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With An Expected Potential Surge of 41% Here’s Why Motilal Oswal Is Bullish On This Financial Stock

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The brokerage company Motilal Oswal Financial Services Limited is positive on the shares of SBI Cards and Payment Services Ltd with a target price of Rs. 1,300, despite the fact that domestic stock markets started Monday's trading session in the green. The brokerage expects the stock to grow 41% from its current market price of Rs. 922 and has given it a buy rating.

 

The brokerage’s take on SBI Cards and Payment Services Ltd
 

The brokerage’s take on SBI Cards and Payment Services Ltd

Motilal Oswal has claimed that "RBI proposed to issue a discussion paper in the next one month to cover aspects related to charges involved in various digital payment modes covering Credit Cards, Debit Cards, PPIs, UPIs, etc. This is with the intent to make digital transactions affordable to users and economically viable to providers. SBICARD has corrected ~9% over the past two days on fears of a reduction in MDR charges, which can adversely impact profitability. SBICARD's spend-based fee constitutes 45-54% of total fees and corresponds to 18-23% of total revenue."

According to the brokerage "As per our sensitivity analysis, we estimate 8-17% earnings impact in case MDR on Credit Cards is reduced by 10-20%. As the company mitigates this impact by effecting a reduction in payment processing charges, cost of reward points, and the interest-free payment period to customers, the earnings hit could be shielded by 5-12%. This would limit the RoA/RoE damage to ~21- 37bp/87-155bp. After a 9% decline in the stock price, it is now trading at 23x FY24E earnings, which appears attractive. Any reduction in MDR charges will be critical to earnings, keeping us watchful in the near term."

Motilal Oswal has noted that "Over the past few years, the spend-based fee has been in the 45-54% range of total fee income and corresponds to 18-23% of the total revenue of SBICARD. The sharp rise in retail spends over the recent months, continued moderation in revolve rate driving a sharp compression in NII growth/margin, and the importance of spend-based fees as a key earnings driver has increased further. We currently estimate spends based fee to average 105-146% over FY22-24E PAT. Any impact on this will have a significant impact on earnings."

Buy SBI Cards share With A Target Price of Rs. 1,300

Buy SBI Cards share With A Target Price of Rs. 1,300

Motilal Oswal in its research report has said that "As per our sensitivity analysis, we estimate 8-17% earnings impact in case MDR on Credit Cards is reduced by 10-20%. As happens in the real world, the company will try to mitigate the impact by i) effect a reduction in payment processing charges (~30bp of spends), ii) reduction in the cost of reward points (~40bp of spends), and iii) reduction in interest-free payment period offered to customers. Together these mitigants will help shield 5-12% of the potential earnings impact as per our scenarios, thus limiting RoA/RoE impact to 21-37bp/87-155bp. This analysis is for illustrative purpose only as the actual changes can turn out to be materially different v/s what we have shown."

According to the brokerage's call "SBICARD has reported a strong recovery in card acquisition and retail spends after COIVD-19 disrupted the growth trajectory. We estimate loan book/earnings CAGR of 30%/56% over FY21-24E, supported by robust growth in spends, strengthening asset quality, and improvement in operating leverage. After a 9% decline in the stock price, the stock is now trading at 23x FY24E earnings, which appears attractive given the company's strong fundamentals, the long-term structural story in a highly underpenetrated space, and superior earnings growth. The reduction in MDR charges will be critical to earnings. We remain watchful on developments in the near term."

Disclaimer

Disclaimer

The stock has been picked from the brokerage report of Motilal Oswal Financial Services Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.

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