SBI Card IPO subscription to begin on March 2: Should you subscribe?

Moneycontrol checked all brokerage recommendation reports on the IPO of the second largest credit card company and found that every research house, which rated, has advised subscribing to the issue.

But, why are brokerages looking so confident about the company when the market has been struggling to find the bottom amid fears of the coronavirus which has ruined global sentiment and sent all global markets bleeding. This included India, which lost over 7 percent last week and ultimately had Rs 11.6 lakh crore of investors' wealth wiped out.

The first major reason they see is the strong support it has from its parent, State Bank of India. SBI has largest customer base of 44.5 crore as of December 2019, and provides access to its extensive branch network (of nearly 22,000) across India. This also opens up a room to become a significant source of new customers in future.

Also read | SBI Cards IPO: 10 things to know about the keenly-eyed issue

The State Bank of India currently holds 74 percent stake in the company and the rest is held by CA Rover Holdings, which will be reduced to 69.51 percent and 22.40 percent, respectively, after the issue.

For 9MFY20, SBI Cards has sourced around 52 percent of new accounts through open market distribution channel (retail/co-brand partnerships), 48 percent from bank distribution channel i.e. SBI.

As on 9MFY20, SBI Cards has a large sales workforce consisting of 32,677 outsourced sales personnel and 3,190 open market points of sale across 145 cities covering most of India’s territory.

"Compared to industry which sources 70 percent from banca & 30 percent from open market, SBI Cards has much lower banca proportion. However, since past couple of years, SBI Cards has been working with SBI to increase the proportion of branch sourcing which has increased from 35.2 percent in FY17 to 51.6 percent for 9MFY20. There is still huge untapped potential to increase business from SBI branches which has a wide network," ABM Equity said.

"Out of around 22,000 SBI branches, SBIC has physical presence by its outsourced sales workforce in 15,686 branches as of 9MFY20. Banca channel has its advantage wherein the captive customer base of the bank is tapped for new credit cards account, thereby reducing the cost of acquisition and the risk of delinquency," it added.

The second largest credit card issuer in India (after HDFC Bank with 27 percent), with deep industry expertise and strong business model is another reason for brokerages to advise the issue.

SBI Cards is the second largest credit card issuer in the country in terms of number of credit cards outstanding and total credit card spends in the Indian credit card market. The company has 93.2 lakh outstanding credit cards and around Rs 98,486 crore in terms total credit card spends as on December 2019 entailing into a market share of 18.1 percent and 17.9 percent, respectively.

"We believe that SBI cards is a formidable play on rising discretionary spends and non cash economy given a) broad reach and parentage of SBI b) under-utilized captive banca potential c) leadership in co-branded cards and d) 40 percent contribution of premium cards," Prabhudas Lilladher said, while initiating coverage on SBI Cards and Payment Services, with a buy recommendation and target price of Rs 1,191 — a potential upside of nearly 54 percent over higher end of price band.

The above target price is slightly higher than the grey market premium, which according to experts is around around Rs 350-380 per share.

Over the years, SBI Cards has been constantly gaining market share, being the highest in terms of incremental cards with 45 percent market share in July 2019 and 24 percent during the three-months (May-July 2019).

The revenue from credit card products consists primarily of interest on credit card receivables and non-interest income primarily comprising of fee-based income such as interchange fees, late fees, annual credit card membership fees and other fees.

SBI Cards has a well-diversified revenue pool with NII constituting 40 percent, fees and commission earned (58 percent) and other income (2 percent). Interest is earned when cardholders roll over their dues while fees and commission includes interchange fees, late fees, annual fees, etc.

"Higher Fees & Commission proportion provides more stability to income currently while also leaving more potential for SBI Cards to tap and increase its loan book to earn higher interest & profitability. NIM earned has been largely stable at strong levels of around 15 percent while Net Credit margin i.e. adjusting for credit cost is around 11 percent which indicates risk-adjusted return is favorable," ABM Equity said.

The third reason brokerages have highlighted is the strong financials that the company has reported in the last several years with superior return ratios and faster business growth than industry.

Having diversified portfolio of credit card offerings and diversified revenue model, SBI Cards has total asset size of Rs 26,000 crore as of December 2019. Its return on equity (ROE) stood at 28.4 percent in FY19 and 36.5 percent in April-December FY20, while return on assets (ROA) stood at 4.8 percent in FY19 (increased from 4 percent in FY17) and 6.7 percent in 9MFY20.

Profitability of the company is growing by leaps and bounds, reported PAT has grown by 52 percent CAGR during FY17-19 and revenue from operations 44.6 percent CAGR.

"Going forward, trend is likely to continue - PAT is estimated to grow by 57 percent CAGR during FY20-22, with ROE/ROA over 33/7 percent in FY21, given favourable demographics, rise in digital payments, boom in e-commerce industry, SBI parentage and aggressive approach of the management," LKP Securities, which has advised subscribing to the issue has said. It sees fair value of Rs 1,220, discounting its FY22e ABV by 9.5x, giving upside potential of 57.4 percent from the IPO price.

