The National Exchange of India (NSE) is poised to capitalise on the increase in capital market penetration in the country, aided by financialisation of savings and higher retail participation, according to a report.
Retail and HNI participation is now 69% of NSE’s cash market turnover as compared to 58% in FY16. NSE’s active client base registered a multifold jump over the last decade, growing at 26% CAGR to 33 million. During the same period, PAT has grown at 27% CAGR to Rs 7,500 crore, according to brokerage JM Financial.
“A marginal improvement in turnover velocity can increase share trading turnover significantly. Low turnover velocity in India can be attributed to higher trade concentration in large cap stocks, significantly high promoter holding, and relatively lower retail participation. Turnover velocity typically increases significantly as the market matures and NSE is ideally positioned to capitalise on the consequent volume surge,” said the report.
NSE’s market share in cash equities has gone up consistently, from 83% in FY13 to 93% in FY23. Over FY13-23, cash equities’ annual turnover posted 17.3% CAGR to Rs 133 trillion. Revenue from cash equities contributed about 10% of FY23 transaction income as per the brokerage’s estimate. Introduction of co-location facilities in 2009 led to a sharp spike in NSE’s market share over the ensuing years due to increased algorithmic trading.
Equity option and futures accounted for 76% and 12% of FY23 transaction income, respectively, as per the brokerage’s estimates. The options segment has been the fastest growing segment with average daily turnover growing at 63.7% CAGR over FY13-23. The growth in options has been primarily on account of change in taxation on options in 2008, peak margin rule, which caused a shift from futures to options, and new product introductions, commencement of weekly option contracts and reduction in lot size.
Equity options average daily volumes have surged 25x over the last five years to Rs 152.4 trillion. Option premium value has grown at a slightly lower pace than option notional value at 74% CAGR over FY16-23 versus 84% CAGR over FY16-23 due to factors such as commencement of weekly options, and lower volatility. NSE charges on premium turnover.
Futures average daily turnover has grown at 15.6% CAGR over FY13-23. However, growth has been muted FY21 onwards primarily on account of the peak margin rule introduced by Sebi. ADV in currency derivatives has increased 17.8% CAGR over FY13-23. NSE now enjoys a market share of 85% in the segment. Fee from currency derivatives was 1% of FY23 consolidated revenue.
NSE is focused on developing differentiated products in the commodity segment to gain share. The company launched the rupee-denominated NYMEX WTI Crude Oil and Natural Gas futures contracts in its commodity derivatives segment recently. This will help expand NSE’s product offering in the energy basket as well as its overall commodity segment.
For NSE, transaction income accounted for about 79% on average of revenues over FY21-23. NSE offers a competitive fee structure in case of the cash segment. However, in derivatives, NSE’s transaction charges are significantly higher than that of BSE, given its market dominance. Options accounted for about 81% of NSE’s FY23 transaction income versus about 30% of transaction income in FY13.