Jefferies India has initiated coverage on SBI Cards and Payment Services Ltd, India's second-largest credit card issuer, with a "buy" rating and increased the target price to Rs 900, by an upside of 27 percent from the current market price.
Jefferies initiated coverage and increased the target price on several positive factors, including an anticipated increase in card spending, an improvement in net interest margins and healthy profit growth from FY24-26e.
The company is expected to experience a 23 percent Compound Annual Growth Rate (CAGR) in card spends from FY23-26e, the brokerage firm said.
This growth is expected to result from the utilisation of SBI's vast customer base and broad co-branded card tie-ups. This projected 21 percent CAGR growth is expected to be fuelled by the rising popularity of digital payments and the low card penetration rate (only 5 percent of the population aged over 15 years).
The threat from fintechs has been mitigated and SBI Cards is predicted to gain market share in card spends by leveraging its large customer base, analysts at Jefferies said.
With a credit card to debit cards ratio (excluding Pradhan Mantri Jan Dhan Yojana) 14 percent below the peer average of 29 percent, there is a significant opportunity to increase penetration within SBI's customer base.
The company's co-branded card tie-ups are twice as large as its peers and its open market channel is larger than most of its competitors, it said.
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SBI Card has experienced pressure on its Net Interest Margin (NIM) due to a decline in the mix of higher-yielding revolvers from over 35 percent pre-COVID to 24 percent in Q3, along with an increase in funding costs, it said.
There is, however, potential to lift the revolver mix by 150 basis points over FY24-26e by increasing the sourcing of customers with a higher propensity to revolve such as self-employed individuals and those in tier 2 and 3 cities. Nonetheless, it is expected to remain well below pre-COVID levels, the Jefferies report said.
One basis point is one-hundredth of a percentage point.
"The recent emphasis on converting transaction spends to EMI has the potential to boost margins, although it may cannibalize some revolver spends. A 1 percent shift in EMI mix can impact earnings per share by 1.5 percent. Funding costs are anticipated to stabilize as rates peak, given that 65 percent of SBI Cards' liabilities are linked to repo/T-bill rates, which reprice faster", Jefferies report said.
As a result, the company is expected to see healthy profit growth and achieve a 23 percent+ Return on Equity (ROE) from FY24-26e. The company's recent underperformance compared to Nifty was likely due to concerns regarding NIMs, the Jefferies report said.
"With asset quality pressures easing, stage 3 assets (2.2 percent 3Q) and credit costs should be stable. Possible caps on MDR and revolver yields, by RBI are key risks - a10 bps change in interchange fee/ revolver rates changes FY24e EPS by 10 percent/ 3 percent", Jefferies report said.
The report identifies two key risks for SBI Card—the potential threat from new entrants like BAF, and higher spending share gain by UPI. On the other hand, key triggers for the company's growth include an increase in revolver mix and the peaking out of rates.
At 10.11 am, the stock was trading at Rs 730.15 on the National Stock Exchange, up 1.39 percent from the previous close.
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