The divergent trend in the two stocks is just the continuation of a trend for at least the past two years. BSE’s market cap was as high as MCX’s two years ago; it’s now just a fourth of its rival’s value. Of course, the trend has accentuated during the pandemic.
“Amid tough economic conditions, this (MCX) is a free cash flow balance-sheet light business with a 90% dividend payout, even as markets worry about debt defaults. Our bull case is that a monopoly exchange (high-quality business) with structural growth and cyclical tailwinds/resilience could trade at much higher multiples,” said analysts at Morgan Stanley in a note on the commodity exchange last month.
While MCX enjoys a near-monopoly in the commodity space, BSE’s position in the equity segment is weak. Recent measures have helped ramp up volumes in the equity derivatives segment, but it isn’t adding much to the kitty in terms of revenue.
In 2019-20, BSE reported pre-tax profit of ₹76.8 crore, much lower than its investment income of ₹158.7 crore. In contrast, rival NSE reported pre-tax profit of ₹2,525 crore, with about 15% of it coming from non-operating income.
MCX’s June-quarter results, meanwhile, showed that while its revenue fell, owing to reduced trading hours during the pandemic, profits rose about 30% thanks to cost cuts and increased investment income.
BSE’s June quarter slacked despite an increase in daily turnover.
Revenue fell about 5.7% year-on-year (y-o-y) as listing fees were lower. Besides, the share of fees it earned from the special rates group was lower, which hit revenues. Its pre-tax profit fell by about 31% y-o-y.
And, while MCX has decent margins even after excluding investment income, BSE faces operating losses.
Note that even though BSE is present in a number of segments such as equities, currency, and commodity trading, it hasn’t been able to establish dominance in any large segment.
In contrast, MCX is milking its dominant position in the commodity space.
While MCX has done better, some of the growth expectations are already reflected in the higher valuations of MCX. BSE quotes at a price-earnings multiple of 20 times FY21 earnings, whereas MCX shares trade at about 31 times earnings.