The fourth reason being highlighted is the underpentration in Indian credit card industry compared to developed countries, with strong co-branded partnerships, technology upgradation and rising trends of digital payments as younger people prefer to use them for consumption needs.

During FY17 to FY19, SBI Cards' total credit card spends grew at a rate of 54.2 percent and the number of credit cards outstanding at a 34.5 percent CAGR as compared to a 35.6 percent and 25.6 percent CAGR for the overall credit card industry respectively, according to the Reserve Bank of India (RBI).

According to Crisil Research, credit card spends have registered robust growth, growing at a CAGR of 32 percent during FY15-FY19 to reach Rs 6 lakh crore in FY19. It is expected to grow at a healthy rate to reach Rs 15 lakh crore in FY24.

"We expect SBI Cards to continue to register healthy CAGR over FY2020-24 owing to (a) Significantly underpenetrated Indian credit card market; number of credit cards per 100 people is 3, whereas in developed/developing countries it is more than 30. (b) As on Q3FY2020, credit card to debit card ratio was 3.7 percent for SBI Cards (versus peers viz. HDFC Bank – 45 percent, Axis Bank – 28 percent and ICICI Bank – 18 percent), which clearly indicates huge scope for mining SBI Bank customers. (c) Total credit card outstanding loan as a percentage of banking sector loan is just 1.22 percent, and retail loan is 27 percent, indicating enough space to increase credit card loan book. (d) Credit card spend as percentage of GDP for India is 3 percent, while that for other countries is more than 10 percent. All the above factors clearly show that there is a huge room for credit card industry to grow," Angel Broking, which has recommended the issue said. It believes, with strong parentage and healthy capital adequacy, SBI Cards should be able to growth at healthy CAGR and gain market share.

While recommending investors to subscribe the issue for listing gains and also from long term perspective, ABM Equity also said, "New Credit card accounts and number of credit card transactions have been growing at 25-30 percent range. Considering the low base, expect this trend to continue in medium to long term. With younger generation, expect credit risk culture to steadily increase over the years which shall enable the credit card business to grow at healthy pace. Focus on digitalization, developments in e-commerce and the demographic changes to keep structural growth in credit card intact."

SBI Cards has 18 co-branded partnerships in its bucket, which again is the highest in the industry compared to other players, followed by ICICI Bank at 12 and RBL Bank at eight. Credit card spends from these co-branded credit cards increased to 24.7 percent from 19.3 percent of total credit card spends in 9MFY19 as compared to FY2019, respectively.

Highest number of co-brand tie-ups augurs well in customer acquisition as well enhance customer experience.

Accordingly, SBI Cards has witnessed robust growth in volume of transaction at 34 percent CAGR in FY14-19 to around 28 crore and 44 percent CAGR in overall spends to around Rs 1.03 lakh crore.

"Focus on increasing customer base with roll out of products in tier II and III cities, emphasize on corporate card business, tapping vast customer pool of parent (SBI) is to lead to higher customer base. Technology upgradation and improved partner tie-up and reward offers to induce and increase transaction volume, thereby supporting growth in business and profitability," ICICI Securities said.

Prabhudas Lilladher said continuous evolution of technological/data analytics capabilities will increase credit card numbers and transaction volumes which would drive operating leverage and reduce cost income ratio by 446bps over FY20-22.

SBI Cards is the first company from the Indian credit card industry with niche business to list on bourses. This is the fifth reason being given by brokerages.

"Generally, the company which has niche business and first listing in the particular industry always attracts a lot of interest from investors. Hence SBI Cards is the first one to list in the card industry business and on top of that, it is a consumer-oriented business company growing higher than industry. Given healthy financials, niche business and first time listing from cards industry, there is a lot of interest for SBI Cards," Siddhartha Khemka, Senior Vice President, Head-Retail Research at Motilal Oswal Financial Services said.

The sixth reason is the manageable asset quality of the company, though it is a risk given the weakening economic and employment trends.

"SBI Cards' asset quality is fairly manageable considering the unsecured nature of credit card business & superior NIM it is able to earn. As on 9MFY20, its gross non-performing assets (NPA) ratio was 2.5 percent and net NPA ratio was 0.8 percent. The NPA ratios are slightly higher than industry which has GNPA ratio of around 2.0 percent. We believe there is a scope that NPA ratios could relatively improve going ahead as contribution from banca distribution increases. SBIC’s credit cost has been stable at around 3.5 percent which is under control," ABM Equity said.

The attractive valuations, though at premium levels, is the seventh reason for subscribing to the issue.

"At the upper price band, the company is trading at 7.9x FY21e and 5.6x FY22e ABV. Given key strengths of the company like - its unique business model which is a pure credit card play, high growth phase alongwith strong profitability matrix, favourable demographic dividend, it is likely to trade at higher multiples," LKP Research said.

Prabhudas Lilladher, which also noted that SBI Cards is being offered at significant premium to global peers which are trading at 9x-13x FY22 EPS, expects premium valuations to sustain given unique business model of standalone cards business, 35 percent EPS CAGR and attractive return ratios.

SBI Cards offers investment opportunity in unique business model with strong profitability, said ICICI Securities, adding sustainability of higher business growth and strong return ratios justifies premium valuation for the business.

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