Motilal Oswal Picks This SBI Group Stock To Invest, Recommends Buy, Sees 26% Strong Upside

Motilal Oswal is reiterates buy SBI Cards & Payment Services Limited (SBICARD) for a target price of Rs 1000/share. The brokerage claims a gain of up to 26% if you purchase the stock at the current market price. SBICARD is a large-cap NBFC backed by the SBI group engaged in the credit card business in India. The company has a market capitalization of Rs 75,371.36 crore.

The brokerage recently organized an interactive session with Mr. Rama Mohan Rao Amara, MD and CEO, SBICARD, and other members from the top management team to discuss the outlook of the credit card industry and the key business metrics of SBICARD. Below are the key highlights of the interaction:

Stock Outlook & Returns

The stock of SBICARD on NSE last traded at Rs 798.05/share, 0.71% down from previous close. Its 52 week high level is Rs 516.50 recorded on 17 August 2022 and its 52 week low level is Rs 655.70 recorded on 20 June 2022, respectively.
The shares of SBICARD in the week have fallen 2.29%. Whereas, in the past 1 and 3 months it has fallen 1.66% and 16.15%, respectively. Over the past 1 year, it has fallen 13.22%, giving negative returns. The stock made its debut on the stock market on 16 March 2020 and since its date of listing it has given 17.12% positive returns. 

 

Spends momentum remain healthy; domestic travel spend has crossed pre-Covid levels

Total number of outstanding cards for SBICARD crossed 15m in Oct'22 with the company adding ~0.34m cards in Oct'22, driving up its market share. Cards, which were adversely impacted by the RBI guidelines in Aug and Sep'22, have also stabilized. Industry spends have reached an all-time high of INR1.29t. Nov'22 has seen good traction in travel and hospitality spends. 

• POS spends too have picked up though the mix of online spends continues to remain robust at ~54-55%. 
• SBICARD indicated that domestic travel spends has surpassed pre-Covid levels while international travel is yet to recover. 
• In terms of corporate spends, B2B spends have started to pick up with an aim to reach 20-22% of the total spends. 
• The under penetration of the Indian credit card industry, coupled with rising consumer discretionary spends, provides significant room for growth over the medium term.

Low revolver mix and rising cost of funds to keep margin under pressure

SBICARD has indicated that the mix of EMI loans has increased ~5-7% from the pre-Covid levels. Further, while the revolver mix has moderated, it has been increasing on an absolute basis. The company expects this to remain lower in the near term and witness a gradual recovery. Overall, SBICARD is targeting the mix of EMI and Revolver book to be ahead of 60%, while the mix of Transactor to be below 40%. Further, cost of funds has seen an increase due to rising interest rate and is likely to increase further as the full effect of past rate hikes takes effect in 3Q. About 60% of the funding comes from short-term sources, exerting exert pressure on margins in the near-term.

Credit cost to witness gradual moderation; expect normalized credit cost to moderate below pre-Covid levels

While credit cost for the company stood slightly higher over 2QFY23, the management expects it to moderate going ahead. With a conducive environment, the company is not expecting any signs of stress. Overall, SBICARD is able to recover ~35-40% in a period of 7-8 years of default and Stage 2 and 3 assets are likely to moderate. Overall, the management expects to bring down the credit costs to below pre-Covid levels

Sourcing from Banca improving; focus remains on deepening penetration into Tier 2 cities and beyond

Incremental sourcing from the Banca channel is improving gradually. Further, 67% of the total sourcing and 50% of the incremental souring is coming from the Tier 1 and Tier 2 cities. In terms of portfolio construction, average spends for Tier 3 customers stands at 75-80% of normal levels, while the same for Tier 2 customers stands at 85-90% levels. Further, average spends per card for partnership with Paytm is higher than the industry average as customer activity & engagement levels remain higher. These customers are basically from Tier 2 and 3 cities with mostly undertaking utility-based spends. SBICARD believes that the linking of Rupay cards with UPI is useful for Tier 2-4 cities as these cities lack the POS infrastructure, which would drive up spends activity in these regions.

Valuation and view

SBICARD has been reporting a modest performance with a healthy spends momentum, while higher credit cost and lower margins are dragging earnings. "We expect the revolver mix to increase gradually as spends mature, while near-term margin may continue to remain under pressure as borrowing cost increases further. Growth in spends is likely to stay healthy, aiding the overall 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%, respectively. We reiterate 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 consult with certified experts before making any investment decision.