40 minutes ago
Four investors who've watched the Stock Exchange (NSE) from very different seats — one from the trading floor, three from the boardroom — sat down to talk about what's coming when NSE finally lists. Their views didn't all line up, and that's probably the most useful thing about the conversation.
NSE's IPO opens on September 17 and closes on September 21. It is entirely an offer for sale of 5.1% of the company, priced in a band of ₹1,700 to ₹1,785 a share. At the top end of that band, the issue size works out to ₹22,569 crore, valuing the exchange at close to ₹4.42 lakh crore.
Ramesh Damani, Member, BSE, sees continued expansion in India’s listed universe supporting both trading and listing-fee growth, while pointing to retail participation and new products as key growth drivers.
Manish Kejriwal, Managing Partner, Kedaara Capital, believes the bigger opportunity lies in the secular expansion of market participation. He expects trading volumes to keep rising as more Indians participate in financial markets and existing investors deploy larger amounts.
At the same time, he sees the regulatory environment and pricing of exchange services as important factors for the company’s earnings trajectory.
Harsha Raghavan, Managing Partner, Convergent Finance, sees several growth levers beyond the exchange’s existing business, including higher retail participation, new listings, bonds and commodities.
Harish Krishnan, CIO - Equity, Aditya Birla Sun Life AMC, is also looking for new sources of growth, particularly products such as gold, fixed income and foreign exchange, while cautioning that the valuation leaves limited room for disappointment.
These are edited excerpts from the interview.
Q: How does it feel? It's almost like coming of age, right, with this IPO.
Damani: The NSE is a cathedral to capitalism. The world has been begat by socialism, but here's this proud exchange that stands out for free markets, open markets, and we have democratised trading, democratised wealth creation in this country, and NSE took the capital markets, which were fine, out of the stone ages, basically, by electronic trading, by easy settlements, by longer trading hours, and there's a lot to thank them. The idea that India could develop without its capital markets is probably a misnomer. So I think the exchanges have really helped India take the leap forward.
Q: If you look at the numbers now, ₹4.42 lakh crore market cap would be among the top 10 or 11 companies in Sensex. They are raising ₹22,000 crores, which is the second highest after Hyundai. In terms of numbers, the sheer size, the sheer dominance that NSE commands, what's your take in terms of in terms of fresh appetite or demand? Will it attract a lot of global capital, given that this is such a marquee IPO?
Damani: I think they will, and I will tell you why. We are always concerned about retail investor penetration, which has been very impressive and probably will still be impressive. But look at the listed universe in India; it's expanding rapidly. While London scrounges around for 10 listings, we have 10 IPOs closing this week. Hyundai, LG and Whirlpool — they’re all listed here. The MNCs are listed here. This will continue to happen. The exchange will not only get trading fees, which is very good, but also listing fees. The growth is pretty much set in the cards. I think it will be a very well-received issue and will become a benchmark for India.
Q: Does it trade like a growth stock or like a utility stock?
Damani: I can’t answer the question, but he’s right. When a public utility or public good is not a for-profit organisation, it cannot maximise profits, and that’s, as he correctly pointed out, the conundrum they will have to fight. But that battle is for another day.
Raghavan: There is a bit of a conundrum. That having been said, the levers for growth from where we sit today for NSE are tremendous. It’s already the most voluminously traded platform in the world. That’s because of our retail investor base, which is something like 18 crore across the country, mostly trading ₹5,000. As India’s wealth goes up, they may start trading ₹6,000 or ₹8,000, and so the values on the exchange will go up sharply as India’s wealth increases. That’s from the retail standpoint.
As Ramesh pointed out, from the number of new listings, there will be tremendous volume growth. Other instruments could also contribute. Our bond markets are still nascent at the retail level, and that could be something. Commodities could be another opportunity. So I think the levers for growth are so many that I don’t think we are anywhere near the point where it will look like an infrastructure company only, without growth.
Kejriwal: I think you need to divide this into volume and pricing, like anything else you look at as an investor. To Harsha’s point and Ramesh’s before, the volume growth is secular. It’s not just the current 180 million active people. There could be another 200 million in the coming years. We have a billion SIM cards and about 400 to 600 million actual mobile users. I can’t imagine this remaining at 180 million. This could be 300 to 350 million. Each of them trading like Harsha, ₹5,000 can become ₹10,000 very easily. So, to me, the volume growth is secular.
As far as pricing is concerned, that’s Harish’s point. If you want to kill the goose that lays the golden egg, that’s anyone’s prerogative. But I would say the same thing applies to anything else, such as aviation or true infrastructure like toll roads. We are in a situation where the government is getting out of that control mentality, and so is the regulator. This will be a free market, and I believe there’s no turning back.
If I add on not just not just the retail investors, but the quality and the side of the global investors, that's going to be incredibly large. India has now become despite what's going on in West Asia and the war, the pivot has happened from many other countries into India. I think this is India's decade. And this is It's not just the retail public, institutionally, you can have a lot more sophisticated investors coming into India.
