Whenever an investor makes a trade, there are various stock market participants that ensures smooth functioning of these trades. One such company is National Stock Exchange. Staying true to our investment style of peripheral play, we believe NSE is a good proxy play on the growing Indian capital market. Let’s understand the scope and business model of how NSE derives its revenue and profitability and ultimately how the NSE makes money.
National Stock Exchange of India Limited (NSE) is one of the leading stock exchanges in India, based in Mumbai. NSE was incorporated in 1992, recognized as a stock exchange in 1993 and commenced operations in 1994.
NSE has been consistently ranked as the largest stock exchange in India in terms of total and average daily turnover for equity shares since 1995 (based on SEBI data). It is one of the largest stock exchanges in the world by market capitalization. NSE was the first exchange in India to implement electronic or screen-based trading which began its operations in 1994.
Just like any other exchange, NSE offers services like exchange listing, trading services, clearing and settlement services, indices, market data feeds, technology solutions and financial education offerings.
Indian exchanges charge on value basis (turnover), whereas global exchanges charge on the basis of volumes.
Transaction Charges (75% of total revenue)
Transaction charges are charges that the exchange levies on the trades conducted on the platform and are based on the transaction value.
It is directly proportional to the level of market activity, household savings and investments.
Transaction charges accounts for majority of the revenue mix of NSE.
Unlike global exchanges, NSE have high dependency on transaction charges since other revenue streams are at nascent stage.
Growth Drivers in Transaction Charges:
- Sharp rise in Average Daily Turnover (ADTO)
- Increase in proportion of big-ticket size orders
- Increase in DEMAT a/c will lead to increase in trades in the market.
Other Services (25% of Total Revenue)
- Listing services
- Book-Building fees
- Services to corporates
- Clearing Services
- Data Feed Services
- Investment Income
- Other sources of income (Training and Support Services
Just like any other company, NSE ltd also has a lot of expenses that are incurred regularly to ensure the smooth operations of the business. These are the major heads of expenses.
IT and telecom expenses and Employee expenses constitute nearly half of the total expenses incurred.
- IT and Telecom expenses include-Repair & maintenance – trading & computer system, IT Management & Consultancy charges, Software expenses, leased line charges, web trading related expenses and Network infrastructure management charges.
- Clearing and settlement charges are variable in nature and are directly linked to value of turnover handled by clearing corporation, i.e. NCL.
- Out of the expenses mentioned above, Depreciation, employee expenses, IT and telecom expenses are fixed expenses to a large extent which constitutes ~ 53% of total expenses thereby giving the operating leverage opportunity.
Peer Analysis – BSE
This sector is an oligopoly with NSE and BSE being the only major stock exchanges in India. BSE is the oldest stock exchange with around 6000 listed companies’ vis- a-vis NSE which has just around 2000 companies.
But still NSE has better margins. Here is a comparison between the margins of NSE and BSE. Clearly, NSE has better margins in both EBITDA and PAT being the undisputed leader in the market.
Profit after tax of NSE has increased from Rs.1461 Cr in 2018 to Rs. 5198 Cr in 2022 having a impressive CAGR growth of 29% over past 5 years.
Although NSE Ltd. is not a part of our smallcase portfolios since it is an unlisted company, we believe in sharing extensive research with our smallcase community to provide insights into our investment analysis process. Our note on NSE Ltd. is intended for educational purposes only and is not a recommendation to invest. We strongly advise consulting your financial advisor before making any investment decisions.
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Niveshaay is a SEBI Registered (SEBI Registration No. INA000017541) Investment Advisory Firm. Our research expresses our opinions which are based on available public information, field research, inferences and deductions through our due diligence and analytical process. To the best of our ability and belief, all information contained here is accurate and reliable and has been obtained from public sources, which we believe to be accurate and reliable. We make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results obtained from its use. This report does not represent investment advice or a recommendation or a solicitation to buy any securities.