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Spends growth remains primary thesis; higher costs to lower earnings throughput

Q2FY22 performance of SBI Cards was directionally strong in terms of spends growth and asset quality along with better outlook ahead. However, growth and mix of receivables was weak while costs increased. Near-term expectations of elevated ‘cost to income’ ratio and lower NIM driven largely by mix lead to 1%/6% cut in FY22E/FY23E earnings. We remain positive on SBIC’s long-term fundamentals (PPOP/PBT grew 38%/23% between FY17-FY21). Maintain BUY with an increased target price of Rs1,320 (earlier: Rs1,205) based on 40x Sep’23E EPS of Rs33 (earlier: Rs30).

* ‘Investment phase’ can lead to higher ‘cost to income’ ratios in near term. Is there an actual cycle of costs and spends growth, or is it being defined by competitive intensity? We expected some reduction in ‘cost to income’ ratios with spend volumes. As such, the outlook of rising cost ratio (‘cost to income’ increased to 56.7% in Q2FY22 from 52.5% in Q1FY22) is a surprise. This could be due to higher competition, but also by more new opportunities in both spends and customer segments. Management alluded that post-covid, there is a “reset” in the entire spends behaviour, which requires investment.

* Spends growth on strong footing. Total spends in Q2FY22 came in at Rs434bn, up 47% YoY and 31% QoQ. Retail spends grew 29% QoQ while corporate increased 36% QoQ. Retail spend suggests that, except for travel, hotels and entertainment, most of the other categories saw an improved performance in Q2FY22 over Dec’19- Feb’20 (pre-covid) levels. Even POS spends in most categories surpassed pre-covid levels. One fourth of all POS spends happen through tap and pay. Travel and hospitality remain at 2/3rd of pre-covid levels. Card additions (0.56mn in Q2FY22 vs 0.22mn in Q1FY22), spend per card (Rs142,000 in Q2FY22 vs Rs111,000 in Q1FY22) and 30-day active spend rate (49% in Q2FY22 vs 45.9% in Q1FY22) showed good improvement on QoQ basis.

* Maintain BUY with revised target price of Rs1,320 (earlier Rs1,205) based on 40x Sep’23E EPS of Rs33 (earlier: Rs30): We expect SBI Cards to clock total spends CAGR of 30% between FY21-FY24E driven by: 12% increase in cards in force and 16% growth in spend per card. Accordingly, we expect spends / CIF / spend per card to increase from Rs1.2trn / 11.8mn / Rs109,446 to Rs2.7trn / 16.5mn / Rs172,647 respectively between FY21-24E. We expect loans % of spends to remain at 15% in FY22 (at Q2FY22 levels) and expect the same to increase to 17% levels in FY23E/FY24E. Non-interest income as % of spends is expected to drop to 3.1% in FY22E and increase to 3.3% / 3.4% in FY23E/FY24E. We expect ‘cost to income’ ratio at 57.5% in FY22 and 54% in FY23E/FY24E. Credit cost is expected to remain elevated at 8.5% in FY22E and dip to 7.5% / 7.1% in FY23E / FY24E.

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