Analyst nook: Provoke with ‘add’ on SBI Playing cards with truthful worth of Rs 900

Swipe to earn. We initiate coverage on SBI Cards (SBIC) with an ‘add’ rating and fair value of Rs 900. We believe that the positives of strong revenue growth led by rising and underpenetrated payments play, highly profitable lending book and benefit of a strong parentage that can lower the origination risk are partly offset by expensive valuations. We like the space as it is one of the few areas where we see strong growth prospects and we like SBIC given its strong market share.

We initiate coverage on SBI Cards (SBIC) with an ‘add’ rating, valuing the company at a fair value of Rs 900, which implies a valuation of 30X FY2023 EPS and ~8X PBR. This implies a 7% upside from current levels. SBIC has delivered strong earnings growth of 40% CAGR for FY2017-20 and we expect 30% CAGR for FY2020-24. With a reasonably long growth runway, we see valuation premium to remain high in the medium term which, in our view, should result in lower risk to multiple de-rating and remain a solid compounder.

There are two distinct characteristics that differentiate SBIC from other lending products, rapid expansion in infrastructure for accepting digital payments (online and offline) that has led to better digital adoption trends leading to a solid play on low risk payment-related income and ability to build a long-term lending relationship, which is high yielding, granular, short-term and yet, highly profitable. Low penetration of digital products implies that the growth trajectory is quite healthy.

In this report, we discuss trends on retail payment behaviour across time periods and different geographies, stakeholders’ perspectives on credit cards and the earnings model of the credit card business. On a risk-adjusted basis, we believe that this business is quite profitable on a through-the-cycle basis.

There are several risks to our thesis, SBIC is a standalone credit card company with limited access to data as compared to a traditional bank. The business is cyclical and expensive with greater emphasis on analytics. Earnings can be extremely volatile and different models in the credit card business can lead to wide variation among players in this segment. Regulatory intermediation on inter-change fees can lead to lower adoption rates. Intermediation of credit- or payment-related function through alternate products can disrupt SBIC’s business model. Relationship with SBI is crucial to build better returns.