The worst listing day performer of 2020, SBI Cards and Payment Services, has had a remarkable turnaround since the stock markets started recouping losses suffered in March. SBI Cards’ share price has galloped 70% in the last seven months. This upward march comes after the first IPO of 2020 saw a disastrous listing day, falling 13% from the issue price on debut. Brokerage and research firm Kotak Securities has now initiated the coverage of SBI Cards and Payment Services, pinning a fair value that implies further upside in the stock from current levels.
High growth trajectory ahead
Analysts at Kotak Securities see strong revenue growth led by rising and underpenetrated payments play, highly profitable lending book, and benefit of a strong parentage that can lower the origination risk as positives that partly offset the expensive valuations. SBI Cards operates in a largely underpenetrated segment with a fairly superior runway for growth, according to the brokerage firm. “When we look at the lending landscape across the retail and corporate lending segments, we believe that the credit card business would probably have the fastest growth,” they added.
SBI cards is the second-largest credit card issuer in India with 19% market share. “SBI Cards’ topline growth performance has been noteworthy with revenues compounding at ~40% CAGR over FY2013-20. Growth has been quite balanced between net interest income (37% CAGR), core fee income (39%) and other miscellaneous income (~45% CAGR),” the report noted.
Kotak Securities expects SBI Cards to deliver best-in-class growth on revenues backed by strong profitability metrics. “We expect the company to deliver 20% RoE and on the back of ~50% earnings CAGR with strong growth in earnings led by lower provisions in the near term,” they added. Although provisions are expected to be high owing to the covid impact by the brokerage firm expects SBI Cards to filter weaker customers out using this episode.
Although growing at a 5-year CAGR of 22%, the credit card penetration in India is still low. It is the lowest among the big economies of the world. “Within this space, we believe that the leaders would have a disproportionately large market opportunity. We see SBI Cards as a major player which is likely to take advantage of this space,” the report said.
Should you buy?
Analysts at Kotak Securities have an ‘Add’ rating on SBI Cards and Payment Services with a fair value of Rs 900. “At our FV, we are valuing the business at 30X FY2023 EPS. This implies an 8X PBR. Earnings, as compared to net-worth-based valuation, is our preferred way as there is a play on payments that is not driven by capital adequacy levels, they added.
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