SBI Card IPO is the 5th largest in terms of issue size; does size matter?

The SBI Cards and Payment Services initial public offering (IPO) opens for subscription on March 2 with a price band of Rs 750-755 per share.

The subsidiary of India's largest lender, the State Bank of India (SBI), is aiming to raise Rs 10,355 crore through this IPO which will close on March 5.

The issue is priced at nearly 48 times the earnings per share (EPS) of the first half of FY20 (annualised) of Rs 15.6 and nearly 16 times book value of equity per share (BVPS). It does not have any listed peers on domestic stock exchanges.

As per the issue size, the SBI Card IPO will be the fifth-largest IPO of the country, preceded by the likes of Coal India, Reliance Power and ONGC.

Coal India's IPO, which came in 2010, tops the chart of the largest IPOs, with an issue size of Rs 15,475 crore. It was followed by Reliance Power IPO which came in 2008 with an issue size of Rs 11,700 crore.

General Insurance Corporation of India IPO is at the third spot. It came in 2017 with an issue size of Rs 11,372 crore. ONGC is at the fourth spot with an issue size of Rs 10,694 crore. ONGC IPO had come in 1996.

Size does not matter

The size of an IPO makes it attractive to some extent but a lot depends on how the company fares going forward. Data shows, some of the larger IPOs, with an issue size of over Rs 5,000 crore, failed to meet the expectations of investors in the long run with their current market price below their issue price.

SBI Card has fetched buy signals from analysts and brokerages, not because of its size, but because of its strong market position, revenue strength, improving profitability and stable asset quality.

"Over the long-term, we remain optimistic given SBI Card's strong market position, revenue strength, improving profitability and stable asset quality. Further, the macro traits are favourable in the domestic card industry with rising disposable income, increase in private consumption growth, young Indian population, surge in use of credit cards in personal spending and government’s support towards digital payment services," said Narendra Solanki, Head Fundamental Research (Investment Services) and AVP Equity Research, Anand Rathi Shares & Stock Brokers.

For the short-term, despite a higher valuation, experts say the stock will give listing gains.

"SBI Card IPO is a much-anticipated one. Despite the IPO-valuation being rich, the stock is expected to give listing gains given the euphoria around it," said Raghav Garg, Research Analyst - NBFCs and Specialty Finance at Nirmal Bang.

In the long-term, Garg said the stock could continue to command rich multiple since it is the only pure-play cards company in India.

"The growth opportunity is also such that the company can thrive. But one may become more wary of valuations after listing gains," Garg said.

The challenges

From macroeconomic headwinds to the probability of any deterioration in asset quality, SBI card, too, will face challenges that will make its ride bumpy.

"Further economic downturn and increase in unemployment rates could throw up growth and asset quality challenges. MDR regulations is another angle one needs to consider as it would impact earnings should that risk materialize," Garg said.

Besides, the fact that the company’s card portfolio is largely unsecured is a risk. The emergence of a competition is also something that will test the strength of the company.

"The company’s card portfolio is largely unsecured without any collateral. While the company is maintaining steady asset quality, any potential prolonged weakness in the economy may affect its portfolio," Solanki of Anand Rathi Shares & Stock Brokers said.

"Further, the increasingly competitive environment, along with the emergence of new or significantly larger credit card issuers or payment solutions providers, may pose a challenge to SBI Cards to retain its customer base. Additionally, the company may have to deal with any adverse regulatory change in the card industry," Solanki added.

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