Its IPO was overhyped but is it time to relook at SBI Cards?

One of the greatest television shows of our time, or at least the most watched, ended without a bang, or not even a spark according to millions of fans. After the hype — which preceded the release of every Game of Thrones series — for Season 8, many fans were left fuming, confused about where it went wrong and felt short-changed. It’s not a new tragedy: expecting the sky and landing hard on the ground. We have all experienced it, in investing, even more so. At least, SBI Cards investors had COVID-19 to blame.

Granted, its IPO wasn’t as big a disaster as the last season of GoT, at least not for private equity major Carlyle, which sold 10% of its 26% holding to institutional and retail investors for Rs.70 billion. SBI sold 4%. Carlyle cashed out big time as it had paid Rs.20 billion for its 26% stake in 2017 and during the IPO it was valued at Rs.170 billion. Even as the pandemic hit, the Rs.103 billion IPO in March was oversubscribed 26.5x. But call it bad timing with COVID-19 or busting the hype behind the first ‘pure credit cards play’, the stock listed at 13% discount to the issue price of Rs.755. As of July 15, it traded at Rs.690, having hit a low of Rs.495 in the last week of May. So, was the IPO overhyped and is it now trading at the right valuation or is there more upside once COVID-19 gets discounted?

Shweta Daptardar, research analyst, Prabhudas Lilladher, says the de-rating was imminent since it is a consumption play. “At times like these, consumption takes a big blow, but it will also be the first sector to bounce back. By FY22, earnings could go back to pre-Covid level, making SBI Cards a good stock to look at,” she explains. 

Flashing amber
That would be the right thing to do in an economy that is growing robustly, which does not seem to be the case with India at this point. The Covid pandemic might just have added fuel to the delinquency fire. A late June research note by SBI’s Economic Research Department mentioned that per card transaction for credit cards declined from Rs.11,863 in January 2020 to Rs.3,620 in April 2020 (See: Spending freeze).

The other notable thing mentioned in the report by SBI chief economic advisor Soumya Kanti Ghosh was that consumers are using their gold holdings and increasingly availing gold loans. 

That along with the moratorium might be, to some degree, masking the current stress in the system. “If one goes by past history, gross NPAs tend to spike on the higher side and with the pandemic, you can expect asset quality deterioration,” says Daptardar. For Q4FY20, gross NPA for credit cards leader HDFC Bank was 1.26% but for SBI Cards it was 2.01%. While both have access to potential customers through their banks, the business model is inherently risky as the loans are unsecured despite the 40-45 days free credit period.

Credit card issuing companies rely on economic growth and rising consumer spending to grow their lending book. When there are not enough ‘good credit’ customers, in order to grow, these companies can also lend to ‘not so credit-worthy’ customers. The high annual interest rate of 24-36% builds in those risks. But extraordinary times call for extraordinary measures.

As a risk containment measure at SBI Cards, all corporate card spending has been restricted only for Travel & Entertainment (T&E) and corporate customers are not being allowed to spend on inventory or personal use. In the last concall, the management reiterated, “T&E cards carry small individual limits but the corporate exposure is large. Wherever we have secured exposure in the form of bank security, we give more flexibility but for unsecured, we have de-risked the usage by restricting usage to T&E.”

This proactive monitoring makes sense as compared with FY19, impairment losses and bad debt for FY20 increased 69% to Rs.19.4 billion. Another key assumption that drives unsecured lending is that not all customers will default simultaneously. However, in the months ahead, this assumption could be severely tested. A recent Macquarie Research report on SBI Cards though plays down the risk and states, “Our channel checks and surveys indicate that white collar job losses in India are not as bad as thought. Moratoriums for white-collar salaried retail loans are coming down. Low incremental spends have helped clear card overdues.” While they are estimating 22% fall in spends in FY21, Macquarie analysts Nishant Parekh, Suresh Ganapathy and Parth Gutka have raised their 12-month target price by 18% to Rs.900 on the back of new card additions and rising per card spend in FY22.

Two to tango
SBI Cards also has the second highest market share in the country at 18%, only lagging behind HDFC Bank, which enjoys 29% share (See: Solid credit). Like HDFC Bank, it has two customer acquisition channels — SBI account holders and those who bank outside SBI. It can acquire SBI customers at lower acquisition costs and with better credit quality. Its IPO prospectus mentioned that the ratio for SBI: Non SBI stood at 55:45. The same ratio for HDFC Bank’s credit card holders stood at 75:25.

SBI Cards is expected to grow its customer base on the back of access to its parent company’s customers. But this is a recent change. Till SBI Cards was a JV with GE Capital, its customer acquisition was mostly from the open market. Post SBI acquiring a majority share, the company is now aggressively targeting SBI customers.

