SBI Playing cards is a pure play on three quintessential India alternatives: discretionary consumption, retail credit score penetration and digital funds. We imagine SBIC’s robust parentage, market management, model and sensible methods will allow it to seize a rising share of India’s fast-growing bank card trade. Regulatory intervention dangers and asset high quality cycles are inevitable, however not imminent in our view.
We’re initiating protection with Outperform and a residual earnings model-based TP of Rs 1,025 (36% upside potential; implies goal FY22e P/E, P/BV and PEG ratios of 35x, 8.7x and 1.1x, respectively). We imagine being India’s solely notable standalone bank card firm and having progress visibility ought to guarantee premium valuations might be sustained.
Poised to capitalise on alternative
A captive retail legal responsibility franchise is a key ‘proper to win’ in India’s monetary providers trade. SBI’s parentage is thus a key benefit for SBI Playing cards, because it permits entry to SBI’s robust model, its 20,000+ department community and 400mn+ buyer base. Together with robust open-market and cobrand card acquisition channels, we imagine SBIC is properly positioned to seize a rising share of India’s bank card penetration story (anticipate playing cards in use to triple in 5-6 years). SBIC has the second largest market share (~18%).
Regardless of its public sector parentage, SBIC is run by area consultants employed from the personal sector and incentivised with ESOPs and market-linked compensation. We like a number of of SBIC’s methods:
(i) introducing a pay-wall (no free playing cards) to make sure larger lively playing cards, (ii) introducing a complete product suite together with co-brand playing cards, (iii) using a re-carding technique within the open market, (iv) sourcing from SBI by way of a tri-patriate settlement involving credit score bureau, CIBIL.
Prime-quartile EPS compounding (30%+ CAGR over FY20-23E)
We imagine SBIC can ship a 32% EPS CAGR with a mean RoE of ~28% over FY20-23e, pushed primarily by 25%+ progress in playing cards excellent. We construct in flat spends/card, AUM combine shift (rising equal month-to-month instalment (EMI) loans and decrease revolver loans), flat interchange and instance-based charges and rising promotion and reward level prices. We expect spending exercise of latest playing cards, credit score prices and working leverage are vital monitorables.
‘Caveat Investor’ – dangers & blind spots
Dangers from (i) regulatory intervention on rates of interest, interchange charges and operations and (ii) a downturn in retail asset high quality cycle, are inevitable, however not imminent. Present strong trade practices, India’s poor digital funds infrastructure, low card penetration and the flexibility to move on a part of potential cuts in MDR to clients provide hedges in opposition to such dangers. Nonetheless, provided that this can be a new trade sub-segment being listed and disclosure ranges are low, there are potential dangers from “unknown unknowns”. Publish-GFC, the standard of retail credit score bureau scores and underwriting practices haven’t been completely examined with a retail asset high quality stress cycle both. Consequently, we’re constructing a 200bps larger price of fairness (14%) into our RI valuation mannequin.