The upcoming initial public offering of SBI Cards & Payment Services (SBIC) on March 2 has created quite a buzz among investors, and, according to leading brokerages, justifiably so. Almost all brokerages are positive on the IPO and some see up to 60 per cent upside from the IPO price range of Rs 750-755. CLICK HERE FOR DETAILS ABOUT THE IPO
The company has allotted nearly Rs 2,800 crore worth of shares to anchor investors ahead of its opening. A total of 36.7 million shares have been allotted to 75 anchor investors at Rs 755 apiece, the top-end of the IPO price band. The list includes including sovereign funds belonging to the Singapore and Kuwait government, Fidelity, Nomura, BNP Paribas, GMO and Blackrock. READ MORE HERE
So, should you subscribe to the offer? Here's what top brokerages say.
Given its dominant position in the credit card market and strong parentage, SBI Cards is well placed to benefit from the rising trend of digital payments and e-commerce. At the upper price band, the offer is valued at 12.6xFY20E BV (on an annualized and fully diluted basis) and 45.8xFY20E P/E. Strong growth, stable asset quality, and superior return ratios provide comfort and justify the premium valuation. Further, being the first in the segment to get listed, it could generate high investor interest. Thus we recommend 'Subscribe' to the IPO.
SBI Cards offers investment opportunity in a unique business model with strong profitability. Sustainability of higher business growth and strong return ratios justifies premium valuation for the business. Therefore, we recommend a SUBSCRIBE recommendation on the stock.
Focus on increasing customer base with rollout of products in tier II and III cities, emphasis on corporate card business, tapping vast customer pool of parent (SBI) is to lead to higher customer base. Technology upgradation and improved partner tie-up and reward offers to induce and increase transaction volume, thereby supporting growth in business and profitability.
Low penetration in SBI customer base plus strong distribution means SBI Cards’ card base can continue to grow at historical growth rates of 27 per cent CAGR (over FY15-19). Increased focus on EMI products can lead to loan book growing at an even faster pace. However, growth in fee income could fall given stagnating per card spends and market-share loss to unified payment interface (UPI). Whilst asset quality has held up till now, a slowing economy and job losses can lead to an increase in non-performing assets (NPAs). Valuations at 46x FY20E post-issue P/E is at 222 per cent premium to Global Card cos (having lower growth & ROE) and at a 10 per cent discount to high growth, high RoE Indian lenders. We recommend applying for the issue and rate the IPO as ‘SUBSCRIBE’.
Geojit Financial Services
The business outlook is healthy with 35 per cent and 54 per cent CAGR in credit card spending and outstanding during FY17-FY19. SBI Cards total revenue grew at CAGR of 46 per cent and net profit grew 52 per cent CAGR during FY17-FY19. Return on Equity (ROE) is robust at 31 per cent which is in-line with the best international standards.
At the upper price band of Rs 755, SBI Cards is available at P/E of 46x FY20, valuation looks justified taking into consideration the historical high growth rate. Given strong parentage and sustainability of growth rate with huge potential for digital payments in India, we recommend ‘SUBSCRIBE’ to the issue with a long-term perspective.
Profitability of SBI Cards is expected to remain strong with PAT likely to grow at 57 per cent CAGR during FY20-22e with ROE/ROA of more than 33 per cent and 7 per cent, respectively, in FY21e. At the upper price band, the company is trading at 7.9x FY21e and 5.6x FY22e ABV. Given the key strengths of the company like - its unique business model which is a pure credit card play, high growth phase along with a strong profitability matrix, the favourable demographic dividend is likely to trade at higher multiples. We accord a fair value of Rs 1220, discounting its FY22e ABV by 9.5x, giving upside potential of 62 per cent from the IPO Price."
As of 9MFY20, SBI Cards reported a return of asset (RoA) of 6.7 per cent versus average of over past three years, mainly driven by better margins/fees, contained credit cost and a lower tax rate. However, we believe that it needs to focus on improving operating leverage, spends per card and convert spends into EMIs/Term Loans to bring stability to its otherwise superior RoAs. Regulatory risk on merchant discount rate (MDR)/Interchange fees, rising competition from alternative digital payment platforms, higher capital requirement and rising asset-quality risk given weakening macros/employment rates are the key risks for the company.