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Business growth recovering well; Return ratios robust

Upgrade to Buy on recent correction with an unchanged TP

* We recently initiated coverage on SBI Cards and Payments Services (SBICARD), highlighting the structural growth story and the unique play on rising retail credit that has been offered by the company. It has strengthened its position as the second largest card player in India, with a market share of ~19% in outstanding cards and ~20% in overall spends. It has an outstanding card base of ~11.5m and has doubled its card base over the past three years at an average incremental market share of 23%.

* We estimated loan book/earnings CAGR of 27%/47% over FY21–23E (RoA/RoE at 6.6%/28.4% in FY23E), however we initiated coverage with a Neutral rating owing to expensive valuations and limited upside to our TP of INR1,200.

* The stock has corrected ~11% since our initiation and is trading at 35x FY23E earnings, which is attractive given its strong fundamentals, earnings growth, and long-term structural story. At the CMP, the stock offers ~23% upside to our unchanged TP of INR1,200 (43x FY23E EPS). Consequently, we are upgrading our rating to Buy. Our earnings estimates stands unchanged.

Lower penetration augurs well for the long-term structural story

While the credit card base/spends has increased at 22%/31% CAGR over the past five years, credit card penetration levels remain much lower at 3.8% v/s most other countries. Credit card penetration to internal customers for the industry stands ~7% (much lower for SBICARD at 3.8%), providing ample cross-sell opportunities. A highly underpenetrated market, coupled with a higher thrust on digital payments, rising e-commerce, and efforts towards making the economy a cashless one provides long-term structural growth opportunities.

Growth momentum to accelerate; offers a unique play on rising retail mix

The Credit Card industry has demonstrated strong resilience as both card spends and new customer acquisitions have reached close to pre-COVID levels. SBICARD’s spend rate has touched pre-COVID levels (over 100% in retail spends), while it has gained ~50bp market share in outstanding cards. A continued uptick in the economy, along with a higher mix of online/retail spends, would accelerate the growth momentum. SBICARD is the only listed company within its domain that offers a direct play on the Credit Card industry. We expect outstanding credit card/spends CAGR of 22%/27% over FY21-23E for the industry. The same for SBICARD would be higher at 27%/32% CAGR.

Strong core profitability to absorb credit cost; PCR to remain healthy at 72%

Core profitability for the business remains strong, which allows absorption of asset quality shocks. Despite the elevated credit cost of ~9% over FY20, RoA/RoE came in strong at 5.5%/28%. Even for 9MFY21, credit cost remains elevated at 10.5%, yet return ratios were steady at 4.3%/18.5%. While we expect delinquencies to remain high, given the unsecured nature of the book – which would keep credit cost elevated, return ratios are likely to remain healthy and improve gradually as credit cost moderates. We expect NNPA to moderate to 1.2% by FY23E, while PCR would sustain ~72%.

Return ratios superior; RoE to revive to ~28% in FY23E

Robust NII and a superior margin profile, along with healthy fee income, have resulted in a strong operating performance by SBICARD. Over FY15-20, SBICARD reported a PPoP/PAT CAGR of 49%/36% and an average RoA/RoE of ~5%/29%. A higher proportion of the interest earning book, coupled with an increase in fee income, would remain the key earnings driver – even as credit cost may remain elevated, especially up to FY22E. We expect SBICARD to report 47% earnings CAGR over FY21-23E, with a superior RoA/RoE of 6.6%/28.4% by FY23E.

Upgrade to Buy on recent correction with unchanged TP

SBICARD has demonstrated a strong track record of growing its card book/earnings. This has enabled it to strengthen its lead as the second largest card player in terms of both outstanding cards and spends. While COIVD-19 has disrupted its growth trajectory, recovery has been fairly sharp and retail spends have exceeded preCOVID levels. We estimate a loan book/earnings CAGR of 27%/47% over FY21-23E, even as credit cost is likely to remain under pressure in the near term given the higher mix of restructuring book. We estimate RoA/RoE to improve to 6.6%/28.4% in FY23E. The stock has corrected ~11% since our initiation and is trading at 35x FY23E earnings, which is attractive given its strong fundamentals, earnings growth, and long-term structural story. At the CMP, the stock offers ~23% upside to our unchanged TP of INR1,200 (43x FY23E EPS). Consequently, we are upgrading our rating to Buy.

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