sbi cards and payment services...

SBI Cards and Payment Services Limited

IPO UPDATE


Credit Card Industry overview:

Credit card spends have shown a massive growth since FY15, registering a

CAGR of 32%, to reach Rs6tn in FY19. One of the biggest factor for such a

robust growth was demonetization. Further, the government‟s emerging

version of a cash-less society, focus on digitalization, opening of new

accounts in the form of Jan Dhan, developments in e-commerce and the

availability of POS infrastructure have significantly encouraged payments

through credit cards. Going forward, demographic advantage, issuances of

cards in smaller cities, tapping NTC customers and strong investments in

payment infrastructure will further aid the credit-card penetration. According

to a CRISIL report, spends in credit card should reach to Rs15tn by FY24, a

CAGR of 20% from FY19 to FY24. The increased use of cards for purposes

such as travel, shopping, lifestyle purchases, entertainment, healthcare, utility

bill payments, etc., have increased the spend per card.

Concomitantly, growth in credit card volume has increased in the last five

years registering a CAGR of 20%, with the number of credit cards issued

stands at 47mn in FY19 and expected to grow at 25% from FY19 to FY20.

Increasing acceptance of digital payments by Indian consumers and the rise of

e-commerce businesses during this period, such as Flipkart and Amazon, gave

a huge impetus to growth, with credit-card players providing promotional

offers and EMI financing options.

There has also been an increase in proportion of credit card originations

amongst millennials from 19% in FY15 to 35% in FY19. This increased

credit card spending by this age-group is due to faster adaptability of

technology by younger generation, strong growth in e-commerce industry and

increasing proportion of discretionary spends on leisure activities, such as

apparels, dine-out, electronics, etc. Apart from this, the increased EMI-based

payments using credit cards is expected to be approximately three times over

the next five years ending FY24, to reach Rs3,313bn, coupled with no-cost

EMI financing options in consumer durables by major credit card players.

Types of cards offered:

Personal

Corporate Cards

Growth Drivers:

Under penetrated credit card market

Growth from New-To-Credit (NTC) customers

Organized retail penetration (including e-commerce) to increase

Continuous improvement in payment infrastructure

Competitive Scenario in the Credit Card Industry:

There are a total of 74 players offering credit cards in India, with the top three

private banks (HDFC Bank, Axis Bank and ICICI Bank) and SBI Card, as the

leading pure-play credit card issuer, dominating the credit card business with

a total of approximately 72.0% market share by number of outstanding credit

cards as on FY19 and approximately 66.0% market share by credit card

spends in FY19.

SNAPSHOT

Issue Opens Monday, March 02, 2020

Issue Closes Thursday, March 05, 2020

Price Band (Rs) 750 / 755

Bid Lot 19 shares and multiples

thereafter

Face Value Rs10

Listing BSE & NSE

Type of Issue Fresh Issue and Offer for Sale

Offer Size (Rsmn)

Fresh Issue 5,000

OFS 98,548

Total 1,03,547

*Implied Market Cap (Rsbn) 708.9

Book Value (Dec 31, 2019) Rs51.7

P/BV (based on Q3FY20

book value)*

14.6

*Note: Implied Market Cap & P/BV are calculated at upper price band of Rs755

Issue allocation

Reservations % of Net Issue

QIB 50

NIP 15

Retail 35

Total 100

Object of the offer

Net proceeds of fresh issue to be utilized for augmenting its

capital base to meet its future capital requirements

To receive the benefits of listing equity shares on the stock

exchanges

Details of Offered Shares

Offer for Sale 13,05,26,798

Fresh Issue 66,22,516

Total 13,71,49,314

Please Turn Over Page No 1

Bank FY 16 FY17 FY18 FY19 CAGR

HDFC Bank 1,14,485 1,19,356 1,35,181 1,44,770 11%

SBI Card 86,011 1,07,737 1,40,975 1,44,813 19%

ICICI Bank 77,555 90,611 1,12,042 1,17,203 16%

Axis Bank 90,193 1,00,167 1,12,877 1,21,220 11%

Citi Bank 1,49,410 1,74,225 1,87,045 1,99,881 12%

Source: RHP, SBI Cards and Payment Services Limited

Exhibit 1: Average spend per card in force (Rs)

Other Highlights

Shareholder category reservation (10%): 1,30,52,680

shares

Employee Reservation Category (1%): 18,64,669 shares

(Discount of Rs75 per share)

SBI Cards shall not receive any proceeds from the OFS by

the Selling Shareholder

IPO UPDATE


Competitive Scenario in the Credit Card Industry: (contd.)

