The outbreak of Covid-19 pandemic has changed the way people across the globe make payments, and especially in India. From an outright cash-based economy, India is switching to UPI (Unified Payments Interface)-based payments to avoid having physical contact. This has proven to be a blessing for SBI Card and Payment Company that got listed a week before the nationwide lockdown was imposed in the country.
The stock of State Bank of India subsidiary has staged a steady northward journey since its listing on March 16, 2020. After a minor blip on May 22, when it touched its 52-week low of Rs 495 apiece, the stock is up an impressive 72 per cent including today’s intra-day gain, ACE Equity data show. In the past two months, the stock has rallied 15 per cent from on the BSE as against a 5 per cent rise in the benchmark S&P BSE Sensex.
What’s triggering the up-move?
For one, digital and cashless payments in India are still at a nascent stage, and its prevalence is likely to accelerate with deeper penetration of e-commerce and expansion of POS systems in non-metros mainly tier-II/III towns, observed HDFC Securities in a September 23 note. This, analysts say, augurs well for SBI Card as the proportion of accounts sourced from combined tier-II and -III cities stepped up from 29 per cent in FY17 to 31 per cent in FY19 and further to 44 per cent in Q1 FY21. Secondly, as SBI Card is the largest pure credit-card issuer in India, analysts expect the company to grow faster than the sector average.
According to reports, the Indian credit card industry grew by a healthy 32 per cent CAGR between FY15-19 while the credit card penetration in India is still at just 3 per cent. CRISIL pegs the growth in credit card spends in India at 20 per cent CAGR between FY19-24E on rising government’s support for a cashless economy, improvement in payment infrastructure and an increase in organized retail penetration including e-commerce. That apart, SBI Cards’ parent’s distribution network is another key strength.
“In October 2017, the company introduced Project Shikhar, marketing credit-card products available to SBI customers. This resulted in an increase in the proportion of new accounts obtained from SBI’s customer base, from 35.2 per cent in FY17 to 49.5 per cent in FY20. Thus, the company is leveraging the parent’s client base to expand its customer base through cross-selling. Also, management hopes that the Bancassurance (bank and insurance) channel would continue to bear fruitful results in FY21,” noted analysts at Anand Rathi.
Credit card spends
According to data compiled by ICICI Securities, pace of rebound in card spends were not as robust in July as May/June. Credit card spends are still at 70 per cent of pre-Covid-19 levels and debit card spends at 80 per cent. Meanwhile, the proportion of online spends has risen to 55-56 per cent. Despite this, the company has expanded its market share to 18.5 per cent and 19.9 per cent in credit cards outstanding dues and credit cards spend, respectively at end Q1FY21.
"SBI Card witnessed a fall in business volumes soon after the lockdown along with UPI and Wallet. However, a V-shaped recovery was observed in each of these payment modes as Covid- social distancing became a matter of prime importance. Although, the popularity of UPI and wallet payments have increased in comparison to the increase in card based payments, cards are still used for various online payments and other recurring payments," says Vinod Nair, Head of Research at Geojit Financial Services.
“In the near term, Covid-19-led disruption might not only affect card spending but can also impact the collection efficiency, new customer acquisition and asset quality for the overall industry. However, we feel that SBIC with its well-built risk management strategy and diversified revenue model will be able to navigate this crisis well,” said HDFC Securities.
Anand Rathi initiated coverage on the stock with a ‘Buy’ rating with a target price of Rs 1,021, while Prabhudas Lilladher has a target price of Rs 974 – higher by 21 per cent and 16 per cent from the current market price on the BSE, respectively.
“Investors can BUY SBI Cards on dips in the Rs 683-687 band (37xFY22E EPS, 8.5xFY22E ABV) and add further on dips to Rs.637- 641 band (34.5xFY22E EPS, 8.0xFY22E ABV) for the base case target of Rs 721 (39.0xFY22E EPS, 9.0xFY22E ABV) and bull-case target of Rs 797 (43.0xFY22E EPS, 10.0xFY22E ABV) over period of six months,” said analysts at HDFC Securities.
Fundamentally, SBI Card’s revenue mainly comes from its interest payment from customers. Net Interest Income from customers increased by 51 per cent in Q1FY21 and net profit by 14 per cent YoY. Also, moratorium accounts reduced significantly from 12.5 lakh accounts in May to 1.5 lakh accounts in June. "While, asset quality concerns might add pressure to the stock in the short-term, long-term out look remains strong given very low penetration of cards in Indian financial landscape compared to Asian peers," says Nair of Geojit Financial Services.