Verdict: A ‘must’ swipe!
SBI Cards and Payment Services (SBI Cards) is entering the primary market on Monday 2nd March 2020, with a mega IPO of Rs. 10,341 crore (at the upper end), comprising fresh issue of up to Rs.500 crore and an offer for sale (OFS) of up to 13.05 crore equity shares of Rs. 10 each, in the price band of Rs. 750 to 755 per share. 9.5% of the issue is reserved for shareholders of parent SBI and 1.4% for employees, with employees being eligible for a discount of Rs. 75 per share (no shareholder discount). Net issue is split 50:15:35 among institutions, HNIs and retail investors respectively. Issue represents 14.6% of the post-issue share capital on upper end and closes on Thursday 5th March, with listing likely on 16th March.
74% subsidiary of SBI, India’s largest PSU bank, SBI Cards is India’s second largest (behind HDFC Bank) and the largest pure-play credit card company, with 10 million credit cards outstanding (31-12-19), commanding 18.1% market share in terms of cards outstanding and 17.9% share in terms of card spends in the 74-player domestic credit card industry and 55 million outstanding credit cards. However, industry is highly concentrated, with top 4 players accounting for 72% of cards and 66% of spends.
SBI Cards is a non-deposit taking NBFC, having two primary revenue streams, split almost equally (i) interest income on revolving credit/EMI and (ii) fees income - spend based or event based, like cash withdrawal, late payment, over limit etc. Company has an extensive physical customer acquisition network of 32,677 outsourced sales personnel (of which, 15,686 at SBI branches) across 145 Indian cities, complimented by strong tech capabilities for online customer acquisition, risk assessment and relationship management, on which Rs. 50 crore has been invested in the past 2-3 years, to build it, once erstwhile partner GE exited the company.
Objects of Issue and Shareholding:
Fresh issue proceeds of Rs. 500 crore will strengthen tier 1 capital and fund future growth. Capital adequacy ratio of 19% (against 15% regulatory requirement) will strengthen. OFS will reduce SBI’s 74.0% holding to 69.5% post IPO, while PE firm Carlyle’s 26.0% holding (under entity CA Rover) will drop to 15.9% post offer.
Key Strengths and Growth Drivers:
- Industry leading growth rates: Between FY19- 9MFY20, following twin levers lead to 33% CAGR rise in company’s outstanding credit cards, as against industry growth of 25%:
- Banca distribution reach: Like life insurance, banking parent SBI plays a lead role in customer acquisition, through its envious base of 445.5 million customers and network of 21,961 branches. Even if 5% of SBI’s eligible customers are on-boarded by SBI Cards, its card count can double to 20 million from current 10 million. 48% of new accounts acquired in 9MFY20 (55% in FY19) were through this distribution channel.
- Co-branding a game changer: Co-branded cards with 21 partners such as Air India, Apollo Hospitals, BPCL, IRCTC, Ola Money, Yatra, Etihad, Fbb among others make SBI Cards India’s largest co-branded credit card company. Co-branded cards not only increase card additions, but also contribute to regular transactions and card spends. 35% of new customer accounts are currently on-boarded thanks to co-branding efforts.
Even on spends basis, between FY17-19, company’s credit card spends grew at 54% CAGR, vis-à-vis industry CAGR of 36%. Till FY24, industry is projected to grow at 20% CAGR providing healthy growth visibility for the company.
- Borrowing cost under check: Despite being a non-bank credit card issuer, its AAA credit rating ensures cost of borrowing is contained at 8% currently, which compares favourably with Bajaj Finance’s 8.3%, although cannot match other banks like HDFC/ICICI/Axis, which source low cost retail deposits (both current and savings).
- Dual earnings of high interest rates + fees income: No asset liability mismatch (ALM): 90% of the Rs. 24,776 crore advances are realisable within 12 months, while most of the Rs. 19,388 crore borrowings are short term (comprising commercial paper up to 1 year and working capital loans).
- Industry yet to mature, tailwinds in place: (a) Penetration of 3 cards per 100 persons in India, versus 320 in US, 73 in Brazil and 42 in China. (b) Share of young and working population with high propensity to consume rising. (c) Only 25% of credit card payments being converted to EMIs, which may rise in future, indicating higher need for lending towards personal loans and consumer durable purchases via credit cards.
