.

 

3. Total Expenses

• Total Expenses (QoQ):
• Q2 FY25: ₹1729.63 crore
• Q1 FY25: ₹942.64 crore
• % Change QoQ: +83.5%

Analysis:
A massive 83.5% increase in total expenses is a red flag for profitability, indicating rising cost pressures. This sharp uptick, especially considering flat revenue, suggests inefficiencies or higher operational costs that could significantly impact margins. Key components that contributed to this rise are analyzed below:

• Employee Expenses:
• Q2 FY25: ₹194.16 crore
• Q1 FY25: ₹147.68 crore
• % Change QoQ: +31.5%

Interpretation: The rise in employee costs could be due to workforce expansion, wage hikes, or benefits enhancement. While investing in human capital is essential, a 31.5% increase in a single quarter may suggest challenges with managing payroll efficiency.

• Regulatory Fees:
• Q2 FY25: ₹300.31 crore
• Q1 FY25: ₹268.85 crore
• % Change QoQ: +11.7%

Interpretation: This increase could be attributed to higher compliance costs, changes in regulatory norms, or fines/penalties. As these fees are non-negotiable, the company might face reduced flexibility in controlling this cost.

• Other Expenses:
• Q2 FY25: ₹1096.19 crore
• Q1 FY25: ₹400.04 crore
• % Change QoQ: +174%

Interpretation: The sharp rise in other expenses is alarming and warrants further breakdown. It could be related to unforeseen one-time charges, increased operational overheads, marketing expenses, or expansion costs. If recurring, this could be a significant drag on profitability.

• SGF Contribution/(Reversal):
• Q2 FY25: -₹426.45 crore
• Q1 FY25: ₹587.34 crore
• % Change QoQ: -172.6%

Interpretation: A reversal in SGF contribution, moving from a positive in Q1 to a negative in Q2, has provided some relief to expenses. This drastic shift suggests a strategic change in fund allocation or risk mitigation but is likely a one-off and non-sustainable.

• Depreciation:
• Q2 FY25: ₹136.97 crore
• Q1 FY25: ₹126.07 crore
• % Change QoQ: +8.6%

Interpretation: The rise in depreciation could indicate higher capital investments or the addition of new assets, which is generally positive for long-term growth. However, it adds to the current cost burden in the short term.

 

4. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)

• EBITDA (QoQ):
• Q2 FY25: ₹2917.50 crore
• Q1 FY25: ₹3693.13 crore
• % Change QoQ: -21%

Analysis:
The 21% decline in EBITDA indicates significant operating profit erosion, largely driven by the substantial increase in expenses. This suggests that cost management has become a critical issue for the company, as rising expenses are far outpacing any gains in revenue or other income.

 

5. EBITDA Margin

• EBITDA Margin (QoQ):
• Q2 FY25: 64.69%
• Q1 FY25: 81.89%
• % Change QoQ: -1,721 basis points

Analysis:
The steep decline in EBITDA margin highlights the impact of rising costs on operational efficiency. A margin drop of this magnitude, especially with flat revenue, implies that the company’s cost structure has become unsustainable and immediate corrective measures are needed. Operating efficiency is under serious strain.

 

6. Profit After Tax (PAT) from Continuing Operations

• PAT from Continuing Operations (QoQ):
• Q2 FY25: ₹2727.25 crore
• Q1 FY25: ₹2595.65 crore
• % Change QoQ: +5.1%

Analysis:
Despite the sharp decline in EBITDA and margin, PAT has grown by 5.1%. This could be attributed to non-operational factors such as lower taxes, favorable financing costs, or income from non-core activities. The rise in PAT amidst operational challenges indicates the presence of effective cost-saving measures in areas like interest payments or tax optimizations.

 

Conclusion and Recommendations:

• Key Issues: The company faces substantial cost pressures, particularly in other expenses and employee costs. With a nearly flat revenue, these rising expenses have had a significant negative impact on profitability at the operational level (as seen in EBITDA and EBITDA margin).
• Positive Aspects: The growth in other income and the rise in PAT despite operational difficulties suggest that the company has been able to manage its non-core business activities well, perhaps through tax or interest optimization.
• Strategic Recommendations:
1. Cost Management: Immediate action is needed to control the rise in other expenses. A detailed audit of these costs should be performed to identify inefficiencies or unnecessary expenditures.
2. Revenue Growth: Given that revenue has remained flat, the company should focus on top-line growth strategies, possibly through market expansion, product diversification, or pricing strategies.
3. Operational Efficiency: Streamlining operations and improving productivity, particularly in employee costs and regulatory compliance, could help protect margins.
4. Sustainable Income Sources: The increase in other income should be leveraged, but it’s important to ensure that core business revenue grows in the long term.

