NSE’s F&O Engine Hits a Speed Breaker — But the Monopoly Still Drives the Market

Key Adjusted Numbers & Interpretation

• For H1 FY26, NSE reported revenue of ~₹7,709 crore (down ~15% YoY). 

• Reported PAT was ~₹5,022 crore (down ~12% YoY), including two large one-off items. 

• The hidden line items:

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1. A charge of ₹1,297 crore for a pending settlement with the Securities and Exchange Board of India (SEBI) on legacy colocation/dark-fibre matters. 

2. A gain of ₹1,201 crore from the sale of its stake in NSDL (India) Ltd..
   
   

• On a normalised basis (excluding those two items), core PAT is estimated at ~₹5,092 crore (down ~11% YoY).

• Transaction charges—a key revenue component—fell ~18% to ~₹5,935 crore. 

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Interpretation:

While headline results soften moderately (~12% PAT drop), the deeper indicator of core business strength shows a larger (~11%) decline, indicating real operational pressures — not just accounting noise. The business remains structurally strong, but one-time items mask the underlying slide in volume-driven income.

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2. What is Driving the Downturn? The Regulatory Impact

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As of now, we have placed a heavy emphasis on regulatory reforms instituted by SEBI aimed at speculative F&O (Futures & Options) trading. Key drivers:
Volume declines across major segments:


Cash market down ~26% YoY
Equity futures down ~30%
Equity options down ~29%
Currency derivatives down ~26%


These declines stem from SEBI interventions:


Larger contract sizes
Fewer expiries (weekly options reduced)
Higher margin and upfront collection requirements
Tighter position limits

• Because the F&O business was a major growth engine for NSE, these regulatory shifts bite directly into its top-line: in history, we have seen that growth in the F&O segment was a primary reason NSE’s revenue had soared historically.

Deeper commentary:

• NSE has long benefited from “flow trading” and short-duration derivative churn (especially weekly options), which generate very high transaction charges. The regulatory clamp-down essentially limits that engine.

• Thus the decline in volumes is not merely cyclical but represents structural change in trading behaviour: less speculative, more considered.

NSE’s transaction-fee model is highly volume-sensitive, with transaction charges accounting for ~77% of revenue in the H1 analysis.In short, the business is being required to transition from a high-frequency turnover model to a more stable, but lower-velocity model of trading and revenue.

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3. Margin & Cost Response

Despite the revenue and volume pressure, NSE’s operating margin (normalised) improved to ~77% (from ~72% last year).
Key factors:

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• Costs fell ~26% (excluding the settlement provisioning), driven by: lower regulatory/clearing fee burdens (linked to lower volumes) and cost discipline. 

• The ratio of high-fixed-cost components (tech-infrastructure investments made years ago) means the decline in volume has not hurt margins proportionally — a sign of operational leverage.

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Takeaway: While revenue is falling, NSE is defending its profitability quite well, which enhances its profile as a high-quality franchise. This suggests that even if volumes stabilise at a lower level, the business can remain very profitable.

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4. Outlook & Future Business Impact

Short-term (next 6–12 months):

• Expect continued pressure in F&O volumes given regulatory headwinds and the baseline now being lower.

• Visibility is weak: Near-term earnings growth is uncertain. Key catalyst: resolution of SEBI settlement matter — until clarity arrives, uncertainty persists.

Medium-term (12–24 months):

• Volumes are likely to settle at a “new normal” lower than prior peaks, and growth will shift from speculative turnover to deeper investor-base growth, product diversification (data, index licensing, listings) and new geographies. For example: Data centre revenue +11%, listing services +13%. These are structural revenue streams.

• It has been noticed that it sees growth coming from expansion of investor participation (24 crore accounts), IPO pipeline (122 IPOs in H1) and overall capital markets growth.

Long-term (>3 years):

• Structural tailwinds remain strong: household financial savings moving into capital markets, digital broking, passive investing, and increasing depth of Indian markets.

• NSE’s “monopoly” / dominant market share remains intact (cash market ~92.3%, equity futures ~99.8%, currency derivatives 100%).

• With such dominance, when volumes eventually recover (or stabilise), the franchise value remains intact.

Net impact:
The business is in transition. Revenue and volume are down, but profitability remains strong. The structural story remains intact. Long-term investors likely will find this attractive, but short-term downside risk remains.

5. Valuation Implications & Unlisted Share Market Context

• The current estimates normalized EPS for H1 FY26 at ~₹20.60 (annualised ~₹41-42) and suggests current unlisted share price ~₹1,900 implies a P/E ~47.5x. 

• In other words, the market is pricing in a return to higher volume growth, favourable regulatory resolution, IPO clarity and structural growth.

• Our verdict: For existing unlisted shareholders, it’s a “hold”. For new entrants, there’s caution: waiting for volume stabilisation, regulatory clarity and some margin of safety is prudent.

• Key risks remain: permanent lower F&O volumes, regulatory shock, and delay in IPO/settlement.

6. Additional Considerations Not Covered (or Under-Explored)

• Settlement risk & timing: The exact outcome of SEBI’s settlement and any extra regulatory/penalty risk remains unclear — this could present upside or downside depending on how it resolves.

• Product mix and diversification: While data and index/licensing are mentioned, how fast they can scale to offset retained F&O‐revenue losses is uncertain. 

• Competitive/regulatory risk: There is mention of possible competitive consequences if regulatory frameworks favour alternate exchanges (e.g., Bombay Stock Exchange) or other platforms, though current dominance remains.

• Macro/market cycle risk: If capital markets activity in India slows (e.g., fewer IPOs, lower investor participation), the tailwinds may soften. 

• Unlisted share liquidity & risk: The current situation reminds us that unlisted shares carry an illiquidity premium, limited price discovery and higher risk — if public listing is delayed or terms unfavourable, value realisation could be delayed.
  
  

7.  Enhanced Summary Verdict

• Strengths: Exceptional business model with near-monopoly market share, very high margins, cost discipline, and structural growth tailwinds.

• Weaknesses/Headwinds: Massive dependence on F&O volumes, which are in structural decline due to regulatory change; near-term earnings visibility is weak; settlement/regulatory overhang is unresolved.

Risk/Reward for investors:
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• If you have a long-term horizon (3-5 years+), are comfortable with some earnings softness now, believe in the India capital markets growth story, this looks like a compelling infrastructure stake.

• If you're looking for near-term returns or a high margin of safety, you might prefer to wait for signals: a few quarters of stabilised volumes, regulatory clarity, IPO timeline and some valuation correction.