With the FDI gates open, a clutch of investors, including the NYSE group, Softbank Asian Infrastructure Fund, investment bank Goldman Sachs and private equity player General Atlantic, has found its way into the shareholder list of India's premier bourse, the National Stock Exchange. Each of them has picked up a stake of 5 per cent.
In the process, the twelve year old exchange, which currently does an average daily turnover of Rs 8,000 crore (Rs 80 billion) - almost twice that of the Bombay Stock Exchange - has been valued at $2.5 billion.
Says Rasesh Shah, CEO, Edelweiss Capital, "At a forward multiple of around 36 for FY08, investors have struck a good deal, given that NSE is clearly the market leader and that's there's scarcity value because of high entry barriers."
At Rs 2,450 per share, the FY06 trailing multiple for NSE works out to just under 58. For perspective, the 12-month trailing P/E for the NYSE is 127 at the current price of $100.
While the opportunity for growth is huge given that barely 4 per cent of the country's household savings find their way into equities, the blocks of five per cent each were ostensibly not large enough to attract more of a premium -there are bourses overseas that trade at multiples of 35-40.
"But, strategic buyers like the NYSE are just looking to get a foot in the door and so, were willing to settle for a small stake," says the CEO of one of the institutions that sold shares.
As Raj Kataria, MD, Investment Banking, Merrill Lynch, observes, "NYSE is viewing this as a long-term strategic investment. Even if there were to be no further P/E re-rating, the earnings growth alone would ensure NYSE a good return."
Kataria adds that NYSE is looking at long-term benefits. Incidentally, the NYSE listed at around $11.5 in 2004, and has been a ten bagger since then.
Many Indian banks and institutions are promoters of the NSE and though a few of them have parted with some shares, not one has exited fully.
Edelweiss' Shah believes that since NSE is not listed, it would have been difficult for local mutual funds, which have to announce a daily NAV, to have bought invested in the NSE.
"This investment is suited either for a strategic investor or a private equity player and since most of the P/E funds are foreign, they have picked up a stake," he says.
With a market capitalisation of $15.7 billion and a daily turnover of nearly $87 billion, the NYSE is one the world's largest exchanges. But, the NSE could be even bigger some day.
Today, though, the NSE is a small: post-tax profits were Rs 191.42 crore (Rs 1.91 billion) in 2005- 06 and reserves are of the order of Rs 616 crore (Rs 6.16 billion).
Despite having brought down transaction charges for cash equities from Rs 9 per lakh in 1994 to Rs 3.50 per lakh today, transaction revenues in 2005-06 stood at Rs 300.77 crore (Rs 3 billion), a 60 per cent increase over the previous year.
According to Ravi Narain, MD and CEO, NSE, transaction charges, which contribute just under 50 per cent of operational income (other sources are listing, membership and book-building fees), will continue to be the main revenue driver going ahead.
However, Narain has a whole lot of plans, including a broader portfolio of derivatives. Says he, "Most of what we have on offer are plain vanilla products."
And he's counting on the NYSE to bring to the table its knowledge of overseas customers and markets. After all, in an increasingly globalised environment, it is inevitable that NSE has a global road map. The NSE chief says there are no plans to go public right now.
But he's clear that since stock broking is no longer just a national business, NSE must be relevant to broker's offshore needs. Whether they're in India or abroad. Who knows, with rupee convertibility not too far away, Microsoft and Coca Cola may soon be traded on Indian shores.