Analysts cut earnings estimate, target price on SBI Card post weak Q2 show

Analysts have cut earnings estimates, and target price for SBI Card and Payment Services (SBI Card) post its weaker-than-expected September quarter show. Following the action, the stock tanked 7 per cent to Rs 800 on the BSE in Friday’s intra-day trade, as against a 0.3 per cent gain in the benchmark S&P BSE Sensex. 
 

That said, while analysts expect the stock’s underperformance to continue in the near-term, they remain fairly bullish on the company’s long-term prospects. 

“Following a weak July-September quarter (Q2FY23), we expect the stock to underperform in the short-term. Even so, we maintain ‘BUY’ as we view SBI Cards as a concept stock—being the only listed player in the highly profitable credit card segment. An uptick in the loan mix from next quarter is important for the company to deliver on net interest income (NII), and fees,” said Mahrukh Adajania, and Shrishti Jagati of Nuvama Institutional Equities.

They have cut their FY23 earnings estimates by 6 per cent, but have increased FY24 estimates by 3 per to factor-in Q2 results.

“Due to margin pressure and lower revolves, we are cutting the target price-to-earnings (PE) multiple from 35x to 30x FY24E. Our new target price, thus, stands revised to Rs 995 (from Rs 1,200),” they said.

SBI Card, on Thursday, reported a 52 per cent year-on-year (YoY) increase in net profit in the July-September quarter to Rs 526 crore, led by a spike in income, and lower provisions. This was lower than Bloomberg’s consensus estimates of Rs 627 crore.

Its total income grew 28 per cent YoY to Rs 3,453 crore as interest income increased by 26.5 per cent, fees and services income rose by 29.5 per cent, and other income grew 31 per cent YoY.

However, its NII growth lagged at 21 per cent YoY/4 per cent QoQ due to a sharp dip in net interest margin (NIM) from 13.2 per cent to 12.3 per cent QoQ. The margin squeezed due to deterioration in loan mix, where the proportion of revolves declined from 26 per cent to 24 per cent QoQ, the share of EMI stayed stable at 35 per cent, while the share of lower-yielding transactors increased to 41 per cent from 38 per cent QoQ. This is the weakest loan mix in eight quarters.

SBI Card’s also reported an increase in cost of funds by 30bp QoQ to 5.4 per cent.

Akshay Ashok of Prabhudas Lilladher expects credit costs pressures to recede, to 4-4.5 per cent from over 5 per cent at present, as recoveries improve post festive season. However, operating expenses may rise, too, as sourcing costs could go up with increased competition (200-300bps likely rise in cost-income over FY22-24 to 60 per cent). 

After incorporating this, he has cut FY23 and FY24 EPS estimates by 7.5 per cent, and 6.2 per cent, respectively. While the brokerage maintained its ‘Accumulate’ rating, it has trimmed the target marginally to Rs 1,013 from Rs 1,087. 

Meanwhile, SBI Card has underperformed its peers amid company-specific/sector issues pertaining to market share, revolver share, and merchant discount rate (MDR)-related challenges. 

While analysts at Kotak Institutional Equities are less worried about the first two, as the size of the market opportunity is quite large, concerns about MDR are hard to address as an extremely low rate can result in a change in payment behaviors which could be negative for the credit card industry.

“We expect the revolver mix to increase gradually as spends mature as the festive season progresses, while margin may remain under pressure as borrowing cost increases. Growth in spends remains strong and is likely to stay healthy, thus aiding loan growth. Moderation in ECL will keep credit costs under control,” projected Motilal Oswal Financial Services.

The brokerage expects 41 per cent PAT CAGR over FY22-24, resulting in a return on asset (RoA)/RoE of 6.5 per cent/28.2 per cent. It has maintained its ‘Buy’ rating but cut target price to Rs 1,000.