Add SBI Cards & Payment Services Ltd For Target Rs. 1,025 By Emkay Global Financial Services Ltd
Strong spends growth, though opex hurts
Despite strong spends growth, stable margins, and some moderation in credit cost, SBIC reported a sharp miss on PAT at Rs4.4bn and RoA of 2.7% due to higher opex. This was primarily due to a seasonally higher retail spends-related opex as well as corporate incentives. Notably, the higher corporate spend is also hurting margins, as it impacts the IBNEA asset growth, which shall continue in the near term as corporate spends normalize back to the earlier levels of the mid-20s. The company has given guidance for continued strength in spends growth, albeit also a higher C/I ratio at 54-56%, which will thus contain PPoP growth. However, fresh stress flow is easing which, coupled with moderation in write-offs, should drive credit cost below 9% in 2H and thus support profitability. We trim FY26E/27E/28E earnings by 13%/8%/6%, while we expect RoA to improve gradually over FY27-28E to 4.2%/5% benefiting from better margin/LLP, from a low of 3.1% in FY25. We retain ADD with TP of Rs1,025, implying Sep-27E PER of ~25x and P/ABV of ~5x.
Strong spends growth, stable margins
SBIC’s new card additions improved a bit to ~0.94mn (vs ~0.87mn in Q1), though remaining moderate vs its past track record, given its conscious strategy to focus on quality. Net addition remained soft at ~0.3mn due to attrition and continued portfolio clean-up. The overall CIF base increased ~10% YoY to 21.5mn, with steady market share at 19%. Spends share increased slightly to 16.8% (from 16.6% in Q1), supported by continued revival in corporate spends and some pick-up in retail spends with the onset of the festive season and the recent GST rate-cut. Consequently, receivables grew to 8% YoY/6% QoQ, while margins remained steady at 11.2%. The company targets calibrated growth with 0.9-1mn quarterly card additions and 10-12% AUM growth in FY26. Strong festive demand post-GST 2.0 should further boost spends, especially in consumer durables and apparel, though higher incremental corporate spends could limit earnings.
Asset quality on recovery path
GNPA ratio (Stage 3)/Stage 2 assets saw 22bps/50bps QoQ improvement in Q2 to 2.9%/4.2%, indicating ease of new stress flow and higher w-offs. Stage 3 PCR improved by ~110bps to ~55%, while PCR on Stage 2 assets were broadly stable at ~21.7%. Overall credit cost was lower than guided at 9% (vs 9.6% in Q1), which the mgmt expects to be <9% in H2FY26, aided by improving asset quality trend and moderation in w-offs.
We retain ADD
We believe SBIC will be a beneficiary of the asset quality normalization cycle in the card portfolio, while accelerating spends; also, AUM growth should drive up RoA over FY27- 28E to 4.2%/5% from a low of 3.1% in FY25. We retain ADD on SBIC and TP of Rs1,025, implying ~Sep-27E P/E of 25x and ~P/ABV of 5x. Key risks: Slower-than-expected growth, delay in asset quality improvement, and attrition in KMP.
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