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Earnings getting its mojo back; revolve rate indicating early signs of recovery

Spends growth robust; margins stable QoQ

* SBICARD reported a robust quarter on key business metrics and its net earnings delivered a strong beat aided by lower provisions. PAT thus grew 106% YoY to INR6.3b (MOSLe: INR5.3b).

* Margin was stable QoQ at 13.2% in 1QFY23. Revolver mix increased to 26% from 25% in 4QFY22. Trends in both retail and corporate spends were strong at 68% YoY and 130% YoY, respectively. Overall spends thus rose 79% YoY.

* GNPA/NNPA ratio stood stable QoQ at 2.24%/0.79% with PCR at ~65%. RBIRE book declined to INR1.5b. 1QFY23 RoA/RoE stood robust at 7.0%/30.8%.

* We estimate SBICARD to deliver 52% earnings CAGR over FY22–24, leading to an RoA/RoE of 7.4%/31.4%. Maintain BUY with an unchanged TP of INR1,100 (premised on 28x FY24E EPS).

Spends growth robust; RBI-RE book declines to insignificant levels

* SBICARD reported PAT of INR6.3b (+106% YoY/+8% QoQ), primarily driven by lower provisions that came in at INR4.5b on improving asset quality. Gross and Net credit costs stood at 5.6% and 3.7%, respectively.

* NII grew 17% YoY to INR10.8b (in line), while margin was stable QoQ at 13.2%. This was led by an increase in revolver mix to 26% (from 25% in 4QFY22). Other income grew 7% QoQ with fee income rising 8% QoQ.

* Opex grew higher at 42% YoY (+6% QoQ) to INR16.6b. Thus, PPoP rose 23% YoY while cost-to-income ratio moderated to 56.3% (-106bp QoQ).

* Cards-in-force grew 19% YoY and 4% QoQ to 14.3m. New account sourcing stood at ~900k (+48% YoY and -10% QoQ), with the open market channel contributing 68% to the total sourcing (58% on an outstanding basis).

* Overall spends surged 79% YoY/10% QoQ, within which retail/corporate spends rose 68%/130% YoY, respectively. The share of online retail spends increased to 55.2% in 1QFY23 from 54.4% in FY22 due to rapid digitization and growing comfort as well as convenience of shopping online.

* GNPA/NNPA ratio stood stable QoQ at 2.24%/0.79% with PCR being healthy at ~65%. The RBI-RE book declined to insignificant levels at INR1.5b (v/s 1% in 4QFY22 and 6% in 2QFY22). ECL declined to 3.4% (v/s 3.5% in 4QFY22).

Highlights from the management commentary

* New account sourcing from banca channel was impacted adversely in 1QFY23 due to some delays and issues; however, the same has now been resolved and the acquisition is now back to normal levels. Overall, SBICARD is aiming to maintain a run rate of ~900k cards on a quarterly basis.

* The revolver mix rose in 1QFY23 and is likely to follow an upward trajectory.

* Cost of funds is likely to increase (5.6-5.8% in 2Q). However, an increase in the mix of interest-earning assets will likely offset the negative impact on margins.

Valuation and view

SBICARD reported a robust quarter on key business metrics with strong growth in its net earnings. Margins were stable QoQ as revolver mix increased to 26%, helping offset the rise in borrowing cost. We expect the upward trajectory in revolver mix to continue that will protect margins over the year even as borrowing cost increases further. Spends growth continues to remain robust and is likely to remain healthy as economic activity gathers further momentum, which will drive loan growth. RBI-RE book declines to a mere INR1.5b providing a strong outlook on asset quality, which will continue to keep the credit costs under control. We expect PAT to report 52% CAGR over FY22–24, leading to an RoA/RoE of 7.4%/31.4%. We raise our estimates slightly by lowering our credit cost assumption. Maintain BUY with an unchanged TP of INR1,100 (premised on 28x FY24E EPS).

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