BSE, NSE operating margins see steep decline

Written by Devangi Gandhi | Mumbai | Updated: May 31 2013, 06:02am hrs
The country's top exchanges National Stock Exchange and Bombay Stock Exchange saw pressure on operating performance and sluggish growth in exchange revenues during the January-March quarter.

For the three months ended March, both the exchanges reported a decline in their operating profit margins (OPMs) compared to the same quarter last year. While the NSE saw a drop of 500 basis points in its OPM, the BSE saw a far steeper drop of 1,300 bps. Net margins, however, witnessed a healthy growth for BSE, and stood at 32% due to an 11% rise in quarterly revenue as well as a decline in the costs related to the liquidity enhancement schemes.

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For NSE, however, the quarterly earnings were supported by the one-off gains of about R36 crore made on account of sale of equity shares in three of its subsidiaries, including IISL, its group company that provides index products and services.

During FY13, NSE fared better than BSE in terms of net profit growth even as both exchanges witnessed a decline in the topline of more than 5%. While the operating profit of both the exchanges declined, unlike BSE, NSE managed to contain its expenses in the year and post a smaller decline of 126 bps in its operating margin compared to a reduction of 700 bps in BSE's OPM.

NSE also benefited from a strong gain in other income that increased by about 45% in the year compared to a 4% gain reported by BSE. As a result, it managed to post a 25% growth in its reported profits whereas BSE's net profit declined by 35% in the year.

Due to such a strong decline in its profit, the earnings per share (EPS) of India's oldest exchange stood at R13 compared to NSE's annual EPS of R195. However, there were two bright spots in BSE's quarterly performance including the moderation in its expenses on the liquidity enhancement schemes (LEIPS), the incentive programmes initiated in September 2011 that are meant to revive the exchange's derivative segment. This outgo, termed as an exceptional item, accounted for 11% of its revenues in the March quarter compared to an average of 22% in the previous five quarters, and eased the strain in its net profits. Secondly, the segment results show that BSE earned 40% of its earnings from exchange operations instead of depositary segment that was responsible for a substantial portion of profits in nine months to September 2012. For NSE, similar data was not available.

Experts say that in the current fiscal, profitability at the exchanges would be driven by lowered transaction fees due to rising competition in the exchange space at a time when cash market volumes are declining structurally. A reduction in the securities transaction tax (STT), specifically that for equity futures from 0.17% to 0.01%, announced in the latest Budget is further expected to support the derivative segment that is observing higher participation than the cash market.

In September 2012, NSE announced that its capital market trading members will be allowed to set off their annual subscription charges of R1,00,000 against transaction costs, starting October 1. This followed MCX-SXs decision to begin its operations by reducing the transaction charges upto 50% compared to NSE.