Wednesday, 25 January 2017

BSE IPO: Avoid counting Fruits as Seed is becoming a Tree

BSE has become the world’s fastest Stock Exchange with an order response time of 6 microseconds and the largest exchange in the world in terms of number of companies listed. It is the first Asian Stock exchange dating back to 1875. These are the things which shouldn’t be ignored especially when we are talking about an Indian Stock Exchange as we Indians just invest around 3-4% of our financial savings in equities as compared to 15% in China and 40% in USA. Most other developed/developing countries have ratios in the range of 10-15%. We never realized the potential of equity markets. I remember one fine day when I visited one of my friend and one Insurance adviser was trying to sell him a very high valued Insurance policy. My friend introduced me as a share market investor. But the adviser assured my friend that Stock markets were risky but their Debt bond based Insurance policies were safe. I simply asked him that the Bonds his insurance company were investing were issued by large listed companies and if they couldn’t make profits and couldn’t grow then who would pay us the high interest rates on bonds and bank FD’s. Banks can pay us high interest rates on Fixed deposits as they are earning higher from borrowers who are investing for economic growth.

Nothing is safe here. Even Bank FD’s (including Interest) are only secured up to 100000/- per bank. So if a Bank goes down, you’ll only get 1 lakh rupee for all of your FD’s. In fact few years back, it has happened in reality.  The Cyprus Govt decided to use the bank deposits of people in the banks above Euro 100000 to pay off its debts as bank deposits only up to Euro 100000 were insured.
So we are misguided regarding safety. We don’t know that Insurance is never about investment but it is for safety…so instead of buying term Insurance we go for low valued endowment plans. We go for FD’s for returns while they are just for safety; to beat the inflation rate to keep the purchasing power of our money secure. We aren’t earning anything from FD’s…it is not capital formation. We are illiterate when it is about investing and returns.

So I see things changing big time in India. Real estate prices are saturated, one can’t earn now by investing in Real estate. Gold is losing its shine also….although as I shared in my earlier post on Gold (Click here) that Gold is also for safety. So we can see high activity in Equity investments in the future. Earlier we used to invest just 1% in equities which has been grown to 3% now in recent times. So we are growing.

But most of the market is not positive about BSE IPO due to low equity trading share of around 15% as compared to Big brother NSE. Nothing share in equity derivatives. But still I see value in this due to high growth in equity markets and it’ll have its share anyhow. But I think BSE is doing some things right now and is focusing big on some emerging trends. It is investing big in Equity derivatives, commodity Exchange and Bond exchange.

I have talked enough about need to grow commodity trading in India (Click here). MCX is an emerging giant and I am heavily invested in this. World over, Commodity trading is way bigger than equity trading. Just for a perspective; U.S. daily commodity turnover, it is about Rs. 1,64,40,000 cr while daily turnover of equity market is 25,00,000 cr. i.e. commodity turnover is about 6 times the equity turnover. Now if we take chinese equity market daily turnover it is about Rs. 8,00,000 cr while that of commodity exchange is of Rs. 16,50,000 cr which is near about 2 times its equity turnover. Now if you take India where daily equity market ranges from 300,000 cr to 4,00,000 cr while that of commodity market daily turnover is about 25,000 to 30,000 cr which is 1/10th of equities. So we’ll see high growth in commodity exchange as SEBI is very serious about this. Our metal giants like Hindalco and HZL do not hedge their exposure at Indian Commodity exchanges but at Global due to low liquidity in India. 

Just look at the daily Equity turnover of India at Rs. 3 lac cr with China at 8 Lakh cr!! USA is like a Sun at 25 Lakh cr. And people are comparing the market share of both NSE and BSE!! This figure of 3 lakh crore is also superficial as FII's are still the major players of Indian market. They are responsible for around 60-70% of the market (if i am right). They are holding around 40% of free float, retail investors in India hold just 33% which is very low as compared to global markets. Domestic institutional players like MF hold 20%. So Indian markets are heavily impacted by the choice of FII's. Indian retail investors aren't well researched when it comes to investing; they invest when markets are at top (due to short term focus) and then they leave when market falls (due to fear and short term focus).

But India has huge capital requirements (Trillion Dollars) to finance its infrastructure. But here people are wasting their money in unproductive real estate and Gold investments. This is going to stop eventually due to falling returns in real estate/Gold. This money will come to equity market.  We need to see the vast sky. BSE and NSE won't compete with each other for market share but they will share the incremental growth. It is not like Indian telecom market which is mature and everybody is fighting for market share...eating the share of others...just like JIO. It is just like the initial Indian telecom market a decade back which had enough for everybody.

Same is the case for Currency Derivatives where RBI and SEBI are trying to grow the liquidity and lowering the speculation opportunities due to timing issues. They are going for extending trading time in synch with global exchanges. BSE is already a big player in Currency derivatives. It is having around 37% share. Actually Commodity and currency trading is highly inter connected as commodity players are also required to hedge their currency exposure also. So with the growth of Commodity trading currency trading will also see higher growth.

Next big thing will be the growth of Bond market in India. As shared in the post related to CARE Ltd (Click here). Indian Bond market will see high growth from now on. Even RBI has put the limits on banks in giving loan to big corporates. So Big corporates are going for Bonds now. We picked AK Capital services, which is a big bond player in India, at 280 and it has already run up to 440 today. Bond issuance has been increased from Rs. 174781 cr in 2008-09 to 413879 cr in 2014-15. This year figures could be way higher. RBI and SEBI are trying to get more people invest in Bonds along with Govt bonds in order to have more liquidity and to have more diverse holding to address the price volatility issues. BSE has a fairly developed Bond trading platform and Bond trading can be a big surprise factor. I am betting on the growth of bond trading big time.

So market may have its own views about the growth prospectus of BSE but I am seeing high growth in its business fortunes. It is also available at cheap valuations of below 20 which provide the margin of safety. So just sense the growth opportunities and exchange your money with it. No need for doing a comparison and an evaluation as seed is just becoming a tree. Avoid counting Fruits. I am going for it and will be holding for long term.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and applied for the IPO of the share discussed in this Post)

1 comment:

  1. ---------- Forwarded message ----------
    From: Gurpreet Singh
    Date: 25 January 2017 at 14:21
    Subject: Re: BSE IPO

    MCX will stay the are right of course..due to network effects.
    But no need to make the comparison...there is enough room for everybody. Single stock exchange is very dangerous so 2-3 players are a must. What we are seeing is a Seed...adequate water and inputs....and tree of life is expanding. So no need to analyse it as a matured company and putting it under the scanner of return ratios, market share etc.


    On 25 January 2017 at 14:15, Manoj G wrote:

    Good thoughts. Especially the market potential for commodity and bond trading.

    Any reason why MCX would give the lead to BSE/NSE in commodity trading ? Because of network effect, wouldn't MCX grow stronger and stronger ?

    And, valuation wise its at 38x FY16. And good part of the income is coming from CDSL subsidiary and its investments into bonds. So, finding hard to give big valuation to it, especially when there are other elephants in the room like NSE and MCX. Just my 2 cents.