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Buy SBI Cards and Payment Services Ltd For Target Rs.1,205

With high growth, entry barriers and near oligopoly, we remain constructive on the Indian credit card business opportunity, and SBI Cards (SBIC) is one of the best placed pure play operators in this space. Rising digitisation, affluence and increasing consumer credit penetration provide sound business triggers. Already existing business and distribution share (SBIC has ~20% share of cards/spend/ POS) provide strong business moats. Initiate coverage on the stock with BUY rating and target price of Rs1,205 based on 40x FY23E of EPS of Rs30.1.

* Credit card (CC) is a superlative business opportunity for well-entrenched players. CC spend/outstanding has clocked 31%/29% CAGR respectively over 5 years ending FY20. This high growth track record is accompanied by significant underpenetration (4 CC for every 100 people) and headway for growth. We expect India’s CC spends to grow at 15% CAGR between FY20-25 to reach Rs15trn (this will translate into 7% of GDP by FY25E which will be lower than the current global average of 12-13%). The industry is also an oligopoly (top 4 players hold ~70 share in terms of spends, CIF and PoS) and a high entry barrier business constantly reinforced through incremental digital investments and partnerships. International examples also point to healthy business returns for most credit card players over last 2-3 decades.

* Alternate consumer credit models remain full of prospects but not a threat to credit card business, more so in India. Alternate credit models, clubbed under “Buy Now Pay Later (BNPL)” definitely have a business case. However, in India, they remain nascent, far from profits and often do not compete for the affluent segment, which is the focus category for credit cards. Even if challenged, credit cards can plough back their FCF to reward spends or lower interest rates to retain customers. Additionally, most successful international BNPL models are based on merchant payments which is very difficult in India. Even BNPL players can eventually fall under stricter regulations as evident incrementally in many countries.

* UPI ‘crowding out’ any sustainable near term threat to credit cards: Consumer cluster is the fundamental driver behind successful payment models of either the Chinese wallets or merchant payment driven models of Klarna/ Affirm/ AfterPay. The superior technology of UPI has resulted in a plethora of business models based on the same resulting with limited capability to charge customer or merchants (UPI is also reason for limited success of wallet in India). As such, CC remains the largest available monetisable consumer cluster (CRED business model is a testimony to that).

* SBIC well positioned as diversified CC player with widest reach; Initiate coverage with BUY rating and target price of Rs1,205 based on 40x FY23E EPS of Rs30.1. We factor 19% / 31% revenue/PAT CAGR between FY20-23. We expect NIM of 18%/17% in FY22/23E with ROA/ROE of 6.1%/ 7.4% and 29% / 36% respectively. We believe that the industry tailwinds and company performance (SBIC has gained ~700bps / 370bps CC spend/count market share between FY17 to Dec’20 with PAT increasing from Rs3.7bn in FY17 to Rs12.4bn in FY20) warrant high valuation multiples.

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