According to a Bank of America Securities report, “The cross-selling initiative has been very effective with SBI’s customer base accounting for 55.2% of new accounts in FY19 versus 35.2% in FY17. This will continue to support market-share gains: 70 basis points over FY20-22 on 310 basis points over FY15-19.”

In terms of earnings growth, SBI Cards net profit compounded at 52% over FY17-19. In FY20, its total income increased 33.8% to Rs.97.5 billion, driven by interest income and income from fees and services (See: Buy now, pay later).

Analysts reckon there is scope for growth in the credit cards space. Deepak Jasani, head of retail research, HDFC Securities explains, “There are two kinds of people who use credit cards — one for convenience and the other for the credit facility. When it comes to the convenience aspect, more and more people are adopting the digital mode. The other wants a credit facility — once your credit profile is approved, you can go on borrowing and repaying — a revolving credit facility.” SBI Cards CEO Hardayal Prasad sure sounded confident during the last earnings call as he said, “We have grown our business faster than the Indian credit cards market, both in terms of credit cards outstanding as well as spends.”

Covid storm
The management also announced that they performed a sensitivity analysis and based on current estimates, created a specific COVID-19-related provision of Rs.4.89 billion, in line with what most financial institutions have had to undertake. “We are in no position to give any guidance but by creating a provision we have ensured that the company is barricaded from losses if they come up,” said Prasad.

This provision will be used to offset the hit from RBI’s decision to implement moratorium on loans, which was earlier slated to end within three months, but has been extended till August. About 12% of SBI Cards customers availed the moratorium for the months of April and May, valued at Rs.38 billion. But the management added that most customers who sought a moratorium “have had a good credit history in the preceding past 24 months.”

Otherwise, SBI Cards has maintained healthy asset quality over the years, with gross NPA below 3% and net NPA below 1% (See: Collateral damage). That is even after 45% of its customers being non-SBI and hence riskier and unsecured. Jasani says, “Salaried employees who have faced job loss or pay cuts will not be able to repay their loans, but that should stabilise once the lockdown ends.”

HSBC Securities analysts Ravi Singh and Rahil Shah don’t believe challenges will subside any time soon. They write in their report, “Past cycles show that credit costs rose to 8-10% in 2009 due to the impact of the global financial crisis. To be conservative, we build in a FY21 credit cost of 14%, up from 7% estimated for FY20.”

While credit cost could go up, the lockdown has affected earnings by reducing new cards issuance, spends and loans. In the second half of March, daily spends declined by 32% as compared to the rest of the quarter. When the lockdown was implemented, SBI Cards saw 60% decline in new accounts in the first few weeks. But the company says new cards issuances have picked up to 2,500 per day in May from 1,000 in March. Another trend that the company has witnessed is decline in non-discretionary spends, which has fallen from 25% to 20% in the past three months. In FY20, retail spend has grown at 39% while overall spend has grown at 27% indicating higher dependence on retail customers for future growth.

Measured optimism
Most analysts believe post the pandemic, SBI Cards’ stock price could see a different trajectory. Analysts at Bank of America Securities were upbeat on the stock as they initiated a ‘buy’ call in April at Rs.540. Their target price of Rs.680 has already been hit. “Despite factoring the near-term impact of COVID-19, we see strong long-term growth supported by its diversified model,” Anuj Singla and Bharat Subramanian had stated in their report. Thus, despite a high 10x/7.7x, estimated price to adjusted book value for FY21/FY22, respectively, they were comfortable betting on SBI Cards (See: High premium).

Their report mentioned that cards issuance and spending is likely to rebound by FY22. “We forecast profit after tax to rise at CAGR of 32% during FY22-24, with an average RoE of 31%, up from 15% in FY21,” it added.

While Daptardar admits that the stock could see further de-rating on account of moratorium slippages, she adds that this risk is industry-wide and that a clearer picture will emerge only after August. “One can invest in SBI Cards if one has a high-risk appetite. Near term challenges are there, but the company is flush with capital and liquidity buffers,” she says. The company has a capital adequacy ratio of 22%, compared with 20% in FY19.

All things considered, HDFC Securities’ Jasani cautions the stock is expensive when you compare it with banks such as HDFC Bank, Axis Bank and ICICI Bank, which trade at an estimated FY21 P/B multiple of 3.28x, 1.33x and 1.84x, respectively. So, is the bullishness of other analysts unjustified? “Whether the reasons are sufficient is for each one to decide,” says Jasani. After all, you could have skipped the GoT finale, but its track record of excellent production, crazy twists and intense characters couldn’t keep millions of viewers away.