Buy SBI Cards Ltd For Target Rs 850 By Emkay Global Financial Services Ltd
Overall CIF growth (6% YoY) and AUM growth (2% YoY) remained soft for SBIC, reflecting its conscious strategy to prioritize portfolio quality. This, coupled with seasonal correction in the EMI and revolver portfolios, led to weak NII growth of 3% YoY. However, overall spends growth remained strong due to continued momentum in corporate spends. Thus, overall healthy spendbased fees, coupled with lower credit costs (7.7% vs 8.2% in 3Q), enabled SBIC to clock largely in-line PAT of Rs6.1bn and an RoA of 3.6%. Going forward, SBIC expects spends growth to remain healthy, but CIF growth to remain moderate, given its continued focus on portfolio quality amid emerging macro-risks from the ongoing West Asia conflict. Factoring in slower CIF and IBNEA growth, we cut FY27E/28E earnings by 10%/15% and our TP by 12% to Rs850 from Rs970, rolling forward on 4x FY28E ABV/24x EPS. However, we expect strong spends growth, and hence the fee, coupled with easing asset quality stress, to drive RoA up to healthy 3.9%/4.4%/4.8% levels over FY27E/28E/29E from a low of 3.3% in FY26E, leading to a gradual stock re-rating. Thus, we retain BUY.
Strong spends growth, but slower AUM growth
SBIC’s new card additions remain largely range-bound at ~0.9mn, given its conscious strategy of prioritizing portfolio quality over growth. Net addition remains soft at ~0.3mn due to attrition and continued portfolio clean-up. Overall CIF base growth moderated to ~6% YoY at 22.1mn, but spends growth remains strong at 31% YoY, with heavy lifting being done by corporate spends. This, along with a rising share of transactors, smallvalue spends, and seasonal contraction in the revolver/EMI portfolios, led to slower receivables/AUM growth of 2% YoY. The management refrained from providing guidance on AUM growth amid ongoing uncertainties around the West Asia conflict.
Asset quality improves, but West Asia conflict calls for higher guard
With incremental stress flow easing, SBIC’s GNPA ratio improved sharply to 2.4%, while Stage 2 assets improved by 20bps QoQ to 3.7%. This, along with lower write-offs, led to a sharp moderation in overall credit costs to 7.7% in Q4 vs 8.2% in 3Q. The management expects asset quality and credit costs to improve further in FY28, while remaining watchful of any potential disruptions due to the ongoing West Asia conflict.
We retain BUY
Factoring in slower CIF and IBNEA growth, we cut FY27E/28E earnings by 10%/15%. However, healthy spends growth, along with easing asset quality stress, should drive RoA up to healthy 3.9%/4.4%/4.8% levels over FY27E/28E/29E from 3.3% in FY26E, leading to a gradual stock re-rating. Factoring in earnings and multiple cuts TP, we value the stock at 4x FY28E ABV/24x EPS and cut TP by 12% to Rs850 from Rs970. Key risks: slower-than-expected growth, delay in asset-quality improvement, and attrition in KMP
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