32% EPS CAGR expected over FY20-23e; market share should rise; initiated with 'Outperform' and target price of Rs 1,025.
SBI Cards is a pure play on three quintessential India opportunities: discretionary consumption, retail credit penetration and digital payments. We believe SBIC’s strong parentage, market leadership, brand and smart strategies will enable it to capture a rising share of India’s fast-growing credit card industry. Regulatory intervention risks and asset quality cycles are inevitable, but not imminent in our view.
We are initiating coverage with Outperform and a residual income model-based TP of Rs 1,025 (36% upside potential; implies target FY22e P/E, P/BV and PEG ratios of 35x, 8.7x and 1.1x, respectively). We believe being India’s only notable standalone credit card company and having growth visibility should ensure premium valuations can be sustained.
Poised to capitalise on opportunity
A captive retail liability franchise is a key ‘right to win’ in India’s financial services industry. SBI’s parentage is thus a key advantage for SBI Cards, as it allows access to SBI’s strong brand, its 20,000+ branch network and 400mn+ customer base. Along with strong open-market and cobrand card acquisition channels, we believe SBIC is well placed to capture a rising share of India’s credit card penetration story (expect cards in use to triple in 5-6 years). SBIC has the second largest market share (~18%).
Despite its public sector parentage, SBIC is run by domain experts hired from the private sector and incentivised with ESOPs and market-linked compensation. We like several of SBIC’s strategies:
(i) introducing a pay-wall (no free cards) to ensure higher active cards, (ii) introducing a comprehensive product suite including co-brand cards, (iii) employing a re-carding strategy in the open market, (iv) sourcing from SBI via a tri-patriate agreement involving credit bureau, CIBIL.
Top-quartile EPS compounding (30%+ CAGR over FY20-23E)
We believe SBIC can deliver a 32% EPS CAGR with an average RoE of ~28% over FY20-23e, driven primarily by 25%+ growth in cards outstanding. We build in flat spends/card, AUM mix shift (rising equal monthly instalment (EMI) loans and lower revolver loans), flat interchange and instance-based fees and rising promotion and reward point costs. We think spending activity of new cards, credit costs and operating leverage are important monitorables.
‘Caveat Investor’ – risks & blind spots
Risks from (i) regulatory intervention on interest rates, interchange fees and operations and (ii) a downturn in retail asset quality cycle, are inevitable, but not imminent. Current robust industry practices, India’s poor digital payments infrastructure, low card penetration and the ability to pass on part of potential cuts in MDR to customers offer hedges against such risks. However, given that this is a new industry sub-segment being listed and disclosure levels are low, there are potential risks from “unknown unknowns”. Post-GFC, the quality of retail credit bureau scores and underwriting practices have not been thoroughly tested with a retail asset quality stress cycle either. Consequently, we are building a 200bps higher cost of equity (14%) into our RI valuation model.