Drew Exchange LP

Dear Partners,

At Drew Investment Management, we have identified a unique opportunity and have set up a Delaware Limited Partnership called the Drew Exchange LP to invest in only one company in India.

The investment is the National Stock Exchange of India (NSE), the dominant stock exchange in India with a market capitalization of approximately $50 billion with a trailing P/E ratio of 30. The company maintains exceptional operating margins above 60% and carries virtually no debt.

NSE operates in what is effectively a natural monopoly, with dominant market share in both equity cash trading (over 90%) and equity derivatives trading (over 80%). Its closest competitor, the Bombay Stock Exchange (BSE), while publicly traded, has a far smaller footprint and I believe is less efficient and less innovative. NSE’s business model benefits from extraordinary operating leverage—similar to other exchanges worldwide.

Interestingly, BSE is the 2nd oldest stock exchange in the world. Prior to the founding of NSE, BSE had 100% market share in India. The disrupter (NSE) blew out the incumbent due to exceptional execution and a strong focus on technology and transparency.

Trades generate a small fee, but with millions of trades occurring every day, these “pennies” accumulate rapidly. Because the infrastructure is largely digital and fixed in nature, the marginal cost of each additional transaction is negligible, making the business immensely profitable. With no apparent need for significant reinvestment and massive scalability, it exhibits many of the features that Warren Buffett has identified as hallmarks of compounding machines. The NSE is a toll bridge that market participants in India have to cross to get access the deepest liquidity and best executions in a market that is growing and becoming increasingly involved in its own capital markets.

In the fiscal year ending March 2025, NSE reported operating margins north of 60%, no debt, and consistent earnings growth averaging at more than 20% annually. The business generates significant free cash flow and returns a large portion of this to shareholders via dividends—currently yielding about 5% based on the current price in the secondary market. More impressively, it does all this while still operating at only about 8% of its current technological capacity, leaving ample room for scale without proportional reinvestment.

India’s capital markets have grown at an incredible pace in recent years. In 2015, there were only 25 million retail brokerage accounts. Today, there are over 175 million. This sevenfold increase in under a decade reflects not just improved access to markets, but also a broader economic transformation. The country’s GDP recently surpassed that of the UK, making it the world’s fifth-largest economy. India’s demographic tailwinds—young, tech-savvy, aspirational, and increasingly financially literate—make this growth trajectory even more compelling. The median age in India is just 29, and with annual GDP growth averaging 6–7%, income levels are projected to double over the next decade, driving even greater participation in equity markets.

I believe NSE is the beating heart of this ecosystem. It facilitates not only secondary trading but also primary capital formation. In 2024, NSE hosted 268 IPOs that raised $19.5 billion—remarkable figures for an emerging market. For comparison, the NASDAQ hosted 174 IPOs raising $22.5 billion that same year. This capital formation is critical for India’s continued development, and I believe NSE is the infrastructure through which it flows.

As Buffett has often said, the best businesses are toll bridges—assets that were built in yesterday’s dollars but continue to earn in tomorrows dollars. NSE fits that mold perfectly. It required significant upfront investment in infrastructure and regulatory compliance, but now operates with minimal incremental cost and extremely high predictability. It has minimal working capital needs, low maintenance capex, and consistent pricing power. Its services are seen as necessary, not discretionary, and the cost to the end user is trivial relative to the benefits—another hallmark of enduring businesses.

That said, no company is without blemish. NSE has been through two governance scandals that would naturally raise questions. The first, in 2015, involved allegations that certain brokers were given unfair access to exchange infrastructure—a co-location controversy that raised issues of integrity and favoritism. The second, more serious incident emerged in 2022 when it was discovered that the former CEO, Chitra Ramkrishna, had been sharing confidential business information with a so-called spiritual advisor and making high-level decisions without proper oversight.

Both scandals were followed by comprehensive regulatory investigations by SEBI, India’s securities regulator (India’s SEC). These investigations led to leadership changes, monetary penalties, and the implementation of stronger governance protocols. In many ways, the scandals served as a catalyst for reform. The new management team is professional, transparent, and focused on compliance. Internal controls have been strengthened, the board has been refreshed, and there is a renewed emphasis on ethical governance. They even put three CTOs in place to ensure the exchange is managed appropriately. While such issues should never be taken lightly, I believe the underlying business model, market dominance, and structural advantages remain intact—and stronger, in fact, for having gone through the crucible.

NSE is not currently listed on any stock exchange, but it has been trying to go public since 2016. Regulatory challenges and the governance issues delayed the IPO process, but a listing seems inevitable in the medium term, given the regulatory requirement for exchanges to list. Drew Investments has acquired shares in the secondary market, where the company trades at roughly 30 times trailing earnings. Its listed competitor, the Bombay Stock Exchange (BSE), trades at around 68 times earnings despite its weaker business model and significantly lower market share. This discrepancy underscores the opportunity.

In addition to its commercial strength, I believe NSE plays an important public function. It is recognized as an institution of national importance. It brings financial access to every corner of the country—present in over 99.85% of postal codes—and serves as a secure, auditable platform for capital markets to function. The Aadhaar system (India’s biometric ID platform) enables NSE to maintain extraordinary traceability and compliance, significantly reducing the risk of manipulation or illicit activity.

I share all this because I believe NSE is one of the great businesses of the next few decades. It is the kind of company that could quietly compound capital at high rates for a long time, with limited reinvestment needs, strong competitive advantages, and a product that only becomes more essential as India continues to grow. I believe this is a business worthy of any smart investors’ attention.

Warmly,
Monsoon Pabrai

Monsoon speaking on NSE at VALUE x BRK in Omaha on May 2nd 2025

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