Comparison Analysis

The recent regulatory and market developments in the derivatives space present a significant shift in the competitive dynamics between BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). Your analysis points to a potential structural advantage for BSE in the near future, driven by changes in the regulatory framework and BSE’s increasing market share in equity derivatives. Let’s break down these factors and their implications.

Key Developments:

1. Increase in Clients & Unique Members on BSE Equity Derivatives

• The continuous rise in the number of clients and unique members trading in BSE equity derivatives is a strong indicator of growing market interest and participation. This not only increases liquidity but also signals broader market acceptance of BSE’s derivative products. A growing client base directly contributes to trading volumes, which in turn boosts transaction fees and revenue for the exchange.

2. Changes in Derivatives Expiry Structure

• BSE’s Revision of Single Stock Derivatives Expiry: BSE recently revised the monthly expiry of single stock derivative contracts to the second Thursday of the month. While this may seem like a small technical adjustment, it can have a strategic impact by aligning BSE’s derivative offerings more closely with market preferences, potentially attracting more traders and liquidity.

• SEBI’s New Rule on Weekly Expiries: SEBI’s measures to limit exchanges to only one weekly expiry contract per index mark a significant regulatory shift, especially for NSE, which has dominated the weekly derivatives market with multiple index options. The rule requires NSE to discontinue three of its weekly index derivative contracts, starting November 20th, 2024. This puts NSE at a disadvantage, as its lucrative weekly expiries will now be curtailed.

3. Impact on BSE’s Revenue and Market Share

• Retention of SENSEX Derivatives for BSE: BSE retains the right to continue its weekly expiry for SENSEX Index derivatives, which is a major revenue driver for the exchange. SENSEX derivatives, particularly options, have contributed significantly to BSE’s recent revenue growth. This retention of a key product gives BSE a competitive edge under the new SEBI regulations.

• Projected Growth in Market Share: Currently, BSE holds around an 11% share of the equity derivatives market, but this figure is expected to grow to 25% over the next year. This would be a substantial increase, representing more than double its current share. The key driver behind this projected growth is the regulatory change, which creates a more level playing field between BSE and NSE by capping the number of weekly expiries allowed per exchange.

4. NSE’s Challenges and Potential Revenue Decline

• NSE, which has been the dominant player in the derivatives market, especially with its multiple weekly index expiries, will be forced to scale back due to the new SEBI rule. The discontinuation of three weekly derivative contracts for indexes will likely reduce NSE’s trading volumes and associated revenues. This will have a direct impact on NSE’s profitability, as derivatives have historically been a major revenue contributor.

• Shift in Market Sentiment: As NSE’s derivative offerings reduce, traders may shift their focus to BSE’s products, particularly the SENSEX Index options, further accelerating BSE’s growth in market share.

Strategic Implications:

1. Big Advantage for BSE: BSE stands to gain significantly from the new SEBI rule as it levels the playing field with NSE. BSE’s ability to retain its SENSEX Index options for weekly expiry ensures that it continues to attract volume in one of its most profitable products. The projected growth in market share from 11% to 25% over the next year is a major booster for BSE and positions it to capitalize on the regulatory changes.

2. Revenue Growth Potential for BSE:

   • BSE’s equity derivatives revenue growth is expected to remain strong, driven by the retention of the SENSEX derivative contracts. With increased client participation and a growing share of the market, BSE could see a significant boost in transaction fees.
   • The impact of SEBI’s rule will likely reduce competition in the weekly expiry space, allowing BSE to capture a larger portion of the market and enhance its revenue-generating capacity.

3. NSE’s Market Dominance at Risk:

   • NSE’s loss of multiple weekly expiry contracts will directly affect its revenue from index derivatives, potentially reducing its trading volumes and overall market share.
   • NSE will need to rethink its derivative strategy to maintain its leading position, possibly by innovating new products or focusing on other areas of the market. However, in the short term, the loss of revenue from the derivative contracts is inevitable.

4. Long-Term Outlook:

   • BSE’s strategic positioning in the derivative market, combined with regulatory tailwinds, creates a favorable outlook for its growth over the next year. If BSE’s market share indeed grows to 25%, it could challenge NSE’s dominance in the equity derivatives space for the first time in many years.
   • This growth could also potentially drive up the valuation of BSE, making it an attractive investment opportunity, as you have pointed out with your "BIG BET" stance.

The company is at a critical juncture, and while its ability to generate profit is still intact, the declining operational performance could pose challenges if not addressed promptly. The company experienced flat revenue but faced a significant rise in expenses, notably other expenses, which led to a decrease in EBITDA and margins. However, a growth in PAT indicates resilience, possibly due to cost management outside of core operating areas.