SBI Cards and Payment Services Limited (SBI Cards) has been assigned a buy call by Emkay Global with a target price of Rs 1000 per share. The stock has the potential to gain up to 20% from its current level if it is purchased today at the current market price considering the brokerage's given target price. SBI Cards is a large-cap Financial services sector company. It has a market capitalisation of Rs 78,309.62 crore.
Stock Outlook & Returns
The SBI Cards' stock is currently trading at Rs 833.50 per share on NSE, 1.12% up from the previous close of 824.25 per share. Today, it opened at Rs 827 per share. The 52 week high level of the stock is Rs 1,028.65 and the 52-week low is Rs 655.70, respectively.
The shares of the SBI Cards' surged 4.17% in a week, and fell 10.26% in the past 3 months, respectively. Over a year the stock fell by 13.24%. Since its listing on the Stock exchange on 16 March 2020, it has given 22.44% positive returns. Its ROE is 20.84%, which is higher than its peers when compared.
Long growth runway in view of the significant card under-penetration and access to banca-channel
Overall industry CC-spends have grown, from 2.6% of PFCE in FY15 to ~7% in FY22, and we model them to reach 20% by FY35E - implying FY22-35E CAGR of 21%, of which 12-13% CAGR would come from CIF. CC penetration was merely ~5% (of population) in Mar-22, and is likely to reach 22-23% by Mar-35E, driven by favorable demographics and improving rural penetration. That said, competitive intensity from alternate products is on the rise, partly blunted by RBI's recent move to link UPI with card and disrupting BNPL cards. Thus, monoline card players like SBIC need to adapt accordingly, for tapping Gen-Z customers and even for partnering with e-coms/fintechs to sustain the growth momentum. SBIC has an option to accelerate banca sourcing, given access to parent SBI's huge customer base, though this could turn slightly spends-dilutive. As a balance strategy, SBIC has re-accelerated its open-market sourcing and launched a cash-back card; this, coupled with its long-standing strategy of focusing on fee-based cards, has driven 19.1% market-share gains in its active card-base. We model SBIC's FY22-25E CIF CAGR at 18% which, combined with growth in spends-per-card, should drive a 30% spends-CAGR over FY22-25E.
RoEs likely to stay resilient; moderation in spend-based fees may be offset by cost optimization, lower LLPs
SBIC's blended gross interchange rate has slipped by 20bps over the past five years to ~1.4%, and is likely to further trend down, given the rising competitive intensity and increasing share of low-MDR spends. The RBI's recent dictum prohibiting penal charges for 'over limit' without customer consent may also impact overall fees, by 5-6%. Nonetheless, we expect margins to gradually improve despite the rising CoF, thanks to the improving share of the EMI and revolver/personal loan portfolio. This, along with better operating leverage and LLP-moderation (Covid-induced asset-quality stress largely behind), should yield average RoA/RoE of 5.3%/26% over FY22-25E (4.8%/23% over FY20-22), and RoS (Return on Spends) of ~1% (0.95% over FY20-22).
Growth with resilient profitability amid disruptions; Initiate with BUY
According to the brokerage, Notwithstanding Covid-induced disruptions and rising competitive intensity from alternate payment/credit products, India's CC-base doubled to 74mn in Mar-22 from 37mn in Mar-18, and now stands at a high 79mn (active base). Cumulative-spends (7MFY23) growth is at 58% YoY (albeit on a low base), indicating strong underlying growth currents. We expect overall industry CIF CAGR of 17% and spends to post a near pre-Covid CAGR of 32% in FY22-25E (33% CAGR in FY15-19). SBI Cards [SBIC] is India's 2nd-largest credit-card [CC] issuer, with 19.1% market share of active cards-inforce [CIF] as of Oct-22, and ranks 3rd in terms of spends, with 18% market share. We expect SBIC to log a strong CIF CAGR too, at 18%, and spends CAGR of 30% in FY22- 25E, thus largely upholding its market share. Beyond FY25, we expect SBIC to maintain spends-share at ~18%, and clock FY25-35E CC-spends CAGR in the mid-to-high teens.
Buy for a target price of Rs 1000 per share
Emkay Global said, "Further, despite the likely continued moderation in interchange fees (ICF), we see RoE staying resilient for SBIC at 25-26% over the cycle, based on >5% RoA (aided by operating leverage) and normalized LLPs (6.2% of loans), with upside risk from higher (>5x) leverage. Nonetheless, our Mar-24 TP of Rs1,000/share, with an upside of 22% (based on the Excess Returns model), assumes a terminal P/B of 2.2x in Mar-35E (6.3x FY25E ABV), consistent with the 20% incremental RoE and 7.5% growth in excess profits."
It added, "Key downside risks to out TP: continuous erosion in SBIC's spends market share; regulatory cut in MDR/ICF. Our worst-case scenario (Regulator cutting ICF to 100bps from FY26E and gradual reduction thereafter) yields a Mar-24E FV of Rs690 (implying 16% downside), though we see such a large-cut as unlikely. We initiate coverage on SBIC with a BUY."
The stock has been picked from the brokerage report of Emkay Global. 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.