Crisis in the stock market of BSE! Market cap dips by Rs 30,000 crore in 3 months, fall in options trading worries investors

The stock of India's leading stock exchange BSE had given excellent returns to investors in the last two years, but now it seems to break its momentum. In the last three months, the market cap of BSE has fallen by about Rs 30,000 crore. There is continuous selling pressure on the stock and the question in the market is whether the period of BSE's rapid growth is now weakening.

According to experts, there are three major challenges facing BSE trading at the moment. RBI's strict bank guarantee rules for brokers and declining turnover in the new Closing Auction Session (CAS) index options. All three could impact the exchange's derivatives business and future earnings.

Decline in options trading

Derivatives trading, especially index options, plays an important role in BSE earnings. But in August so far, the average daily options turnover of the BSE has been about 12% lower than in July.

The BSE premium turnover declined 22.7 per cent to Rs 18,100 crore, according to data from brokerage firm Nuvama. At the same time, the number of options contracts has also declined by about 30.5 per cent.

Market experts are considering the new Closing Auction Session (CAS) as one of the major reasons behind this decline. In this system, the closing price of the stock or option at the end of the day is determined through an auction process. This can make it harder for traders to predict changes in options prices, especially at the time of expiry.

Why CAS impact on BSE?

Expiry day is very important for BSE as a large part of its derivatives trading is concentrated on this day.

In July, around 72.6 per cent of BSE contracts were on expiry day. In such a situation, if the options trading is weak on the day of expiry, then it can have a relatively high impact on the total turnover and earnings of BSE.

The continuous increase in market share in Sensex options has also been an important reason behind the last round of rally in the stock of BSE. But now if the growth of this share and business slows down, it may be challenging to maintain the current high valuation of the company.

Brokerages cut earnings estimates

The impact of the changing business environment is also visible on the estimates of brokerage firms.

Jefferies has cut BSE's EPS estimate by around 5-12% for FY27 to FY29. At the same time, Nuvama has reduced the EPS estimate of FY27 and FY28 by 6.3% and 15% respectively.

This simply means that brokerage firms are less confident about BSE earnings in the coming quarters than before.

RBI's bank guarantee rules could also become a challenge

Another concern for the BSE is the RBI's new bank guarantee rules for brokers. These rules are expected to put pressure on brokers' business, especially high-frequency trading.

Jefferies estimates that premium turnover could decrease by up to 10% due to these changes over the next one year. If that happens, it could have an impact on derivatives volumes and ultimately BSE earnings.

Is a return to the BSE out of the question?

However, the picture of BSE is not entirely negative. The exchange has many options to improve the business.

BSE can try to increase earnings per trade by increasing its option fee. Also, if the volatility in the market increases, traders adjust better to the new CAS system and liquidity increases in the auction, then the options trade can be strengthened again.

That is, the current decline cannot be considered as the end of the long-term story of BSE. But it can be risky for investors to bet on a stock now just by looking at the stellar returns of the last two years.

Jefferies and Nuvama

Brokerage firms have also reduced their target prices amid mounting pressure on the BSE stock.

Jefferies has lowered its target price from ₹3,520 to ₹2,940, giving an 'underperform' rating to the BSE.

At the same time, Nuvama has reduced the target price from ₹4,090 to ₹3,240 while maintaining the 'Hold' rating on the BSE.

These revisions indicate that brokerages are currently cautious about the challenges faced in trading on the BSE.

What should investors look out for?

Three things will be most important for investors of BSE in the coming months - Trading of index options, expiry day activities after CAS and actual earnings of the company.

If the BSE retains its share in the options market, trading volume increases again and the impact of CAS decreases over time, there could be a possibility of recovery in the stock. But if options trading continues to fall and the impact of the new rules on brokers increases, both earnings and valuation of the BSE could remain under pressure.

Big question for investors.

The speed with which the BSE has given returns to investors over the years has certainly been attractive. But the current circumstances suggest that the future performance will not be decided on the basis of old returns alone.

Investors will now have to closely monitor the options volume of BSE, market share in Sensex derivatives, impact of CAS, premium turnover and earnings for the coming quarters.

In such a situation, while deciding to invest in BSE stock, it is more important to see how the future earnings and derivatives business of the company is going in the direction than 'how much is the past return'.