ICICI Direct - Stock Tales - SBI Cards and Payments Ltd

SBI Cards and Payment Services is a subsidiary of State Bank of India (69% stake) and is the second largest credit card issuer in India with 19% market share (December 2020) in terms of spends and number of cards. It offers an extensive credit card portfolio to individual cardholders & corporate clients, including lifestyle, travel, etc, and corporate cards covering all major segments. Strong business model with higher return ratios and favourable digital and consumption trends make the stock an attractive BUY.

Digital wave offering healthy growth visibility: SBI Cards is set to forge ahead on a healthy growth trajectory as we believe under penetrated market (three cards/100 population), potential within the group (existing-to-bank customers at ~49%) and increasing digital transactions (73% CAGR in FY15-20) would lever growth. Industry spends have grown at 29% CAGR in FY13-20, FY21E being an exception due to pandemic. Industry growth, in terms of spends, is set to be 20%+, going ahead, with SBI Cards in a comfortable position to benefit and gain market share as well.

Strong margins, return ratio profile defining business factors: Credit card business is a high margin, high profitability segment compared to any other lending segments. Yields on revolver/rollover balances is as high as 36-40% while in case of EMI conversion it can go up-to 24% while CoF for SBI Cards is ~6-7%. This results in strong 15%+ NIMs while with digitisation, rising spends per card has led to a decline in C/I ratio in the past few years. Thus, the company has a strong return profile with 25%+RoE and +5% RoA.

Strong financials: It has maintained a strong operating performance over the years as NII has grown at 38% CAGR in FY17-20 while PAT has zoomed at 49% CAGR to Rs. 1245 crore in the same period. NIMs have improved from 15.3% in FY17 to 16.8% FY20. Capital position is strong with CRAR of 23.7%. Return ratios are strong with RoE of 27.9%, RoA of 5.5% in FY20.

Valuation & outlook

SBI Cards is a multiyear growth story and provides a unique opportunity to participate in high potential credit segment with strong profitability. It is a proxy to the fast-growing digital payments with a strong parentage. We believe SBI Cards would post a healthy PAT growth of 45% CAGR in FY21E-FY23E and reach RoA, RoE of 5.9%, 25.6%, respectively, by FY23E. We value SBI Cards at ~10xFY23E ABV to arrive at a target price of Rs. 1100/share. We have a BUY rating on the stock.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_SBICards_StockTales_Mar21.pdf

Source : Equity Bulls

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