Reduce SBI Cards; target of Rs 725: Emkay Global Financial

Emkay Global Financial's research report on SBI Cards

SBI Cards continues to report margin contraction (30bps QoQ to 10.9%), coupled with deteriorating asset quality (GNPA up 20bps QoQ to 2.8%) leading to higher LLP. However, sharp reduction in opex, mainly due to fall in corporate spends-related opex, roll-back of festive incentives, and higher LLP/charge-off, SBI Cards (SBIC) reported a strong beat in earnings at 24%, with PAT at Rs6.6bn/4.7% RoA. Going forward, Management believes that high interchange (1.9%) corporate spends will normalize in 1-2 quarters, till then, fee and cost will remain contained. Management continues to guide for softer margins in the near term, as the rate reversal cycle is delayed. SBIC has recently issued Tier-II bonds to the tune of Rs13bn, owing to which, the CRAR has jumped above 20% levels. However, we believe it needs to shore up Tier-I capital at some point in time.

Outlook

We have upgraded our earnings for FY25-26E by 2-6%, and believe that slower growth, coupled with margin softness/rising NPAs, could limit RoAs around 4-4.4% over FY25-27E from 4.6-5.6%. We retain REDUCE with a TP of Rs725/share, implying 4.2x FY26E ABV and 23x P/E.