SBI Card (SBIC) reported 3% q-o-q dip in PAT in Q3FY23 primarily on account of lower NIMs (subdued revolver mix and higher cost of funds), lower instance-based fees (removal of over-limit (OVL) fees) and higher cost to income (higher acquisitions and more corporate spends) partially offset by lower credit cost. Earnings are expected to improve hereon driven by gradual improvement in NIMs, stabilisation of cost to income to below 60% and credit cost below 6.5%.
The delay in recovery of revolver mix is leading us to cut the multiple of the company from 40x to 35x. Maintain Buy with a revised target price of 1,040 based on 35x Sep 'FY24E earnings. The business is growing rapidly which poses an upside risk in an amenable cycle and a downside risk in an adverse cycle. Factoring22bn/25.7bn/ 30bn PAT in FY23/24/25E—key tenets. SBIC spends are on track towards2.7trn for FY23. We expect spend CAGR of 35% between FY22-25E driven by the business target of adding 1mn net cards per quarter and overall spend/card CAGR of 15% between FY22-25E basis past trend of 6% between FY17-22E (last 5 years). Receivables, as a percentage of spends, should remain in the range of 16% basis 9MFY23 trends while we expect NIMs to gradually improve to 13.6% by FY25. We factor cost to income to remain sub 60% while credit cost to be in the range of 6-6.5%.
NIMs near bottom despite another 30-40bps QoQ increase in cost of funds in Q4FY23. SBIC reported NIMs of 11.6% in Q3FY23 as against 12.3% reported in Q2FY23. Dip in yields was due to an increase in the cost of borrowing from 5.4% to 6.3% in Q3FY23. Income yields remained flat at 11.6% as revolver mix remained stable at 26% in Q3FY23. It expects to gradually offset the incremental hike in cost of funds through tactical pricing of the EMI category. The company has seen recovery in yields to pre-festive season during Nov/ Dec’22. We factor FY23/24/ 25 NIMs at 12.3%/12.6%/ 13.6%, respectively.
Expect earnings print to improve ahead driven by lower cost to income in Q4 as we move past the impact of the festive season. To give a trend, cost to income has declined sequentially in 3 out of last 5 years ending FY22, absolute earnings growth from CIF growth in 9MFY23, positive impact of fees which the company has started to levy like processing fees on EMI and rentals.