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Largely in-line performance, adjusted for unusual fees and credit cost
SBI Card delivered 6% PAT beat on our expectation which was characterized by 1) sustained significant gross card addition (up 37% yoy), 2) stronger spends growth (retail spends up 2% qoq/33% yoy), 3) stronger receivables growth (up 5% qoq/30% yoy) and stable mix, 4) resilient NIMs with improvement in yield, 5) higher instance-based fees (due to application of fees on rental spends from mid-Nov), 5) higher business development income (triggering of incentive milestone due to strong spends), 6)
material decline in cost/income ratio due to restrained opex growth (from improving cost of acquisition on blended basis), and 7) higher credit cost (delinquency flow from pre-pandemic book + elevated write-off + 20 bps impact from ECL model
strengthening). Annualized RoA/RoE for the quarter stood at 5.4%/25%.

Management commentary indicative of recovery in return ratios
Key management comments that suggest RoE can improve over the medium term are 1) maintaining 0.9-1mn net cards addition rate, 2) intent to grow spends faster than estimated industry growth of 22-25%, 3) endeavor to further improve share of IEA in
receivables, 4) expectation of NIM improvement from H2 FY24 with pricing actions in EMI/TL product and peaking of CoF, 5) incremental recovery in instance-based fees from doubling of fee on rental payments from mid-March, 6) stable inter-change yield
from normalized mix of spends, 7) further improvement in cost of acquisition from increasing share of digital onboarding, and 8) expectation of moderation in credit cost in coming quarters.

Marginally upgrade estimates; see valuation recovery lead RoA/RoE recovery
Our earnings estimates undergo mild upgrades on tweaking of CIF growth and NIM assumptions. We estimate 21%/25%/25% CAGR over FY23-25 in CIF/Spends/Earnings. Stock witnessed a significant de-rating in the past 12-15m on
account of fear over MDR reduction, loss of market share in industry CIF/Spends and substantial decline in NIM. SBI Cards has been recovering CIF/Spends market share over recent quarters, and we expect significant NIM recovery in FY25 due to softening of rate cycle. We haven’t assumed any regulatory MDR action as there has been a prolonged silence from RBI. Expect stock’s valuation to re-rate from current reasonable level of 4.8x P/ABV and 20x P/E on FY25 estimates. Typically, valuation recovery will happen ahead of RoA/RoE recovery. Upgrade to BUY with increased 12m PT of Rs975.

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