SBI Cards stock sees investor interest revival on hopes of faster recovery

While Q2 will reflect the real asset quality picture, focus on non-discretionary spends, strong customer sourcing support to aid business

The stock of SBI Cards and Payment Services (SBI Cards), which was hit by the pandemic-led market crash after its listing in March, has seen a revival in investor interest.

With expectations of a faster recovery in business, it has recovered 27 per cent and is approaching its initial public offering (IPO) price of Rs 755. And, analysts say, there is further upside potential of 30 per cent.

Factors such as focus on non-discretionary spends and strong customer sourcing support of its parent — State Bank of India (55.3 per cent of overall source mix) — augur well, more so when digital/online transactions are seeing strong traction amid the pandemic.

Therefore, analysts such as Shweta Daptardar of Prabhudas Lilladher (in her June 2020 quarter, or Q1, update) say: “We see SBI Cards geared to return to normalcy sooner than expected.”
 

Some analysts also believe that India’s unemployment rate is not as bad as expected earlier, indicating lower cuts in customer spending. What would aid faster recovery for SBI Cards is that, unlike earlier, cardholders aged above 55 have started using their cards for online transactions.

 

 

In Q1, the addition of 288,000 new accounts and focus on non-discretionary spends such as departmental stores, fuel, direct marketing, etc, led to average daily spends improving to 76.5 per cent of pre-Covid levels in June, from 54 per cent in May. This, along with about 10 per cent year-on-year (YoY) rise in outstanding loans to Rs 23,330 crore and lower funding costs, resulted in a 52.2 per cent YoY rise in net interest income to Rs 1,137 crore.

Overall spends in Q1, however, were still down 36.8 per cent YoY to Rs 19,085 crore. Thanks to the 22 per cent YoY rise in bad loan provisioning, profit before tax was down a per cent to Rs 528 crore.

Nonetheless, with fewer customers opting for moratorium in June, salaried individuals constituting 85 per cent of customer based, and strengthening collection, analysts have lowered their bad loans and credit cost estimates for FY21.

That said, how the asset quality pans out in Q2 would be crucial, given that lower moratorium accounts do not necessarily indicate repayment of dues. For one, while number of customers opting for moratorium has fallen from 1.2 million in May to 150,000 in June, there is lack of clarity on repayment by the moratorium customers. Secondly, share of revolving credit (cardholders make minimum repayment, typically 5 per cent of outstanding dues) in the loan mix is also up to 45 per cent in Q1 from 40 per cent in the March quarter.