About the company: SBI Cards and Payment Services Ltd (SBI Cards), subsidiary of SBI, started operations in 1998 as joint venture between SBI and

GE Capital. In the year 2017, SBI and CA Rover Holdings acquired GE Capital‟s ownership stake, with pre-issue holding stands at

74% and 26% respectively. The company is registered as “NBFC-ND-SI”, (Non-Banking Financial Company - Systemically

Important Non-Deposit taking company) with the RBI. It is the second-largest credit card issuer in India, with 18.1% market share

in the Indian credit card market in terms of the number of credit cards outstanding as on November 30, 2019. In terms of total

credit card spends; SBI Cards has 17.9% market share as on November 30, 2019. The company offers an extensive credit card

portfolio to individual cardholders and corporate clients that includes lifestyle, rewards, travel and fuel, shopping, banking

partnership cards and corporate cards covering all major cardholder segments in terms of income profiles and lifestyles. It offers

four primary SBI Card branded credit cards namely SimplySave, SimplyClick, Prime and Elite each catering to a varying set of

cardholder needs. SBI‟s parentage and highly trusted brand has allowed it to quickly establish a reputation of trust, reliability and

transparency with its cardholders.

The company has a diversified customer acquisition network and has 32,677 outsourced sales personnel as on December 31, 2019,

and they are operating in 145 Indian cities engaging prospective customers through multiple channels. In addition, it has presence

in 3,190 open market points of sale across India as on December 31, 2019.

Its operating model is focused on catering to what it sees as its cardholders' two main financial needs namely transactional needs

and short term credit. It has a revenue model whereby it generates both non-interest income (primarily comprised of fee based

income such as interchange fees, late fees and annual fees, among others) as well as interest income on their credit card

receivables. The share of revenue from operations that the company derives from non-interest income has steadily increased over

the past three fiscal years, from 43.6% in fiscal 2017 to 48.9% in fiscal 2019. This has made the capital structure more efficient

and will further provide a relatively stable revenue composition that is less susceptible to market fluctuations, such as interest rate

volatility.


Source: RHP, SBI Cards and Payment Services Limited Source: RHP, SBI Cards and Payment Services Limited

Exhibit 2: Outstanding Credit Cards Exhibit 3: Total Credit Card Spends

Exhibit 4: Fee Income Split - SBI Cards (FY19)


Exhibit 5: Revenue Split % - SBI Cards


IPO UPDATE


Products & Services offered:

Peer Comparison SBI Card and BOB Cards are the only credit card issuers who are

NBFCs while all other issuers are banks. These players have their sole

focus on the credit card business, which helps them offer customized

products to customers while enabling them to innovate and integrate

various processes in the value chain. However, borrowing cost for such

NBFCs are higher, unlike banks, due to a lack of availability of low

cost funds like deposits. According to CRISIL Research, top players,

such as HDFC, SBI Card, ICICI and Axis Bank, are expected to

continue to account for approximately 70.0% market share of overall

credit card outstanding as of fiscal 2020. In terms of cards in force from

August 2016 to July 2019, the table below depicts the player-wise

market share

Financial and Operating Matrix:

