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SBI Cards and Payment Services – Industry level challenges with unsecured lending


Company Name – SBI Cards and Payment Services Limited (SBI Cards)


Current Share Price – INR 703 (Feb 5, 2024)


Market Cap – INR 66,854 cr


 

1. What is interesting about the stock?


Credit cards can be a valuable financial tool when used responsibly. They offer easy access to credit, are more convenient than cash or cheques, and come with added benefits like loyalty programs, extended warranties, and fraud and purchase protection. But where did it all begin?


The modern credit card era started in 1950 with the introduction of the Diners Club card. It was the first widely accepted charge card that allowed customers to charge their expenses at multiple establishments. Though initially intended for use at restaurants, it soon expanded to other businesses.


In India, the history of credit cards is relatively recent compared to other countries. The first credit card to make its way into India was the Diners Club card, launched in 1960. However, its usage was limited to a few establishments and targeted primarily at high-net-worth individuals and business travelers.


The usage of credit cards in India is still relatively low at 6.3 cards per thousand, which is only one-sixth of the global average. However, the figure is increasing at an annual rate of over 20% due to rising awareness and infrastructure, as well as the growth of e-commerce and disposable income among the middle class.


SBI Cards and Payment Services Limited, a subsidiary of the State Bank of India, is the sole listed credit card issuer in India and the second-largest in the country. The company is a non-deposit accepting systemically important non-banking financial company registered with the RBI, providing credit card services to Indian consumers. Its headquarters is located in Gurgaon, Haryana.


SBI Cards was established in 1998 as a joint venture between the State Bank of India and GE Capital. In December 2017, State Bank of India and The Carlyle Group acquired GE Capital's share in the company, resulting in SBI owning 74% while Carlyle held 26%. In March 2020, SBI Cards became the first credit card company to be listed on the stock exchanges in India. After the IPO, the original investors currently own 70% and 16% respectively.


In April 2022, Carlyle Group sold the remaining 3% of its stake in SBI Cards & Payments Services Ltd (SBI Card). This move came after the company had already reduced its stake in several stages following the IPO.


Why invest in SBI Cards?

  • Strong parentage – The Company is a subsidiary of the State Bank of India, which is the strongest and most trustworthy brand in banking in India. The Company has been leveraging the brand name and access to customers of its parent, to become the second-largest card issuer in India.

  • Under penetrated market – India has a credit card penetration of 6.3 cards per 1000 vs. the global average of 35.7 cards per 1000 persons. It is expected that the growth of credit cards will exceed 20% per annum for the next few years. Improvement in payment systems, changing consumer behavior, and favorable Indian demographics provide tailwinds for growth.

  • Stronger risk management – The Company has increased its sourcing from the self-employed category but has managed to maintain the asset quality. This has been done through prudent underwriting, which includes understanding their credit behavior and cash flow strength. The Company is also targeting more mature customers who have higher amounts of assets and less risky financial behavior.

  • Ability to raise fees – the stickiness of its customer base has allowed the Company to raise its fee income in the last quarter through higher instance-based fees including rental income.

  • Geographical distribution – The Company has raised sourcing from Tier III cities and below locations as saturation starts happening in Tier I and II cities. Most of the competition is also focused in this segment but SBI’s strong brand has helped the Company increase its new client sourcing from these locations. Due to a lack of financial products, these customers have access to, their stickiness is higher.

2. Key Historical Financials

  • Company revenue and profit have been growing 21% and 30% on a CAGR basis respectively in the last 5 years

  • Net profit has increased ~2.3x from FY21-23

  • Revenue growth was strong in Q3FY24 but the interest & credit costs also increased substantially leading to a flat PAT level. Excerpt from their conference call: "As per our conversations with the credit bureau, there is an increase in 30+DPD and 90+DPD for credit cards across the industry. Industry data also suggests there is a worsening in delinquency levels for unsecured exposures. This has been recognised by the RBI and has been factored into recent regulatory changes (e.g. changes in risk weights) and their guidance for increased adherence to their prudential norms with regard to unsecured lending"

  • Credit quality is expected to be under pressure for at least next couple of quarters

  • ROA and ROE increased to 4.1% and 19.2% respectively in Q3FY24

3. What is my view on company valuation?


The Company is trading at a P/E of 29x against a historical median P/E (3-year) of 45x. The large listed NBFC firms with similar size are trading around the current multiple while the listed NBFC companies have a median P/E of 19x, hence there is no headroom for P/E multiple expansion currently.


Company is an interesting investment opportunity given the Company’s strong management, large card base and spending, and linkage with SBI. The current valuation seems reasonable in the long term. However, the stock could face headwinds in the next 2-3 quarters as the issues with unsecured lending unfold across the industry.


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Rapid acceptance on the back of regulatory support to digital payment modes like UPI or newer models like Buy Now Pay Later (BNPL) or caps on Merchant Discounting Rates (MDR)

  • Aggressive competition can move away spending to their cards through higher promotional expenses and increased acquisition costs

  • An increase in the cost of funding can impact operations

 

About the Author


Long-term investor.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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