BSE Shares Drop 7% After Jefferies Cuts Rating to ‘Underperform’ Over High Valuations

Shares of the Bombay Stock Exchange (BSE), one of Asia’s oldest stock exchanges, fell by 7% during intraday trading on Wednesday, October 16, bringing the price down to ₹4,419 each. This drop followed a downgrade by Jefferies, a global brokerage, which changed its rating from ‘hold’ to ‘underperform.’ They cited that the risks currently outweigh potential rewards for the stock.

Jefferies expressed concerns that factors such as stricter regulations impacting market volumes, limited benefits for BSE, and possible new regulations pose significant risks. Despite the downgrade, Jefferies raised its target price for BSE to ₹3,500, which still suggests a 21% decline from the current price.

Earlier this year, Jefferies had already downgraded BSE from ‘buy’ to ‘hold’ and slightly reduced its price target from ₹3,000 to ₹2,900. Recently, BSE shares had been rising due to the Securities and Exchange Board of India (SEBI) introducing a new framework limiting options trading activity by allowing only one sub-index weekly contract per exchange.

In a related announcement, the National Stock Exchange (NSE) stated that starting November 20, 2024, it would discontinue weekly derivative contracts for Nifty Bank, Nifty Midcap, and Nifty Financial Services, converting them to monthly contracts. Many investors see this as a positive change for BSE, believing it will draw more trading volumes to its platform, leading to higher transactions and increased revenue. However, Jefferies does not expect BSE to gain significant market share from this shift.

Jefferies stated, “If there’s a 25% drop in overall market volumes, our estimates suggest that BSE’s market share could rise from around 13% in Q2 2025 to 30-35%, achieving 40-50% in weekly contracts.” However, they believe this estimate is too optimistic, given the risks of a major market impact and limited spillover gains.

Jefferies pointed out that while monthly contracts, which make up 30% of the market, will not be affected by the new rules, BSE’s share in this segment is only about 10%. This raises questions about the feasibility of achieving a 40-50% market share in weekly contracts, as current valuations imply.

Additionally, if the market’s overall impact is less than expected, regulatory risks will still be significant. Changes like the removal of calendar spreads and the need for upfront margin payments may also reduce trading volumes, including for the weekly Sensex product.

Stock Performance Over 19 Months

BSE’s stock has soared over 950% in the past 19 months. The rally started in March 2023 when shares jumped from ₹430.95 to their current price of ₹4,540, marking a stunning increase of 955%. During this period, the stock had only four months of negative performance, with positive returns in the other 15 months. Notably, October 2023 saw the highest monthly gain at 43%, followed by a 33% gain in November 2023.