Buy SBI Cards Ltd for the Target Rs 750 by Emkay Global Financial Services Ltd
Sharp improvement in credit cost to 6.8% (vs 8.1% in 4QFY26 and 10.3% in 1QFY26) led to SBICARD delivering an impressive 20% yoy growth in PAT to Rs6.64bn. However, PPoP at Rs18.4bn was down 12% yoy and 3% qoq, as AUM growth remained anemic at 3% yoy and revolver rates stable at 22%; the quality of spends growth remained poor with corporate card spends growth (+125% YoY) driving a large part of the spends growth. Overall, asset quality pain seems to be gradually resolving, albeit leading to challenges on the revenue growth front due to a combination of spending mix (retail vs corporate) moderating revolver rates and EMI in the asset mix. Factoring in the slower NII and spend based revenue growth, partly compensated by cut in credit cost estimates, we cut FY27-29E EPS by ~5-7% and Jun-27E TP by ~12% to Rs750 from Rs850 (Mar-27E), valuing the company at FY28E PER of 22x. We retain BUY on the stock, as we believe the moderated valuation multiples and easing asset quality challenges will support a re-rating.
Healthy spends growth; AUM growth improves
SBIC’s new card additions improved to 1.02mn after being range-bound at ~0.9mn in recent quarters, while net card additions increased to ~0.5mn vs ~0.3mn qoq. The overall cards-in-force (CIF) base grew 6.6% yoy to 22.6mn. Spends growth remained healthy at 27% yoy/3% qoq driven by corporate spends, which increased 125% yoy and declined 4% qoq, while retail spends growth improved 14% yoy/5% qoq. Increase in EMI contribution, along with a stable revolver portfolio, supported receivables/AUM growth of 2.9% yoy/2.4% qoq, albeit remains anemic. Management believes revolver rates will be broadly stable, though with a marginal downward bias, while it expects receivable growth to accelerate in 2HFY27, on higher customer acquisition and festive season demand
Asset quality improvements continue; revenue growth drivers in slow mode
With the sustained easing in incremental stress flow, SBIC’s GS3 ratio improved sequentially to 2.04% (vs 2.41% in 4QFY26), while GS2 improved to 3.6% (vs 3.7% in 4QFY26). This, along with lower write-offs, led to a sharp moderation in overall credit costs to 6.5% in 1Q vs 7.7% in 4Q. The management expects asset quality and credit costs to improve further in FY27, while remaining watchful for potential disruptions from the ongoing West Asia conflict.
We retain BUY, on valuation and easing in credit costs
To reflect the 1Q developments and management commentary, we change our FY27-29 estimates; this leads to: 1) ~2-3% cut in net revenue; 2) ~4-8% cut in PPoP estimates; and 3) ~5-7% cut in EPS estimates. We cut our Jun-27 TP by ~12% to Rs750 from Rs850 (Mar-27E), valuing the stock at Jun-28E PER of 21x, as we believe moderation in earnings growth and ROE warrants multiple compression. We retain BUY, as moderation in valuation multiples and easing of credit costs are likely to support a re-rating. Key risks: slower-than-expected growth, deterioration in asset quality, and attrition among KMPs.
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