In the last few days, many analysts and brokerage firms have started to favour financial stocks even as the cycle of rate hikes has begun.
The biggest factor behind the positive sentiment is compelling valuations.
Financial stocks have seen a good correction in the last few months due to the global selloff and FII continue selling in the Indian market for the last eight months.
While the valuation of most financial stocks is low, that should not mean that one can blindly bet on the sector. Picking quality stocks which has a strong potential to grow is the key rule of investing.
And here comes the stock of SBI Cards and Payment Services (SBI Card) in the picture. This stock is not only available at cheap valuation presently, but also looks on course to reap the benefits of its partnership with parent State Bank of India (SBI) which gives it the benefits of SBI’s vast network, cheaper customer acquisition cost, better asset-quality clients and strong cross-sell opportunities.
Brokerage firms highlight that the company’s strategy to expand into tier-2/3 cities should spur growth, with SBI having the highest network reach among banks in these markets.
If we consider the valuation, this stock is down about 34 percent from its all-time high of ₹1,164.65 that it hit on September 1, 2021. The stock is trading at attractive valuations of 24 times FY24E earnings per share (EPS), brokerages point out.
Brokerage bullish on the stock
Now, the brokerage firm YES Securities sees an up to 63 percent upside in the stock, considering its June 9 closing price of ₹770.90 on BSE. The brokerage firm has a 'buy' call on the stock with a target price of ₹1,260.
On June 9, YES Securities said in a note that after its interaction with SBI Card's management in its high conviction ideas conference and the takeaways were reassuring on concurrent and expected trends in card addition/mix, spend growth/mix, revolvers’ share, competitive landscape and credit cost.
"The company is confident about maintaining the card sourcing run-rate demonstrated in the past two quarters while would not chase market share at the cost of risk or profitability. Higher acquisitions from tier-3 and beyond locations and of self-employed customers are mainly through the SBI channel. This would drive revolvers’ share recovery along with the consistent increase in discretionary spending," YES Securities said.
"Less-risky customers onboarded during FY21-22 and portfolio construct/ECL coverage being at pre-pandemic level offers visibility on prompt normalization of credit cost. The cost/income ratio is expected to remain at 56-57 percent in the near term, with scale and digital benefits mitigating the increased intensity of spend-related costs," the brokerage firm added.
YES Securities estimates a 20-22 percent CAGR in CIF and receivables over FY22-24. Also, the brokerage firm said that despite modelling 25 bps MDR reduction (partial recoup through opex), it expects RoA (return on assets) and RoE (return on equity) to be 5.5-6 percent and 24-26 percent which was the pre-pandemic metric (adjusted for capital base).
YES Securities believes that the stock price represents overstretched concerns on (a) MDR reduction and lack of flexibility to recoup it, (b) structural pressure on cost-income/profitability from increased competitive intensity, and (c) impact on growth from the rising scale of the new-age card costs and BNPL.
"Being the only listed pure-play credit card issuer with significantly higher profitability than Banks and NBFCs (in good times as well as bad times), SBI Card would continue to command a premium valuation," the brokerage firm said.
Another brokerage firm BOBCAPS ( a wholly owned subsidiary of Bank of Baroda) is also bullish on the stock. In its June 6 report, the brokerage firm said it had initiated coverage on the stock with a 'buy' rating, citing strong fundamentals, structural story and compelling valuations.
BOBCAPS has fixed the target price of ₹1,137 for the stock, implying a 47 percent upside.
The brokerage firm underscored that credit cards are a high-margin business and SBI Card earned an average RoAA (return on average assets) and RoAE (return on average equity) of 4.6 percent and 29 percent, respectively, for FY16-FY20. Amid Covid-19, these ratios fell to 3.8 percent and 16.9 percent, respectively, in FY21 before rebounding to 5.2 percent and 23 percent, respectively, in FY22.
BOBCAPS expects RoAA of 6 percent and 6.4 percent and RoAE of 26.2 percent and 26.9 percent in FY23 and FY24, respectively, as the pandemic impact ebbs.
Also, the brokerage firm believes that as economic activity revives, the share of interest-earning EMI and revolver accounts in the receivables mix will grow over the next two-three years, supporting better margins of about 14.5 percent by FY25.
BOBCAPS expects credit costs to decline further to 7.7 percent and 7.2 percent and 7 percent for FY23, FY24, and FY25, respectively.
SBI Card had posted an over three-fold jump in its March quarter profits of the financial year 2022 (Q4FY22).
The company posted a PAT of ₹580.86 crore in Q4FY22 - surging by 3.3 folds compared to a profit of ₹175.4 crore witnessed in the same period last year. Q4 PAT jumped by 50.6 percent from ₹385.78 crore recorded in the preceding quarter.
Revenue from operations stood at ₹2 850.31 crore in Q4FY22 higher by 22.91 percent from ₹2,319.01 crore from Q4 of the previous fiscal. Revenue was marginally lower from ₹2 889.46 crore witnessed in Q3FY22.
The bank witnessed a significant improvement in its asset quality during the March quarter of the last financial year. The gross non-performing assets were at 2.22 percent of gross advances as of March 31, 2022, as against 4.99 percent as of March 31, 2021. Net non-performing assets were at 0.78 percent as against 1.15 percent as on March 31, 2021.
Disclaimer: The views and recommendations made above are those of broking firms and not of MintGenie.
