Buy This Financial Sector Stock For Gains Up to 24%, Target Price Rs 1000, Says Motilal Oswal

Motilal Oswal has given a buy call to SBI Cards and Payment Services Limited (SBI Cards), a large-cap financial services sector company of SBI Group (having a market cap - Rs 76,432.53 cr).

SBI Cards reported a muted 2QFY23, with net earnings dragged by higher provisions, even though PPOP growth stood in line. PAT grew 52% YoY to INR5.3b (11% miss). Margin fell 90b QoQ to 12.3% in 2Q on the back of a decline in the revolver mix (24% v/s 26% in 1QFY23) and higher cost of funds. Trends in Retail spends were strong at 45% YoY, while Corporate spends witnessed a slight moderation (34%). Overall spends rose 43% YoY. GNPA ratio improved by 10bp QoQ to 2.14%, while NNPA ratio was stable at 0.78%. PCR moderated to ~64%. RoA/RoE stood at 5.4%/24.1%.

Stock Outlook & Returns

The brokerage claims a 24% potential upside in 12 months with a target price of Rs 1000 per share. The current market price (CMP) of SBI cards stood at Rs 810.30 per share, 5.58% down as compared to its previous close. On October 28, 2021, the stock hit its 52-week high level at Rs 1,157.10, whereas, on June 20, 2022, it hit its 52-week low level at Rs 655.70. 

 The stock has fallen by 6.37% in a week. In the past 1 and 3 months, the stock fell by 9.72% and 12.79%, respectively. Over a year, the stock gave a negative return of 28.03%. However, since its listing in March 2020, it has given a positive return of 18.92%. 

Robust growth in Retail spends; asset quality stable

• SBI Cards reported a PAT of INR5.3b (up 52% YoY; 11% miss), driven by higher provisions that stood at INR5.5b. Gross/net credit costs stood at 6.2%/4.6%. In 1HFY23, NII/PPOP/PAT grew 19%/20%/77% YoY to INR22b/INR25.4b/INR11.5b.
• NII grew 22% YoY to INR11.2b (in line), with margin declining by 90bp QoQ to 12.3%. This was led by a decline in the revolver mix to 24% (v/s 26% in 1QFY23) and higher cost of funds. Revolver mix witnessed a decline on account of higher spends in Sep'22 due to the festive season, which is likely to revolve gradually. Fee income grew at healthy 30% YoY. 
• OPEX grew 33% YoY and 10% QoQ to INR18.3b. PPOP rose 18% YoY (in line), while cost-to-income ratio increased by 310bp QoQ to 59.4%.
• Cards in-force grew 18% YoY and 3% QoQ to 14.8m (95% of cards are active and hence the impact of the new RBI guidelines was minimal). Sourcing of new cards stood ~1.3m (up 36% YoY and 44% QoQ), with the open market channel contributing 63% to total sourcing (59% on an outstanding basis). 
• Overall spends surged 43% YoY and 4.4% QoQ, within which Retail/ Corporate spends rose 45%/34% YoY. The share of online Retail spends grew to 57.8% in 1HFY23 from 55.2% in 1QFY23 due to rapid digitization and growing comfort as well as the convenience of shopping online.
• GNPA ratio moderated by 10bp QoQ to 2.14%, while NNPA ratio stood stable at 0.78%, with PCR moderating to ~64%. ECL declined to 3.3% v/s 3.4% in 1QFY23.

Highlights from the management commentary

SBI Cards launched a new variant 'Cashback SBI Card' in Sep'22 and the same has seen strong customer interest. While the cost of funds stood at 5.4% in 2QFY23, the management expects the same to move up to 6.1-6.2% in coming quarters. However, the share of interest earning assets is likely to increase, which will offset the impact on margin.

Valuation and view

SBI Cards reported a modest quarter with net earnings impacted due to higher provisions. Margin fell QoQ as the revolver mix declined to 24%, coupled with rising funding cost. We expect the revolver mix to increase gradually as spends mature as the festive season progresses, while margin may remain under pressure as borrowing cost increases. Growth in spends remains strong and is likely to stay healthy, thus aiding loan growth. Moderation in ECL will keep credit costs under control. "We expect 41% PAT CAGR over FY22-24, resulting in a RoA/RoE of 6.5%/28.2%. We maintain our Buy rating with a TP of INR1,000 (premised on 29x FY24E EPS)," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.