Low consumption deepens SBI Cards' woes as Covid-19 lockdown gets extended

Worsening business conditions and sell-off by anchor investors have taken the stock southward

The extension of the lockdown, announced on Tuesday, has added fuel to fire, as regards SBI Cards and Payment Services (SBI Cards).

The stock has already taken a severe knock in less than a month, despite the Rs 10,350-crore initial public offering (IPO) attracting subscription of nearly Rs 2 trillion.

Termed as the mother of all IPOs, expectations were high from SBI Cards. Being the first IPO of a credit card company in India, investors were willing to overlook concerns, including its pricey valuation of 46x its FY20 estimated earnings.

However, between the time of floating the issue and listing, market conditions started worsening, thus leading to the stock closing at Rs 683 on the BSE, below its IPO price of Rs 755, on listing day. The situation has worsened since then. 

 

 

Hitting a roadblock

The lockdown has proved to be a killer blow to SBI Cards’ business, as it is with other credit card players. In addition, the lockdown and its subsequent impact may alter the consumption theme, which is the underlying growth driver for SBI Cards.

In an update regarding business development earlier this month, SBI Cards said its sales and sourcing operations had been discontinued, and its collection and recovery efforts had also been severely hit. 

It also indicated that portfolio quality may be adversely impacted.

“There has been a significant decline in discretionary spend. In categories like airlines, travel agents, hotels, railways, entertainment, and dining, expenses have dropped to almost nil. While the ticket size of retail spends have remained stable, the number of transactions have reduced significantly,” the company pointed out.

Anchor investors giving up shares that they had bought during the IPO could have added to the stock’s decline.

The 30-day lock-in for anchor investors ended on Monday. 

Experts said that the pulling out of nearly Rs 500 crore of shares (1 per cent of m-cap) by anchor investors led to the 15 per cent fall.

In contrast, going by the shareholding for the March quarter, foreign institutional investors (FIIs) and domestic institutional investors (DIIs) have been lapping up shares following the IPO. FIIs had increased their stake from 3.53 per cent (at the time of listing) to 4.03 per cent (at the end of March), and DIIs to 3.04 per cent from 1.6 per cent.

Investors’ dilemma

So, should retail investors follow their institutional peers?

Not unless they are prepared to see near-term (3-4 quarters including Q4FY20) financials coming under severe pressure. As consumption across categories may take a backseat in the near term — even if the lockdown were to be lifted on May 3 — some critical revenue streams and asset quality may be impaired.

In the long term, however, the stock will bounce back when the overall market and consumer sentiment improve, says Nilesh Shah, MD of Envision Capital. This is because the business fundamentals of SBI Cards remain intact, he said.

At 14 per cent net interest margin and 29 per cent return on equity based on 9MFY20 results, the numbers look attractive. SBI Cards is the market leader on parameters such as open market sourcing and co-branding cards, despite being second to HDFC Bank in terms of issuances.

Being a subsidiary of SBI, it has access to the latter’s 400 million-plus customer base. The decision to refrain from issuing free cards also helps maintain profitability, said analysts at PhillipCapital. A possible regulatory intervention on fee and pricing is an overhang on the stock.

In addition, Shah says that if SBI Cards decided to tighten its underwriting norms, it could alter its growth trajectory. “Considering how core banking stocks are available at a discount, SBI Cards seems to be trading at a premium,” Shah adds. At Rs 505.6, it is trading at 35x its FY20 estimated earnings.