Established in 1998, SBI Cards & Payments Services Limited is one of the only two NBFCs registered as issuers of credit cards. And with its Initial Public Offering (IPO) scheduled to open on March 2, 2020, SBI Cards is poised to become the only listed company in its industry. The NBFC is a subsidiary of the largest bank in the country, the State Bank of India (SBI), and as of November 30, 2019, the company owned 18.1% of the market share in terms of number of credit cards outstanding.
Why is a subscription to the SBI Cards IPO recommended?
SBI Cards has been on the payment solutions scene for over two decades now. This IPO comes at a time when the company’s finances reflect positively on its business. Here’s a detailed look at the facts behind this investment rationale.
- Significant potential for further growth
Between the financial years from 2015 to 2019, the Compound Annual Growth Rate (CAGR) associated with the NBFC’s outstanding cards was 28%. By comparison, the industry average for the same period stood at 23%. This healthy growth rate is highly likely to be repeated in the next five-year period, between the financial years from 2020 to 2024, due to the following factors.
- Highly underpenetrated Indian credit card market:
In several developed and fast-developing countries, the number of credit cards per 100 people is 30 or higher. However, in India, it’s only 3. This showcases how severely underpenetrated India’s credit card market is and promises lucrative opportunities for SBI Cards to tap into the country’s customer base.
- Low credit card to debit card ratio:
Data pertaining to the third quarter of FY 2020 shows that the credit card to debit card ratio for SBI Cards stood at 3.7%. Other players in this sector reported higher ratios, with HDFC Bank’s coming in at 45%, Axis Bank’s at 28%, and ICICI Bank’s at 18%. This stark difference in the ratio points to a higher scope for mining SBI Bank customers.
- Space to expand the credit card loan book:
Currently, the company’s total credit card loans outstanding make up on 1.22% of the total loans in the banking sector. And retail loans make up only 27%. This goes to show that there’s ample scope to increase the credit card loan book.
- Potential for the development of the credit card industry
While data pertaining to other countries showcases that credit card spending makes up over 10% of their GDP, the relevant figure for India stands at 3%. This is another indicator that the country’s credit card industry has sufficient space to evolve.
- Healthy return ratios coupled with stable asset quality
A look at the company’s financials shows that SBI Cards is driven by the twin forces of healthy return rations combined with stable assets. Over the last 3 years, the NBFC’s average return on equity (ROE) was 29%, while its return on assets (ROA) was 4.3%. The cost-to-income (C/I) ratio has also declined from 63% in FY 2017 to 60.5% in FY 2019, and then further down to 56.6% as per the 9MFY2020 figures.
As SBI Cards penetrates the credit market further, spend base fees are bound to increase. Currently, they may up 26% of the total income, and any increase in these fees will only increase operating leverage, thereby further reducing the C/I. Also, while advances grew at a CAGR of 34% over between FY 2017 and 2019, the asset quality remained stable, ranging from 2.3% to 2.4%.
- Positive outlook and valuation
SBI Cards currently offers both retail credit cards as well as corporate cards. It is also the largest co-brand credit card issuer in the country, and it has launched cards in partnership with other smaller and regional banks. This existing variety coupled with the potential for future growth lays the foundation for a positive outlook.
Furthermore, at the upper price band of the issue, which is Rs. 755, SBI Cards is valued at 45.5 times the annualized earnings reflected in its 9MFY2020 statements. While this valuation may appear to be on the higher side, the rationale behind it is the trifecta comprising of the favorable industry scenario, the company’s strong financial track records, and the large pool of untapped SBI Bank customers.
Details of the SBI Cards IPO issue
Here’s everything you need to know about the upcoming IPO issue of SBI Cards.
|Issue opening date||March 2, 2020|
|Issue closing date||March 5, 2020|
|Face value||₹ 10|
|Present equity paid up capital||₹ 932.3 crores|
|Fresh issue||₹ 500 crores|
|Offer for sale||₹ 9,855 crores|
|Post equity paid up capital||₹ 939 crores|
|Price band||₹ 750 to ₹ 755|
|Issue size (amount) calculated on lower price band||₹ 10,290 crores|
|Issue size (amount) calculated on lower price band||₹ 10,355 crores|
|Lot size||19 shares and in multiples thereafter|
|Post-issue implied market cap calculated on lower price band||₹ 70,422 crores|
|Post-issue implied market cap calculated on upper price band||₹ 70,891 crores|
|Promoters holdings pre-issue||74%|
|Promoters holdings post-issue||69.51%|
The details pertaining to book building are tabulated below.
|Investor category||Percentage of issue|
|Qualified institutional buyers (QIBs)||50%|
How is the company’s income constituted?
Before you decide on whether or not to invest in this IPO, you will also need to understand how the NBFC earns its revenue. Here’s a list of the primary and other sources of income that constitute the revenue of SBI Cards.
- Interest on credit card receivables
- Interchange fees
- Late fees
- Annual credit card membership fees
- Interest income on revolver receivables, transactor receivables and term loan receivables
- Subscription-based fees
- Spend-based income
- Instance-based fees
- Service charges
- Insurance commission
If these figures and the corresponding outlook have you interested, you could subscribe to the SBI Cards IPO issue using an online stockbroking platform. As an individual, your investment belongs to the retail category. And the minimum application for this category comes up to ₹ 14,345 at the higher end of the price band (19 shares at ₹ 755 each).