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* Despite continued margin pressure and higher provisions, SBI Cards (SBIC) reported inline PAT at Rs6bn (3% YoY/17% QoQ), driven by higher fees which, in turn, were led by business development fees on higher volume milestones and other fees including charge on rental spends. Higher provisions were mainly because of some inch-up in NPAs (Gross stage 3 up 14bps QoQ to 2.4%) from the vintage pool and tightening of the ECL model, leading to a 20bps (Rs0.2bn) increase in LLP.

* SBIC clocked healthy new card addition at 1.4mn (CIF@16.8mn), leading to slight improvement in the CIF market share (up 40bps QoQ) to 19.7%. Spends growth, too, was strong at 32% YoY/4% QoQ, with corporate spend coming back and leading to increase in its share at 23% vs 21% in Q3. Receivables growth tracked the spends growth, at 32% YoY/5% QoQ, as revolver share remains rigidly low at 24%.

* SBIC expects industry spends growth to moderate on the higher base to ~22-25% in FY24 from 47% in FY23, while maintaining some alpha and thus gaining market share. This should support spend-based fee growth and, hence, the core profitability. Management expects CoF to inch up till 2Q, post which it should stabilize and thus support margins.

* We have nipped our FY24E earnings by 2%, but expect SBIC to deliver strong RoE of ~25% over FY24-26E, partly led by margin recovery (from FY25E) and improving leverage. We retain BUY on the stock, with revised TP of Rs980/share, based on the ERE model, implying 6.2x FY25 P/ABV and 27x PER. Key downside risks to our TP: Slower than expected spends-growth/market-share, prolonged funding cost pressures, and industrywide regulatory cut in MDR/ICF.

* Strong spends/AUM growth, but margin slips: New Card addition remains strong at 1.36mn vs 1mn last year, with overall CIF at 16.8mn, leading to CIF market-share gain of 80bps YoY/40bps QoQ to 19.7%. However, spend/transaction-based market-share dropped 100bps YoY/remained flat QoQ at 18.2%, as other players tend to become aggressive. Spends growth too was strong at 32% YoY/4% QoQ, with corporate spend coming back, leading to increase in its share to 23% vs 21% in Q3. Receivables growth tracked spends growth at 32% YoY/5% QoQ, as revolver share remains rigidly low at 24%. This, coupled with rising CoF (up 40bps QoQ), led to continued contraction in NIMs (down 5bps QoQ) to 11.5%. Management expects CoF to inch up till 2Q, post which it should stabilize and thus support margins.

* NPAs inch-up again, from the identified stress pool: Over Stage 3 assets inched up, by 14bps QoQ to 2.4%, due to the identified stress pool from the vintage book. Stage 2 assets pool further declined to 5% of loans from a high of 8.5% in Q4FY22, signifying steady improvement in the stress pool. That said, Mgmt indicated strengthening its underwriting standards and has also recently tightened its ECL-based provisioning model, leading to 20bps (Rs0.2bn) rise in LLP over 4Q. We conservatively build-in higher LLP/charge-off rate over FY24-26E, factoring-in macro disruptions and the expected rise in revolver rate.

* Outlook and valuations: We slightly cut our earnings estimates for FY24 by 2%, but expect SBIC to deliver strong RoE of ~25% over FY24-26E, partly led by margin recovery (from FY25E) and improving leverage. We retain BUY, with revised TP of Rs980/share, based on the ERE model, implying 6.2x FY25E P/ABV and 27x PER. Key downside risks to our TP: Slower than expected spends growth/market-share, prolonged funding cost pressures, and industry-wide regulatory cut in MDR/ICF.

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