Global brokerage firm Jefferies has initiated coverage on SBI Cards and Payment Services, the country's second-largest credit card issuer, with a 'buy' rating and a target price of ₹900 apiece, which reflects an upside of 20.45% from the stock's previous closing price of ₹747.25.
The brokerage believes the outlook for the credit card market is strong and expects SBI Cards to report strong growth in card issued and spends by leveraging its parent SBI's large customer base, a strong open market channel, and co-branded card tie-ups.
As per the brokerage, India's card penetration is significantly low, with only 5% of the population over 15 years having credit cards, which is below that of key global countries. Additionally, only 23% of active retail credit users possess credit cards, while the total amount of credit card spending accounts for merely 3% of GDP and 7% of private final consumption.
However, the brokerage pointed out that the industry is expected to experience growth due to rising digital payments, improving acceptance infrastructure, and a more aggressive push by banks and credit card companies in offering credit cards.
SBI Cards is well-positioned to benefit from the shift as it is the second-largest credit card issuer in India, with a market share of 20%, and the third-largest player by spending, with 16.5 million cards in force as of February 2023.
The scope to lift penetration within SBI's customer base is large, as the credit cards to debit cards (ex. PMJDY) ratio of 14% is below the peer average of 29%.
The company's cards in force (CIF) are expected to grow at a 19% CAGR and card spends at a 23% CAGR over FY23–26E, driven by increasing penetration within SBI's customer base and cross-selling to customer base of its co-branded card partners, according to Jefferies.
On the other hand, SBI Cards has been experiencing pressure on its net interest margins due to a fall in its revolver mix and the increasing cost of funds. However, this trend is expected to bottom out in the first half of FY24 and gradually improve over FY24–26E as the revolver mix and cost stabilize, said the brokerage.
To boost the revolver mix, SBI Cards has increased the sourcing of customers with a higher propensity to revolve, which should lift revolve mix slowly as these customers start to revolve.
A 100-bps increase in revolver mix and EMI mix could lift FY24E EPS by 3% and 1.5%, respectively. In addition, a 1% shift in customers from revolver to EMI could impact EPS by 2%.
“We expect the top line to grow at 22% CAGR over FY23-26E, led by 24% NII CAGR and 21% fee income CAGR over FY23-26E. We believe margins should largely bottom out in 1HFY24 and should expand 50 bps over FY24-26E.”
“Profits in FY24 should grow 13%, factoring in the full impact of lower margins and assuming a stable revolver mix. Profit growth should rebound to a 28% CAGR over FY24–26E as the revolver mix inches higher. RoE should bottom out in FY24 and subsequently rise 170 bps over FY24-26E to 25% in FY24E,” said the brokerage firm.
However, Jefferies has outlined some key downside risks that could affect the valuations, including a potential decrease in revolver mix, and the possibility of cannibalization of some revolver spends due to SBI Cards' push to convert transaction spends to EMIs.
Further, the regulatory changes such as a potential cap on MDR and revolver rates, competition from new entrants like BAF, and the risk of UPI taking a higher-than-expected share of credit card spending are other factors.
27 analysts polled by MintGenie on an average have a 'buy' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.