If one has to make a choice between the parent company, SBI or the SBI Cards IPO, experts feel that investors’ will be better off investing in the IPO for listing gains as well as long term gains.
Amid coronavirus fears, D-Street is gearing up for a historic event to unfold this week – the SBI Card IPO, which will open for subscription on March 2.
This will be the largest IPO after General Insurance Corporation of India which came out with its initial offering in October 2017.
SBI Card proposed to raise Rs 10,289 crore at the lower end of the price band (Rs 750 per share) and Rs 10,355 crore at the upper end (Rs 755 per share).
The next big question in the mind of investors is where should investors place their money – SBI that has a market capitalisation of Rs 2.7 lakh crore (as of February 28) or SBI Card IPO?
If one has to make a choice between the parent company, SBI and the SBI Card IPO, experts feel that investors will be better off investing in the IPO for both listing and long-term gains. The grey market premium is around 40 percent on the listing.
SBI Card (SBIC) is a subsidiary of State Bank of India, and is also the second-largest credit card issuer with 93.2 lakh outstanding credit cards and Rs 98,486 crore in terms of total credit card spends as on December 2019.
“We would advise investors to subscribe to the SBI Card IPO and earn from the listing gains. Since there is a lot of buzz around the IPO and it is already trading at a 40% premium in the grey market, a stellar opening is expected by D-Street,” Umesh Mehta, Head of Research, Samco Securities told Moneycontrol.
“Contrary to this, SBI Bank’s stock won’t deliver the same returns in such a short span of time. Hence, investors should play the SBI Card IPO and avoid the SBI stock which is trading in a range-bound manner,” he said.
One of the reasons, which experts feel, could play in favour of SBI Card is the low penetration of the credit card market. Compared to other markets, the Indian credit card market remains severely underpenetrated with a meagre 3% (per 100 population) penetration, which is among the lowest in the world, according to reports.
“Investors who had SBI shares in their portfolio as on February 18, 2020 – the record date for application under this criterion – can apply for the IPO under this category,” Atish Matlawala, Sr Analyst, SSJ Finance & Securities told Moneycontrol.
“Penetration of credit cards in India is just 3% compared to 73% in Brazil and 42% in China. This presents an immense opportunity for the entire industry to grow. Thus we will prefer investment in SBI card and not SBI at this point in time,” he said.
Earnings & Valuations:
SBI Cards has maintained a strong earnings trajectory with revenue growth at 44.6 percent CAGR to Rs 6,999 crore in 2017 and net profit trajectory at 52.1 percent CAGR to Rs 862.7 crore in 2019 with sustainable RoA of over 4 percent and RoE of about 28 percent, said an ICICIdirect report.
“SBI being Parent will be beneficiary of the IPO and its expected rich valuations. At IPO price it contributes Rs.40 per share (post 20% discount) to SBI’s valuation. SBI (bank) is expected to report strong earnings (~50% CAGR) over the next 2 years considering declining slippages and improving recoveries,” Pankaj Pandey, Head – Research, ICICI direct told Moneycontrol.
“Subsidiaries are adding to valuations further. We believe investment in SBI bank can be considered at current levels. SBI cards IPO should be subscribed for listing gains as valuation remain rich at 44x FY20E PAT IPO price,” he said.
Largest pure-play issuer:
SBIC has grown its business faster than the market over the past two years both in terms of the number of cards outstanding (35% CAGR over FY17-19) and card spends (54% CAGR), according to a Motilal Oswal report.
This helped in improving its market share to 18 percent in both the categories (as of November 2019). It offers a wide range of card portfolios (46) with 40 percent being the premium cards (2nd highest).
The working-age population, spend-thrift nature of the millennials, credit card penetration being low, government's thrust on digitalisation and a growing economy a are the major driving force for the credit card industry flourish in times to come, suggest experts.
No doubt SBIC commands higher valuations, but with strong financial metrics as well as rising market share, it becomes a value play for even long-term investors as well.
“SBI Cards is the first offering of its kind where the tailwinds is quite optimistic, financial metrics are quite strong and hence it warrants a significant listing premium and a high valuation,” Paras Bothra, President of Equity Research, Ashika Stock Broking told Moneycontrol.
“As SBI being the promoter to it and the lofty valuation which SBI Cards listing would command will certainly have a positive rub-off effect on SBI’ stocks price. Hence investors can consider applying for the SBI Cards IPO for good gains,” he said.
Being the largest financial conglomerate with businesses across segments like corporate, retail, government businesses, insurance, asset management, credit cards among others, SBI turns into a holding company and thus does not provide a pure-play.
“While the valuation may seem attractive from holding company perspective, we would prefer a pure-play with limited balance sheet risk like Life insurance business,” Sameer Kaul, MD & CEO, TrustPlutus told Moneycontrol.
“SBI Cards not only operates in a segment, which has very low penetrations but is also least prone to interventions from the government unless Agri credit cards are issued under pressure. Having said that, we believe that valuations may be slightly on the higher side for a PSU and thus allocation has to be careful,” he said.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.