Day: June 24, 2015

(Disclosure:I am market making in the shares of BSE)

Last week, Canadian investor Thomas Caldwell sent a combative letter to Indian Finance Minister Arun Jaitley, copying both Modi and the head of SEBI to protest excessive delay in listing the exchange. Caldwell, chairman of Toronto-based Caldwell Investment Management, bought 4.8% of BSE in 2007 for roughly $47 million not long after BSE demutualized. Caldwell was also a major investor in New York Stock Exchange before it went public in 2005, and has invested in 36 other exchanges around the world. “As Canadian investors we felt comfortable investing in a country with a British common law basis,” Caldwell wrote Jaitley. “We all laud the rhetoric of the past several months, but, as we move from this ‘honeymoon’ period, substantive steps are now hoped for.”

The paradox isn’t lost on investors: One of India’s most promising stocks – and the operator of its booming stock market, no less – isn’t itself on the market. Across the world, publicly-listed exchanges are the norm rather than the exception, and Caldwell, who shared a copy of his June 16 letter with Barron’s, said it was “ironic” that India is encouraging companies to go public to democratize capital markets, but the exchanges aren’t allowed to do the same.

BSE was founded in 1875, and came to be the jewel of India’s 22 exchanges. Then India launched the National Stock Exchange in 1992, a modern exchange that would let investors trade shares listed anywhere from anywhere else in India, and whose benchmark is the CNX 50 index. BSE rapidly lost share, but its strong brand kept it alive. Under Chauhan, the BSE began its revival. Today, it is still India’s best-known exchange, with the benchmark S&P BSE Sensex Index. It has 5,672 companies listed – the most in the world—and their combined market value of more than $1.57 trillion makes it the planet’s 11th largest. It’s also the world’s largest for currency options, and third largest for currency futures. Its technology – from Deutsche Boerse, which owns 5% – is advanced, and about 30% of the exchange is owned by foreign investors

So what might a publicly-listed BSE be worth? India’s benchmark Sensex index trades at 22 times what its components had earned. Applying a price-to-earnings multiple of 20 – 25 times to the $24.5 million BSE earned would peg its value roughly at $490 million to $613 million.

But that’s just a start, and the BSE could be worth much more in time. Stock markets are growing in Earth’s second most populous nation, and just a small fraction of India’s savings is invested in equities, so trading volumes are poised to expand. In a recent interview, Chauhan forecast that the Indian stock market could help companies raise $150 billion a year over the next five to seven years. Just look at BSE’s peers: Hong Kong Exchanges & Clearing ( 388.HK ) has become one of the best-performing stocks within Hong Kong’s Hang Seng Index, commanding a market value of $43.4 billion, and fetching 36 times 2015 earnings. The Intercontinental Exchange ( ICE ), which owns NYSE, has a market value of $25.6 billion and trades at 23 times earnings. The Singapore Exchange (SGX.Singapore), which owns 5% of BSE, has a market value of $6.3 billion and trades at 24 times earnings.

–from Barrons