Particulars (Rs mn) FY17 FY18 FY19 Q3FY20

Share Capital 7,850 7,850 8,372 9,323

Net worth 14,488 24,246 36,532 48,228

Total Advances 82,684 1,14,128 1,36,505 1,85,777

Total Borrowings 99,829 1,40,455 1,79,087 2,39,332

Revenue 34,710 53,702 72,868 72,402

Profit after tax 3,729 6,011 8,627 11612.1

EPS 4.75 7.40 9.43 12.45

NAV per share (Rs) 18.46 29.83 39.93 51.73

No. of employees 3,041 3,642 3,701 3,883

Key Ratios: FY17 FY18 FY19 Q3FY20

RoNW (%) 28.50 31.00 28.40 36.50

RoA (%) 4.00 4.50 4.80 6.70

CRAR (Basel-III norms) (%) 15.69 18.28 20.00 19.18

Gross NPA (%) 2.34 2.83 2.44 2.47

Net NPA (%) 0.76 0.94 0.83 0.83

NIM (%) 15.30 16.50 15.50 15.60

Provision Coverage Ratio (%) 67.90 67.33 66.48 66.96



Share in cards in force 1M 3M 6M 12M 24M 36M

HDFC Bank 30% 18% 12% 16% 20% 21%

SBI Card 45% 24% 27% 24% 23% 22%

ICICI Bank 44% 29% 24% 21% 17% 15%

Axis Bank 19% 13% 16% 16% 15% 15%

Citi Bank 2% 1% 0% 1% 1% 1%

Kotak Mahindra Bank -11% 1% 3% 4% 5% 5%

RBL Bank -8% 7% 9% 9% 9% 7%

American Express 4% 3% 3% 3% 3% 3%

Standard Chartered Bank -3% 0% -1% 0% 1% 1%

IndusInd Bank 4% 4% 3% 3% 3% 3%


Credit Cards Value-added services

Personal Cards ATM cash

Lifestyle Cards Easy Money

Rewards Encash

Shopping Encash Inline

Travel and Fuel Flexipay

Banking Partnerships Balance Transfer

Business

Corporate Cards

General Corporate

Central Travel Account

Utility

Corporate Purchase

White Label Cards


Exhibit 6: Player-wise market share

IPO UPDATE


Strength of the Company:

Second largest credit card issuer in India with deep industry expertise and a demonstrated track record of growth and

profitability

India‟s leading co-brand credit card issuer

Diversified customer acquisition capabilities

Supported by a strong brand and pre-eminent Promoter

Diversified portfolio of credit card offerings

Advanced risk management and data analytics capabilities

Modern and scalable technology infrastructure

Highly experienced and professional management team

Strategies adopted for growth forward:

Expand customer acquisition capabilities to grow cardholder base

Tap into new cardholder segments by broadening portfolio of credit card products

Stimulate growth in credit card transaction volumes

Continue to optimize risk management processes

Continue leveraging technology across operations

Enhance cardholder experience

Risks & Concerns:

Poor macroeconomic conditions in India could affect the usage of credit cards and thus can adversely impact company‟s

financials

Expansion in unsecured credit card receivables portfolio would lead to increase in the provision for credit losses, which

will impact the profitability of the company

Dependence on the promoter‟s brand name

Any limit in interchanging fees and interest by the regulatory body may affect the company‟s operations

Disruptions or failure in the operations of technology infrastructure could adversely affect company‟s performance

Competition from prepaid instruments such as e-wallets and UPI service is rising

Any regulatory change in MDR can disrupt the entire business model of SBI cards

Outlook and Valuations: With under-penetration in the credit card industry in India, as low as 3%; SBI cards stand strong for the exponential growth

opportunities going forward. Furthermore, given its dominant position in the domestic credit cards market and strong parentage of

SBI, it is well-positioned to take advantage of the rising trend of digital payments. In terms of valuations, the IPO demands a PE of

~45.5x and P/B of ~14.5x, which does seem to be on the higher side, but it has no listed peers in India to compare with. A look at

more mature markets such as the US reveals that American Express, which derives over half of the revenue from consumer

services including credit cards, trades at a trailing P/E of around 17 with ROE of nearly 30%.

SBI Cards has grown its revenues at CAGR of ~45% and net profit at ~52% CAGR from 2017-2019. With NPA‟s at the low levels

(Gross NPA at ~2.47%, Net NPA ~0.83%) and the management commentary suggesting that the levels would be maintained, there

are limited risks to the business. As this is a „first in the industry‟ IPO in India, it will be the benchmark for newer companies.

Capitalizing on the brand recall of SBI, rapid growth depicted by the company and the first mover advantage in the industry, we

recommend a Subscribe to the IPO for listing gains and cautiously recommend to SIP into the same for long term

investments and exposure to growing consumerism.

Page No 4

IPO UPDATE


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