BSE‘s share price was tanking on Wednesday morning extending losses to the second straight session. The stock slumped around 5% to hit an intraday low of ₹4,500.

What Happened: Jefferies has downgraded its rating on BSE to “underperform” from “hold”, following a recent surge in the stock, fuelled by hopes of market share gains. The global research firm has raised its price target on the stock to ₹3,500 from ₹2,850.

This recent optimism has stemmed from the anticipation that SEBI’s new futures and options (F&O) measures, starting in November, could tighten the index derivatives market over the next three to six months, leading to spillover trades that benefit BSE. While discontinued weekly products account for around 40% of market premiums, Jefferies expects the overall market impact to be lower (around 25%-30%) due to potential trade spillovers into continuing weekly products.

Jefferies cautioned that the assumption of a large market share gain may be overly optimistic. Monthly contracts, which account for 30% of the market and remain unaffected by the new F&O framework, have seen BSE’s market share remain low at around 10%.

See Also: FIIs, Mutual Funds Cut Stake In BDL In Q2, LIC’s Holding Goes Up

For BSE to meet current valuation expectations, it would need to capture 40%-50% market share in weekly contracts (weeks 1-3), which the analysts believe is unlikely without a significant change in participant behaviour, especially on non-expiry days.

Furthermore, the research firm points out that the market has not fully factored in near- and medium-term risks, such as the potential lower-than-expected market impact from the regulatory changes and the introduction of new compliance measures, like the intra-day monitoring of ₹500 crore exposure limits starting April 1, 2024. These could affect market volumes, as could the removal of calendar spreads and the requirement for upfront margin collection for buyers.

Although Jefferies has raised its FY25-27 earnings estimates by 15-17%, driven by stronger-than-expected growth in the first half of FY25 across segments (cash, StAR MF, options), the brokerage believes that valuations are now running ahead of optimism.

The risks, such as higher regulatory impacts on market volumes, limited spillover gains for BSE and additional regulation, outweigh the potential gains, Jefferies said.

Price Action: BSE’s share price was down over 5% at ₹4,509.65 in early trade on Wednesday.

Read Next: Bajaj Auto Q2 Preview: What To Expect From Pulsar Maker?

Disclaimer: This content was partially produced with the help of Benzinga Neuro and was reviewed and published by Benzinga editors.