Investment rationale for SBI Cards according to HDFC Securities
Despite an explosion in non-card mobile payments (67% compound annual growth rate (CAGR) during FY18-FY21), we expect credit card spends to exhibit ~24% CAGR by FY26E. With a large and mature profit pool (average return on assets (ROA) at ~4%) in most developed economies, our analysis indicates that even a non-revolving loan has a very lucrative customer lifetime value (~ INR 2K) although an optimal revolve / EMI mix is crucial for driving superior profitability.
SBI Cards is the second-largest and among the only two standalone credit card issuers in India; it has emerged as a formidable, high-quality, high-growth franchise that is poised for sustained earnings growth (45% EPS CAGR during FY21-FY24E) and high profitability (RoA of ~5.2% over FY21-FY24E). Given its strong parentage, well-balanced customer acquisition engine (open market and Banca sourcing at ~50:50), and strong potential customer funnel available for up-sell, SBI Cards has traversed the COVID crisis well and its credit costs are expected to normalise from FY22.
Our proprietary analysis of segmental economics suggests that while the Banca channel offers ~60bps superior RoA, the open market channel is >20% superior on unit economics. More crucially, SBI Cards’ incremental sourcing strategy appears to offset most structural risks around age profile (
The brokerage’s take on SBI Cards
We expect SBI Cards to deliver ~6.2%/28% return on average assets (RoAA)/return on average equity (RoAE) by FY24E, led by strong growth in CIF/spends and steady-state unit card economics. Despite the fact that competitive pressures on the card’s profit pool are lowering RoEs over the medium and long terms, the card’s strong earnings visibility and healthy RoEs justify a premium valuation, according to the brokerage.
We initiate coverage on SBI Cards with a BUY rating and target price of INR1,100. We value the company using the three-stage residual income (RI) model. We expect double-digit CIF growth and moderate growth in per card spends during FY22- FY33E, post which RoEs would begin to taper off, along with growth, the brokerage has highlighted in its research report.
The above stock has been picked from the brokerage report of HDFC Securities. 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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