BSE shares took a significant hit after global brokerage firm Jefferies downgraded the stock from ‘hold’ to ‘underperform,’ leading to a 6% drop in its value. The decline occurred despite an increase in the stock’s target price, which Jefferies raised from ₹2,850 to ₹3,500, driven by hopes of market share gains. However, the brokerage warned that these expectations may be overly optimistic, with potential risks overshadowing any benefits. As a result, BSE shares reached a day’s low of ₹4,471 on the NSE following the downgrade.
This comes as a surprise, as BSE shares have been on an upward trajectory in recent months. The Bombay Stock Exchange, one of the oldest exchanges in Asia, has seen steady growth fueled by changes in regulatory frameworks, particularly those introduced by the Securities and Exchange Board of India (SEBI). Despite these positive developments, Jefferies expressed concerns about BSE’s risk-reward balance in the near term, indicating that challenges such as regulatory pressures and limited spillover effects could hinder its market performance.
Jefferies Downgrade and BSE’s Market Share Hopes
Jefferies’ decision to downgrade BSE shares was based on several factors. The brokerage firm highlighted an unfavourable risk-reward ratio in the short term and pointed to regulatory concerns that could negatively impact market volumes. Additionally, Jefferies raised doubts about BSE’s potential to achieve significant market share gains, particularly in the face of new regulatory frameworks and evolving market dynamics.
Despite the rating downgrade, Jefferies increased its target price for BSE shares to ₹3,500. However, even with this revised target, the brokerage still projected a 21% downside from the current price of ₹4,471. Earlier in the year, in April, Jefferies had already downgraded BSE shares from ‘buy’ to ‘hold,’ lowering its price target slightly from ₹3,000 to ₹2,900. The latest downgrade reflects continued uncertainty about BSE’s ability to capitalize on market shifts.
One of the key developments that initially bolstered BSE shares was SEBI’s new framework, which limits options trading to one sub-index per exchange. This change was seen as potentially beneficial for BSE, with investors anticipating that it could attract more trading volumes to the exchange, thereby increasing its transactions and revenue. Additionally, the National Stock Exchange (NSE) announced that starting November 2024, weekly derivative contracts for Nifty Bank, Nifty Midcap, and Nifty Financial Services would be discontinued and converted into monthly contracts. Investors speculated that this could give BSE an edge in capturing more market share in options trading.
However, Jefferies remains cautious about these optimistic projections. The brokerage noted that while BSE’s market share could potentially increase from around 13% in Q2 2025 to 30-35%, with an estimated 40-50% share in weekly contracts, this scenario appears overly ambitious. According to Jefferies, the impact of new regulations, limited spillover gains from these changes, and additional regulatory hurdles could limit BSE’s ability to achieve such market share growth.
Risks and Challenges for BSE Shares
While hopes for market share gains have been a driving force behind BSE’s recent stock performance, Jefferies warned of several risks that could pose significant challenges. For instance, the brokerage pointed out that monthly contracts, which represent around 30% of the market, would remain largely unaffected by the new F&O framework, and BSE’s share in this segment is currently low at just 10%. Achieving a market share of 40-50% in weekly contracts, particularly in weeks 1-3 of the month, appears unlikely according to Jefferies.
Moreover, regulatory risks continue to loom large. Jefferies cited concerns that the removal of calendar spreads and the requirement for upfront margin collection from buyers could negatively impact trading volumes. These changes could also affect BSE’s weekly Sensex product, further dampening its revenue potential. The brokerage emphasized that the risks associated with the new regulatory landscape could outweigh the anticipated gains from increased trading volumes.
Despite these challenges, BSE shares have experienced an extraordinary rally over the past 19 months. The company’s stock price surged from ₹430.95 in March 2023 to the current trading price of ₹4,540, marking an impressive gain of 955%. Throughout this period, BSE shares recorded positive performance in 15 out of 19 months, with October 2023 standing out as the best-performing month, with a 43% increase in stock value, followed by a 33% gain in November 2023.
The company’s remarkable rise can be attributed to a combination of favorable regulatory changes and investor optimism about its potential to capture a larger share of the market. However, Jefferies’ recent downgrade serves as a reminder that this upward trend may not be sustainable in the face of ongoing regulatory challenges and market risks.
Conclusion: Future Prospects for BSE Shares
BSE shares have undoubtedly had a remarkable run, with an impressive 950% increase over 19 months. However, Jefferies’ downgrade to ‘underperform’ signals potential hurdles ahead. While the exchange’s stock price has benefited from regulatory changes and market optimism, Jefferies cautions that the risks associated with new regulations, limited spillover gains, and overly optimistic market share projections could hinder future growth.
Investors should carefully consider these risks when evaluating BSE shares, especially in light of the brokerage’s revised target price of ₹3,500, which suggests a significant downside from current levels. While BSE has shown resilience and growth, it remains to be seen whether it can navigate the challenges ahead and continue its impressive upward trajectory.
You might also be interested in – SEBI F&O Rules Reshape Derivatives Trading on NSE and BSE
