SBI Cards' scarcity premium, high growth to overshadow its book quality

Penetration opportunity, shift to digitalisation will remain long-term triggers for the stock

SBI Cards and Payment Services or SBI Cards was the most anticipated public issues of 2020. While it was a laggard post listing and the lockdown aggravated its underperformance, with year-to-date gains of 8.5 per cent, the stock hasn’t outperformed its banking peers, thus making for an attractive investment narrative.

Calling it the quintessential India opportunity, analysts at Macquarie Capital expect the company to deliver 32 per cent annually compounded earnings growth and an average return on equity of 28 per cent in FY20-FY23, primarily driven by 25 per cent plus growth in cards outstanding. These growth estimates are almost unachievable for any bank or non-bank lender under the current circumstances thereby making the credit card issuer a formidable play in the segment. Even those at Kotak Institutional Equities ratify the view. “These return ratios are one of the highest across our coverage universe and represent the nature of the underlying business, which has a high share of fee income as well as high-yielding lending book,” they note.

To put things in context, SBI Cards is a non-banking finance company and a subsidiary of State Bank of India. This corporate structure positions it as a niche player in the segment – that of being the only non-bank card issuer and not just another card division of a bank.

At 10x FY21 estimated book, SBI Cards is the most expensive stock in the financials space and enjoys valuations far superior to a bank-driven credit card division. Positioned as a number two player – second to HDFC Bank in terms of total cards outstanding (11 million as of September quarter or Q2), its long-standing partnerships with IRCTC, Air India, Bharat Petroleum to name some, makes it the market leader in the co-branding segment; an important sourcing strategy for the company.

 

That said, there are some critical headwinds to note. After Q2’s gross non-performing assets ratio increased many-folds to 7.5 per cent, analysts expect FY21 and FY22 gross NPA ratios at 8 per cent and four per cent respectively. Credits costs will remain a sore point in the next two – three years for the company (see table). Average spend per transaction may also remain muted at Rs 3,300-3,500 given the economic downturn.

Yet, despite these threats, SBI Cards may grow faster than the banking sector (as seen historically) and this justifies its tall valuations. Stock price correction, in future, presents a good buying opportunity for investors who have missed lapping up the stock during its public issue.