SBI Cards: Motilal Oswal initiates coverage with a Neutral rating and target price of Rs 1200

SBI Cards and Payments Services share price: SBI Cards has strengthened its position as the second largest card player in the country with market share of 19% in cards and 20% in overall spends. The company has an card base of 11.5 mn and has doubled its card base over the past three years at an average incremental market share of 23%. SBI Cards has access to parent SBIN's vast network of 22k branches and customer base of 450 mn, along with strong open market sourcing capabilities. SBI Cards share price today Rs 1103, trading flat.  

Thus, SBI Cards remains well-placed to capitalize on growth opportunities in a highly underpenetrated market. SBI Cards has delivered an average RoA/RoE of 5%/29.5% over FY18–20. While COVID-19 has disrupted the growth trajectory, recovery has been fairly sharp, with retail spends surpassing pre-COVID levels.

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Motilal Oswal estimates a loan book / earnings CAGR of 27%/47% over FY21–23E, while margins are likely to remain broadly stable. Motilal Oswal estimates credit cost to moderate gradually, and expects the company to report healthy return ratios with RoA/RoE of 6.6%/28.4% in FY23. Motilal Oswal initiates coverage with a Neutral rating and target price of Rs 1200 (43x FY23E EPS).

India one of the lowest card penetration rates globally:

India’s credit card base has increased at a 22% CAGR over the past five years to 60 mn, while total spends have improved at a faster 31% CAGR during this period. Thus, the credit card penetration rate has increased 230 bps to 3.8% in the past five years. However, this remains much lower v/s most other countries.

Furthermore, the credit card penetration to banks’ internal customers stands at a meager 7% (the lowest for SBI Cards at 3.8%), providing ample cross-sell opportunities. Therefore, Motilal Oswal believes a highly underpenetrated market coupled with a higher thrust for digital payments, rising e-commerce, and efforts towards making the economy a cashless one provides strong structural growth opportunities.

Strong parentage + open market sourcing to enable robust growth for SBI Cards:

SBI Cards has grown its outstanding cards at a 27% CAGR over the past five years. On the other hand, the customer acquisition rate has reversed to normal levels as the impact of COVID-19 has waned. On account of robust distribution, SBI Cards is well-placed to capitalize on growth opportunities as the market remains significantly underpenetrated.