Krishnan: Clearly, we are excited about the financialisation of savings, with exchanges being at the vanguard - as he rightly pointed out, it’s the house. In some sense, it collects the toll on everything that we do. And what better way to have a long-term bet on India and the economic story that India has than being part-owners of exchanges?
From a perspective when we think about it, India as a society is a low-trust society, and which is why you have brands that command such huge valuations that they are, because once people love certain things and they believe that it provides them certain benefits, they kind of pay up for it again and again. And that's why FMCG and many other areas have such disproportionate multiples compared to the rest of the world. Now, why I am bringing this is financial space was very, very low trust, lot of friction in terms of how trading happened. And clearly, NSE and the entire reform of SEBI, mutual funds, all of these together happened in the 90s and the early 2000s have led to where we are today. So, I think we can all be proud of the fact that we have all been part of this ecosystem, and NSE clearly being the vanguard in terms of how they kind of shaped this entire ecosystem.
What we are looking forward to, of course, is the growth optionality, especially as more and more Indians start embracing financial products. For now, it’s an equity and options story, but who knows? It could be commodities in a very different way 10-15 years down the line. I don’t think any of us could have predicted the way futures and options really exploded in the last five years. So there is significant growth optionality as Indians embrace more of those products.
The second is that they are also, in many ways, a public good. That provides a certain degree of defensibility in terms of cash flows and dividends. The key question is, is it really going to be priced more like a growth stock, or is it going to be priced like a public-good utility stock? That is the big conundrum the market will have to work through over the next several years.
Q: How would you look at NSE as an investment opportunity, particularly with mutual funds yet to own the stock?
Krishnan: This is definitely something we would want a piece of in our portfolios. The real question is, what’s the optionality that can surprise us, say, five years from now, that is not built into expectations? Because it’s not coming in cheap.
We have seen options explode multifold in the last five years, and a lot of the profit and revenue pools have already come through, which were non-existent five or seven years ago. So you need something else to unlock. Now, it’s very hard to time it. That’s why they’re called optionalities.
I would definitely want to evaluate how their gold product, EGR, is likely to shape up, because that could be a very large optionality. Indians have a love for gold. Can they start trading it just as they have done with stocks? Fixed income is again on the list. It’s been a constant wish list: can we see trading there? Forex is another area. So there are many asset classes. There is a lot of equity in the story today, but we’ll need proof points and green shoots from these other areas.
Q: A year or a year and a half ago, the market was talking about exchanges potentially trading at 100 times earnings in a bull case, and we saw what happened with BSE. But now there is also a regulatory aspect, which has moderated option volumes, and that remains a major earnings driver. Manish, what are your thoughts?
Kejriwal: I have three points to make. As an investor, you look at different time periods. If I reiterate the secular nature of this, I would say I’m a buyer from a 10-year perspective, no question in my mind. In the shorter run, I’d let my friend Harish and all his ilk get into it because they haven’t had a chance to, so we’ll be generous and let him buy it.
I also think many of these things are well-priced. I do think there was a correction in the pricing recently. Like anything else, there are buyers and sellers, and the market is pretty efficient. I think the market will arrive at an efficient price. I do think if there is a regulatory shock and someone gets overeager on the regulatory side, on the pricing side, or by banning X, Y and Z, it could be disastrous because this is at 40 times. I don’t think 40 times is cheap for any stock.
Again, it goes back to the point is this a consumer stock? Is it a finance stock, or is it a utility? I have no idea from that perspective. If it's a utility, 40 times would be a dream. On a realistic thing, I don't think this is going to be a disaster by any stretch. I think it’s a very strong company, a very strong management team, and the secular needs of the country are such that there is a strong long-term case. But there are many variables, so this would be one that is priced efficiently. They’d be foolish to leave too much money on the table, so I am assuming it’s going to be priced efficiently and it will grow as per the growth parameters of any other company.
What will drive the valuation of this going forward will be EBITDA growth, which will be driven by all the things that we spoke about. I think it’s healthy, but I’m more positive on the long run than the short term.
Q: When you looked at NSE in the early 2000s, what was the opportunity you saw in India compared with global markets?
Raghavan: When you think back to the early 2000s, clearly the US had market depth. Hong Kong, Japan and London had it as well, but it wasn’t very widespread. Then you looked at the rest of the world and said, “Who has the potential to have that same level of market depth in the future?” One country did rise to the top, and that was India, which had the potential to build that same kind of market depth. I don’t think any one of us imagined that we’d be at this level of scale today. It has revolutionised the country, but we certainly saw the potential at the time. It was very much top-down view. It is the best way to play on the financialisation of an economy, the market maker and so it was a top-down view driven by that.
For the entire discussion, watch the accompanying video
