SBI Cards IPO: Why analysts suggest subscribing despite rich valuation

Siddharth Purohit of SMC Global Securities believes that given the stable RoE of 30% valuation, in terms of P/E ratio is likely to come down to 31x and 22x in FY21 and FY22, respectively from 43x.

SBI Cards and Payments Services (SBI Cards) will open its four-day initial public offer (IPO) on March 2. With a price band of Rs 750-755, the issue seeks to garner Rs 10,341 crore at the upper-end, making it India’s fourth-largest IPO – falling behind Coal India, Reliance Power, and GIC Reinsurance.

The offer comprises a fresh issue worth Rs 500 crore and an offer for sale (OFS) of up to 130,526,798 equity shares. A major chunk of the IPO will be a secondary share sale by parent State Bank of India (SBI) and private equity (PE) major Carlyle.

The largest public sector bank will offload a 4 per cent stake, while Carlyle will sell a 10 per cent stake. After the issue, SBI’s stake will drop from 74 per cent at present to 70 per cent, while Carlyle will see its holding come down from 26 per cent to 16 per cent. The bid lot for the offer has been finalised as 19 equity shares and in multiples of 19 shares thereafter.

Steep valuation

Valued at nearly 43x P/E (trailing) and 41x (based on H1FY20 annualised EPS), analysts see the valuation of the credit card issuer as aggressive when compared with peers. They, however, believe that the stock commands the premium valuation given its strong financial track record, goodwill associated with its parent company – State Bank of India (SBI), and strong distribution network. Nearly all of them have assigned it a ‘subscribe’ rating.

Brokerage firm Sharekhan values the company at 80x its FY2019 EPS and 60.6x its 9MFY2020 EPS. However, given the company’s high compound annual growth rate (CAGR) across verticals, it believes SBI Cards has the potential to have a high-growth trajectory along with dominant market share and attractive return ratios in the future.

Meanwhile, credit card spends have registered robust growth, reporting a CAGR of 32 per cent from FY15 to FY19 and are expected to reach Rs 15 trillion by FY24, which is 2.5x over FY19, they wrote in an IPO note.

Siddharth Purohit, a research analyst at SMC Global Securities believes that given the stable RoE of 30 per cent valuation, in terms of P/E ratio is likely to come down to 31x and 22x in FY21 and FY22, respectively from 43x (trailing for the nine months ended December 2019).

That apart, stable asset quality, too, augurs well for the company. Though credit costs were higher during FY19, we think that asset quality is manageable with GNPAs/NNPAs of 2.4 per cent/0.8 per cent. There is a huge potential to tap the bank’s customers, which would help on the growth front,” say analysts at Nirmal Bang Institutional Equities.

“At 13.5x BV/46x EPS (trailing), the valuation factors in a very optimistic scenario of sustainable high growth and profitability ratios. Given the anticipation built around the IPO, the stock may deliver listing gains,” they added.

For Vinod Nair, Head of Research at Geojit Financial Services, a healthy business outlook with the total credit card spends and outstanding growing at a CAGR of 35 per cent and 54 per cent, respectively over the last 2 years makes the stock a long-term investment pick.

Sneha Poddar, a research analyst at Motilal Oswal Financial Services, on the other hand, banks on the rising trend of digital payments and e-commerce in India to help SBI Cards cement its position as a market leader. Currently, it’s penetration among SBI’s vast customer base stands at just 2.2 per cent which provides the company with huge growth potential.