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Incrementally better placed for recovery

Despite the covid impact, SBI Cards (SBIC) managed to clock flattish revenues in FY21 with improvement in spend / card market share from 17.9% / 18.3% in FY20 to 19.5/19% in FY21 (up to Feb’21, expected to improve in Mar’21). Considering the unique impact of lockdowns and consequent payment moratoriums in FY21, the elevated credit cost (11% in FY21) is expected to decline hereon.

While the card addition, yield, spend and receivable mix remains impacted due to the pandemic, SBIC is now better prepared to make a calibrated journey post the experience in FY21. We remain positive on SBIC’s long-term fundamentals (PPOP / PBT grew 38% / 23% between FY17-FY21). Maintain BUY with target price of Rs1205 (unchanged) based on 40x FY23 EPS of Rs30.1.

* Moderation in spend is not a big concern in an uncertain environment. Total spend in Q4FY21 (relatively unaffected by covid) was less than expectations on account of lower card addition (0.3mn in Q4FY21 vs 0.48mn in Q3FY21) as well as overall lower than expected spend per card (Rs123,000 in Q4FY21 vs Rs134,000 in Q3FY21). This could be driven essentially by business caution in new issuances considering the environment and the continued delay in spend in select categories like travel, entertainment, restaurants, etc. Due to similar reasons, spend-based fees declined (Rs5.1 bn in Q4FY21 vs Rs5.7bn in Q3FY21) and the 30-day active spend rate fell to 49.2% in Q4FY21 from 50.6% in Q3FY21 and 53.5% in Q4FY21.

* NIM has been supported by lower cost of debt, but lower yield was driven by lower revolver mix and RBI RE book with 15-16% interest rate. This should improve as new card additions mature along with improvement in mix and gradual extinguishment of RBI RE book. FY21 NIM (15.9%) was supported by lower cost of funds (6.1% in FY21 vs 7.8% in FY20) but lower income yields (20.1% in FY21 vs 21.7% in FY20) driven by lower revolver mix (28% in Mar’21 vs 40% as on Mar’20). Q4FY21 NIM came in at 13.2% down 346bps YoY led by drop in Interest income yield which came in at 17.1%, down 507bps YoY while cost of funds improved from 7.4% in Q4FY20 to 5.5% in Q4FY21.

* Incremental credit cost in Q4 was largely in-line. GNPA remained at 5% for Q4FY21 vs 4.51% in Q3FY21 while the write-off beyond the standstill book of Rs7.8bn remained at Rs4bn for Q4FY21. Considering the entire stress pool of RBI RE book of Rs19bn, EPP book of Rs3bn and reported GNPA of Rs12.5bn, the provision coverage ratio is ~60% as of FY21. Credit cost should improve hereon despite covid second wave given that SBIC is better prepared in terms of monitoring additions and collections through online means. Additionally, the RBI RE book recovery can continue to reduce (Rs3.8bn reduction in Q3FY21 and Rs4.4bn in Q4FY21).

* We remain positive on SBIC (IC note link); Due to characteristics like high growth, entry barriers and near-oligopoly, we remain constructive on the Indian credit card business opportunity, and 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 card / spend per card / POS as on Feb’21) provide strong business moats

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