- Competition: New-age payment avenues like UPI and digital wallets (GPay, PhonePay etc.) are potential threats. However, we believe they are more of a substitute to cash. Credit card primarily meets two financial need of a cardholder - transactional and short term credit, scoring over these emerging payment channels.
- Regulatory intervention: Any regulatory caps on interest rates to be charged on credit cards may prove to be adverse. Page 46 of RHP highlights that a case is pending in Supreme Court to cap interest rates on credit cards to 30%, which is now anywhere between 36-48%. Also, zero merchant discount rate (MDR) on Rupay cards implemented from 1Jan2020 can impact fee income, as inter change fees is a component of MDR. Company has not quantified impact of zero MDR on its business for Jan-Feb 2020. Hence, this aspects remain key monitorables.
- Average ticket size under pressure: Company earns nearly 20% of its income from spend based fees. Hence, average ticket size is an important metric. However, as the company expands deeper in tier 4 and above towns (which accounted for 26% of new accounts sourced in 9MFY20), average ticket size is coming under pressure, down from Rs.3,713 in FY19 to Rs. 3,452 in 9MFY20. This downward trend may impact fee income and potential interest income over the long term.
FY19 revenue grew 35% YoY to Rs. 6,999 crore, aided by 41% YoY growth in fees/ services income to Rs. 3,072 crore. Net interest income (NII) grew 25% YoY to Rs. 2,558 crore, leading to 45% YoY jump in PBT to Rs. 1,331 crore and 44% rise in PAT to Rs. 863 crore. During 9MFY20, most of these financial data points have surpassed FY19 numbers, with 9MFY20 revenue increasing 35% YoY to Rs. 6,843 crore, fuelled by fees/services income rising 40% YoY to Rs. 3,019 crore. 9MFY20 NII stood at Rs. 2,527 crore (up 34% YoY), PBT at Rs. 1,619 crore (up 71% YoY) and PAT at Rs. 1,161 crore (up 89% YoY), leading to an EPS of Rs. 12.45, on equity of Rs. 932 crore (FV Rs. 10 each), as against FY19 EPS of Rs. 9.43.
Company’s cost of acquiring a new customer is approximately Rs. 3,000, whereas annual fees per card is over Rs. 4,000 (excluding interest income), indicating break-even of just 9 months. Thus, this has been profitable growth, and that is what company aims to maintain going forward.
Given the unsecured nature of lending, average yields are high at 21.5% leading to net interest income (NIM) being maintained at superior levels of 15.6%. On the other hand, net NPAs at 0.83% have been under check, in comparison to other premium-enjoying financials like Bajaj Finance (0.70%), Kotak (0.87%) and Bandhan (0.81%).
Company’s net worth (31-12-19) stands at Rs. 4,751 crore (BVPS Rs. 52) with 4x leverage also under check. RoA and RoAE stood at 6.7% and 36.5% for 9MFY20 respectively.
At Rs. 755, company’s market cap will be at Rs. 70,891 crore, leading to FY20E and FY21E PE multiples of 41x and 28x respectively. While there are no strict peers, broad comparison can be drawn with Bajaj Finance, which is ruling at a much higher PE multiple of 37x (FY21E).
Why have we compared SBI Cards with Bajaj Finance? SBI Cards is a non-deposit taking NBFC while Bajaj Finance is a deposit taking NBFC, but both NBFCs have high RoAs (over 4.5%), most of their lending is unsecured (over 60% of Bajaj Finance’s Rs. 1.4 lakh crore book is unsecured) and high growth rates of over 35%.
On one-year forward basis, SBI Cards IPO is attractively valued, given its status of a large NBFC with unique business model, pedigree promoter, AAA credit rating, high return ratios and bad loans under check. Post listing, retail float (non promoter, non institutional) will be low at 5%, which should help sustain premium valuations. Company is confident of surpassing HDFC Bank to top the credit card market in India, just like its peer in the mutual funds industry, highlighting reach and brand of SBI, especially in non-urban India. Thus, highway to growth is long, with company’s strong distribution reach-cum-vast untapped opportunity in SBI customers and under-penetrated industry.
Strong brand, extensive distribution reach, backend risk mitigation capabilities, act as strong competitive advantages. SBI Cards being a standalone credit card company, supported by favourable industry prospects can be an excellent investment, both from short term and long term point of view. We are bullish on the company and hence advise a ‘subscribe’ to the IPO.
Grey Market Premium (GMP) of SBI Cards: Grey Market Premium of SBI Cards is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.
Disclosure: No Interest.