SGX to take hit from India derivatives delay, but is it priced in?

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Singapore Exchange’s shares have taken a hit since Indian exchanges have taken aim at its Indian derivatives business, but the turmoil may already be priced into the stock, OCBC said.

The stock has fallen from this year’s high of S$8.50 to as low as S$7.10, OCBC noted in a research note on Friday, adding that it had wiped as much as S$1.5 billion off the market capitalization.

“As this continues to play out in the coming weeks, the outcome is unlikely to be clear, but the share price has clearly reflected most of the negatives and the potential hit on SGX’s bottomline,” OCBC said. “We are of the view that the correction is overdone and has more than priced in the potential hit on its earnings.”

Singapore Exchange said last week that it would delay the launch of its Indian derivative successor products to the SGX NIfty product family. That was after an Indian court granted India Index Services and Products Ltd. (IISL), a subsidiary of the National Stock Exchange of India (NSE), an injunction on May 21 against the launch of SGX’s new products. The Bombay High Court has sent the matter to arbitration.

India derivative launch delayed

SGX had planned to list the successor products before August, when the license for the SGX Nifty products expires. The new products were aimed at providing the same ability to manage risk exposure to the Indian capital markets and at transitioning market participants before the SGX’s license deal with NSE expires.

That deal was ended as Indian stock exchanges decided to cut off foreign exchanges’ data access for derivatives products in an apparent belief that the foreign exchanges were “stealing” volume to offshore markets that could be settled on the subcontinent. It’s unclear if the move to block overseas derivative use will lead to investors cutting their India exposure or boosting their onshore trade.

In a February note, Goldman Sachs estimated that 10 percent of SGX’s derivatives business revenue comes from the Nifty F&O and rupee futures, which are its two key India offerings.

OCBC noted that for SGX’s fiscal nine-month earnings, derivatives accounted for about 40 percent of group revenue. While the bank kept its earnings forecast for fiscal 2018, ending June 30, “largely intact,” it was revising the forecast for the following fiscal year for the potential hit to the derivatives business.

That led the bank to cut its fair value for SGX shares to S$7.89 from S$8.22, but it kept a Buy call, pointing to “stable core earnings” and a committed dividend payout offering a dividend yield of around 3.9 percent at current levels.

The stock ended Friday down 0.14 percent at S$7.23.

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