With stellar returns, SBI Cards a good bet despite premium valuation

Following robust returns provided by SBI Life Insurance within three years of listing, the market is quite positive on SBI Cards and Payment Services (SBI Cards). Strong fundamentals, coupled with a healthy growth potential and an attractive return profile, makes the IPO — opening on March 2 — a good bet despite its premium valuation.

At 45-46x price-to-earnings and 15x price-to-book value (based on annualised numbers of April-December 2019), the valuation is way higher than global credit card peersand at a premium to domestic well-established lenders.

Rohan Mandora, vice-president at Equirus Securities, says: “SBI Cards’ unique business model, strong growth visibility and healthy return ratios justify the premium valuation.” Analysts at Narnolia Financial Advisors, who have a ‘subscribe’ rating, believe the higher earnings growth vis-a-vis global peers warrants a higher premium.

SBI Cards has an 18 per cent market share in terms of outstanding number of cards, as of November 2019. Its strong 27 per cent compound annual growth rate (CAGR) in credit cards from FY15-19 has helped SBI Cards clock a 300-basis-point increase in market share. 

Strong traction in total credit card spends, rising sourcing of customers from its parent (SBI), and cost efficiency (cost-to-income ratio declined by 204 bps over FY17-19) have helped drive up financials. Total operating income and earnings expanded at a CAGR of 41-45 per cent during FY17-19, and by 35 per cent and 84 per cent year-on-year, respectively, in 9MFY20. Over two years, the return on assets improved by 80 bps to about 5 per cent in FY19.

The trend of strong growth and healthy return ratios is expected to continue. Lower card penetration (3-4 cards per 100 people in India versus over 30 per 100 people in developed countries), expected sturdy retail credit growth, and digitation augur well for the domestic credit card industry.  Credit Card spends, which witnessed a CAGR of 32 per cent over FY15-19 to Rs 6 trillion, is expected to reach Rs 15 trillion by FY24 (CAGR of 20 per cent), according to CRISIL Research estimates. 

Apart from supportive macros, focus on tier-2/tier-3 areas, strong reach, its co-branding strategy, and an untapped customer base of SBI should support future growth. For instance, at present, it has tapped not even 10 per cent of SBI’s potential customer base (excluding small accounts). 

There are potential risks too, including competition from other digital channels like UPI. However, Anil Gupta, sector head (financial sector ratings), ICRA, says the credit cards market is unlikely to get affected by other digital channels as these are typically used for small-ticket transactions, unlike credit cards that can be used for higher amounts. 

Investors should keep an eye out for asset quality. Anand Dama and Neelam Bhatia of Emkay Global say: “Asset quality risk is on the rise due to weakening economic and employment trends; SBI Cards with its already high delinquency levels and gross NPA ratio of 2.47 per cent versus 2.3 per cent in Q2 (industry: about 2.0 per cent), needs to be more vigilant.” 

There are instances of rising credit card delinquencies even in some Asian countries (Hong Kong, Taiwan, etc) due to slowdown or crisis. Thus, any further deterioration in asset quality could weigh on valuations, say analysts. Higher share of salaried customers (over 85 per cent) though provides some comfort. 

Overall, the issue looks good for investors with long-term horizon.