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SBI Cards and Payment Services (SBICARD IN) Q3 earnings, while in line with our estimates, stagnated as the company is besieged by challenges. Lower core profitability growth of 4% QoQ and a higher-than-expected PAT decline of 9% QoQ was due to: 1) an 18% QoQ spike in opex with the cost-income ratio rising to 60%, up 285bp QoQ, on account of higher festive cash back/allied offers (online & offline), and the impact was pronounced in Q3, 2) provision climbing 19% QoQ with credit cost inching up to 7.5% from 6.7% in Q2, as absolute GNPA surges 18% QoQ, 3) flat margin as a 44bp QoQ rise in yield to 17.2% was offset by a 49bp spike in funding cost to 7.6%, 4) a fall in interest income share in overall revenue to 45% from 47% in Q2, as high yielding revolver mix further falls to 23%. The only savings grace for the quarter was a 16% QoQ rise in fees, led by higher spend revenue, especially during the festive quarter.

Festive months drives spend; new accounts, receivables run-rate dips

SBICARD posted spends growth of 41% YoY and 22% QoQ, led by a 32% QoQ rise in corporate spend and a 20% QoQ rise in retail, attributed to festival demand & offers. The company saw a 22% increase in point of sale (POS)-led discretionary spend and 13% rise in POS spend related to  travel & entertainment in 9MFY24. It is evident SBICARD stands plagued by industry headwinds, given weakening business downtrends: 1) down trending receivables of INR 489bn, up 26% YoY, with an average growth run-rate of 25% vs 37% in 9MFY23, 2) dipping new accounts to 1.96mn, down 33% YoY & 4% QoQ, 3) dropping revolver share to 23% post a five-quarter stagnancy at 24%. We trim our card CAGR to 13% and our spends CAGR to 15% CAGR vs 16%  & 17% earlier, respectively, over FY24-26E, with a lower receivables CAGR of 27% vs earlier 30% over FY24-26, given challenges galore of low revolvers, competition in the EMI portfolio, a weak discretionary cycle in the semi-urban & rural markets, and risk in small-ticket card loans. 

Credit cost bypass precarious 7% levels; asset quality under threat

Stage 3 currently is at ~2.6% with credit cost at 7.5%, given customers with tradelines turning delinquent, says management. While stress is widespread with 30DPD and 90DPD slipping, SBICARD is monitoring vintages and reorienting customer segmentation through reduction in credit limits, restrictions on cross-selling, and blocking cards.

Valuation: revise to Sell with a lower TP of INR 719; ROA dips <5%

Given vague guidance and lingering challenges, we revise our rating to Sell from Reduce with a lower TP of INR 719 from INR 829 on 22.4x (from 24x) P/E. We assume an 13% outstanding cards CAGR, 15% spend CAGR, 27% loans CAGR and a NII CAGR of 27% over FY23-26E. We expect an average credit cost of 7.3%, resulting in ROA dipping to less than 5% with a ROE of 22-23% over FY24-26E.

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