IPO Analysis: SBI Cards & Payment Services

IPO Rating - Invest

SBI Cards and Payment Services (SBIC) a subsidiary of SBI, engaged in credit card services, is entering the capital market with its Initial Public Offer (IPO) of equity shares of Rs 10 each.  The price band has been fixed between Rs 750 and Rs 755. The issue size at upper price band is around Rs 10,360 crore, including a fresh issue of Rs 500 crore and an offer for sale up to 130,526,798 equity shares by the existing shareholders. Reservation of up to 1,864,669 equity shares for subscription by eligible employees of the company and up to 13,052,680 equity shares for subscription is reserved for SBI shareholders. The IPO will be open for public subscription from March 2 to March 5, 2020 and the minimum number of shares to be subscribed, has been fixed at 19 shares. 

Object of Issue

The IPO majorly consists of an offer for sale of 13.05 crore shares by CA Rover Holdings (Carlyle) and SBI & fresh issue of Rs 500 crore to be used for augmenting the capital base.

About the company

SBIC, the subsidiary of SBI, is the second-largest credit card issuer in India, offering an extensive credit card portfolio. It is the largest co-brand credit card issuer, having partnerships with several major players. The company has been able to grow its business faster than the market over the past two years, both in terms of the number of cards outstanding, which has grown at a CAGR of 35 per cent over FY17-19 and card spends grew at 54 per cent CAGR in the same period. This helped SBIC to improve its market share to around 18 at the end of November 2019, compared to 15 per cent in FY14. It offers a wide range of card portfolio (46 types) with 40 per cent being the premium cards (second highest). SBIC extensively uses its parent company SBI to increase its business. Almost 48 per cent of the cards are issued using SBI’s distribution channels while 52 per cent is through its customer acquisition network across 145 Indian cities.

There is a lot of growth prospect for the company as SBIC’s penetration among SBI’s vast customer base stands at just 2.2 per cent, which provides SBIC with huge growth potential. Moreover, as per CRISIL, Indian credit card market is highly underpenetrated at just three per cent and expects it to grow at 23 per cent CAGR over the next five years, driven by the increasing penetration in smaller cities, rising organised retail and growth in payments infrastructure. Besides this, it also expects credit card spend to grow 2.5x over the next five years, led by a focus on digitalisation, developments in e-commerce, and the demographic changes.

Financials

Over FY17-19, SBIC’s financials grew at a robust pace. Revenue of the company grew at a CAGR of 44.6 per cent to Rs 6,999 crore at the end of FY19. Out of around Rs 7,000 crore of revenue in FY19, 51 per cent was from interest income, 44 per cent from income from fees & services and rest five per cent from others. Interest income has grown at a CAGR of 37.6 per cent between FY17-19 and non-interest income grew at a CAGR of 53.2 per cent in the same period.  Higher spending and increasing usage of EMI facility have helped to drive interest income. Conversely, the share of non-interest income has steadily increased to 49 per cent in FY19 from 44 per cent in FY17, thus making its revenue efficient and stable. Profit after tax in the same period has grown at a CAGR of 52 per cent over FY17-19 to Rs 862.7 crore. Better performance of the company has helped it to improve its ROA from four per cent in FY17 to 6.6 per cent in 9MFY20 while ROE improved to 33.6 per cent from 25.7 per cent in the same period. The asset quality has been stable for the SBIC with gross NPA at around 2.5 per cent and Net NPA at around 0.8 per cent.

Valuation and recommendation

At the higher price band of Rs 755 and on the expanded equity base considering the IPO, the offer is demanding a price to book value of 12.6 times after annualising the finances of 9MFY20. The price to earnings at which it is available is 45.8 times. On the surface, it looks expensive, however, if we discount a strong growth that the company is likely to exhibit, we may see valuation justified. Besides, stable asset quality and better return ratios provide comfort and hence, advise our readers to subscribe.