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Strongly positioned to shift gears

SBI Cards (SBIC) posted an impressive Q2FY22 with PAT of INR3.5bn— up >60% YoY, indicative of stronger recovery trends. Rising spends momentum (up >30% QoQ), improving cards in-force (>4% QoQ), sustained investments and adequate provisions indicate that the company is well positioned for a further step-up.

We view SBIC as a concept stock offering high-growth and high-returns by the only listed player of its kind for a foreseeable future. SBIC’s leadership, deep knowhow (long experience) and strong moats will help it gain market share in an otherwise difficult-to-master business with high entry barriers. Maintain ‘BUY’ with a TP of INR1,350 (unchanged).

Well positioned to build on business momentum

SBIC reported a sharp recovery in business momentum reflected in- >4% QoQ rise in the cards in force , >50% QoQ surge in new accounts and >30% QoQ jump in spends. The spend growth is on the back of strong retail spends, reflective of return of discretionary spends. With strong spend categories such as travel/entertainment likely to bounce back (signs already visible), we believe growth will improve further, and we expect credit card book to be the fastest to recover among all retail asset classes. Additionally, the company continues to make investments (cost ratios higher), but that augurs well from future capability perspective.

Asset quality holding up; adequate provisions already accounted for

Asset quality showed encouraging trends with gross stage-3 further declining to 3.4% (from 5% in FY21). Add to that, a further drop in RBI-RE book to 4% (from 6% QoQ), of which ~26% are overdue 30–90 days and are already provided to 65% and excess provision (ECL of 5%) renders comfort. Given: i) higher salaried customers; ii) origination from SBI; and iii) extensive collection infrastructure, all lend resilience to asset quality.

Outlook and valuation: Concept stock; maintain ‘BUY’

Covid has disrupted momentum, but it has also shown business resilience. This qualitatively sets a base and will spur growth progressively. We expect SBIC to deliver an EPS CAGR of >45% over FY21–24E, translating to >6%/25% RoA/RoE. Sustainable superior RoEs would sustain SBIC’s premium valuation. Maintain ‘BUY/SO’.

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