Can SBI Card give multibagger returns in next 5-10 years? SBI Card Fundamental Analysis

From being a cash driven economy to a stage where today even your nearby local kirana shop is accepting digital payment, India has come a long way.
It would be difficult to believe just a few years ago that we would be doing digital payment even for a transaction of Rs 10.

And guess what? It is only the beginning of a digital transformation in India.

Talking about digital transformation, one company that is working towards digital currency is the SBI card.

It was not long before SBI card launched its IPO. In fact, the IPO was launched last year in March 2020. The price band was set at Rs 755 and the IPO got a very good response. But right after the IPO, there was a stock market crash and the stock price fell to Rs 495. But since then, the share has doubled in less than a year!

So in this article, I have covered the fundamental analysis of SBI Card by analyzing the company and management, competitive strength, future growth prospect and the financial analysis to decide if SBI card is fundamentally strong or not. Then we will analyse the valuations of the company to decide if it is worth investing in SBI Card at current levels. So let’s get started.

Company and its business

Established in 1998, SBI Card is India's second-largest credit card issuer after HDFC bank, with more than 1 crore cardholders and it is the largest pure-play company in the credit card business. Please note that pure-play means that SBI card is a dedicated credit card company. Otherwise, the credit card business is generally a part of a bank's business.
It is a subsidiary of the State Bank of India which is India's largest commercial bank in terms of deposits, advances, and the number of branches. As of Sep 20, SBI bank holds 69.45% shareholding in SBI card.
It got listed on the Indian stock exchange in Mar 2020 and as of today, it has a market cap of Rs 91,999 Cr.

SBI Card is India’s largest co-brand credit card issuer with 23 partners. Their banking partners include Central Bank, Allahabad Bank, Federal Bank, and South Indian Bank. Non-banking partners include Air India, Apollo Hospitals, BPCL, Chennai Metro, Club Vistara, Etihad Guest, FBB, IRCTC, Lifestyle, Mumbai Metro, oLA Money, Tata, and Yatra.

Overall, on the company and its business, I would rate it 10/10

Competitive strength

Brand with top recall: In a market survey conducted by Kantar IMRB in 2020, SBI Card attained 100% total awareness and 37% top- of-the-mind recall. This was the highest among all credit card brands surveyed. So SBI card is the most popular card brand in India.
Diversified product offering: SBI card has a comprehensive cards portfolio that caters to all customer segments, from new-to-credit to high net worth individuals, and to all their spending needs including travel, shopping, fuel, etc. SBI card has partnered with merchants in all relevant categories such as utility bill payments, electronics, pharmacy, grocery, fitness, in line with the current spending trends to bring a rewarding experience to cardholders. This enables their customers to derive maximum benefits out of their SBI Credit Card.
Robust customer acquisition model: SBI card has a robust customer acquisition model comprising open market distribution, bank distribution, and corporate distribution channels to engage prospective cardholders. This gives them a nationwide presence spanning india’s Tier i, Tier ii and iii cities, and rural areas. Their SBI parentage provides them access to the huge customer base of SBI bank.
Innovation: During the year, SBI card has partnered with full-service carrier Vistara, Landmark group and ola Cabs to launch co-branded credit cards. The ola Money SBI credit card is one-of-its-kind in the mobility space, targeted at addressing customers’ evolving mobility spends while providing them maximum value and benefit.
Technology adoption: SBI card has invested heavily in building a sophisticated technology infrastructure. For example, SBI card employed predictive modelling analytics based on cardholders’ behaviour and transaction patterns across the entire lifecycle of relationships. This enables them to offer targeted products and services to each customer, ensuring more efficient cross-selling and higher cardholder satisfaction and retention. Use of Artificial Intelligence (AI) and process automation technologies for routine activities has enhanced operating efficiencies. In FY20, 56% of Credit card applications were decided by credit decision engines without human intervention.
Agile Business: SBI card is very agile in terms of risk management. For example, to handle the Covid related disruption in business, SBI card issued e-cards along with instant PIN generation to allow customers to immediately start transacting without waiting for physical card delivery. They also started video KYC and e-sign for contactless and presence-less customer onboarding.

Competitors:

In the card business, SBI card has got strong competition from top banks like HDFC Bank which is the #1 company in terms of card business in India. Then other competitors include ICICI bank, Axis bank. Kotak Mahindra, BOB, YesBank, etc.

UPI Payment: SBI card business is getting stiff competition from UPI payments. Launched in 2016, UPI payments have become a popular choice for sending and receiving money. Within 4 years, UPI payments have grown from 6 million transactions in the month of July 2016 to 2.2 billion transactions in Nov 2020 with a transaction processing of 3.9 lakh cr rs in Nov 2020.

Although, UPI payments are mainly used for smaller transactions and card payments have more usage in larger transactions. Moreover, UPI payments do not have credit facility or EMI facility as of now. But UPI is still eating away the business of card payments. Google pay is the #1 company in UPI payments in India, followed with Phone pe. You also have companies like Amazon pay and Paytm. Recently WhatsApp has also entered in Indian market with WhatsApp pay.

Overall, looking at the competitive strength of SBI card and stiff competition, I would rate it 8/10.

Future Growth Prospects

Short term growth prospects:

In the short term, Covid has impacted SBI card in both positive and negative way. While there was an increased acceptance of digital payment, the overall consumer spending reduced significantly. It was visible in the revenue and profits that were impacted due to Covid19.

Moreover, the biggest threat due to Covid is the deterioration of asset quality. There is a risk that people might default in payments. In fact, company has increased its provisions for bad loans and its Gross NPA has increased from 2.3% in Sep 19 to current level of 4.3% in Sep 20. That’s a bit of worry in the short term.

Long Term Growth Prospects:

Despite the economic slowdown and the unprecedented situation posed by CoVID-19, fundamentally the outlook for the digital payments industry and long-term growth story of credit cards in India remains strong.Let us look at the key drivers of future growth:

Drivers of future growth

Increasing digitalization: Internet and smartphone penetration, demonetization; goods and services tax (GST); launch of Unified Payments Interface; and CoVID-19 pandemic have boosted digital payments in India. This would be a key driver for future growth in card payment sector.
Rise of ecommerce: E-commerce is cost-effective compared to brick-and- mortar stores and thus offers lucrative deals to attract customers. Industry has nearly doubled since FY16 to 2,90,500 crores in FY19 and is expected to grow at a CAGR of 23-28% to reach 9,02,500 crores by FY24. Online spend for SBI cards has increased from 36.6% in FY17 to 54.6% of total spend in Sep 2020.
Favourable demography: India is one of the youngest nations in the world with a median age of 29 years. These young people prefer using credit cards. The per capita income in India has increased from Rs 90k in 2014 to Rs 1.5 k in 2020. So there is a huge rise in affluent spenders which is again a key for future growth.
Shift from savings to consumption: Earlier, people prefer to save more. But now, people like to spend money. So there is a decline in the household savings as a percentage of gross national disposable income (GNDI) from 24% in FY12 to 17% in FY18. Moreover, people now prefer to save in banks and various other instruments like debt funds unlike keeping money in the form of cash.
Low market penetration: India still has a very low number of credit card users as compared to countries like China, US, Australia, etc. It is expected that the credit card spend in India is going to increase from 6.1 lakh crore in FY19 to 15.2 lakh crore by 2024. That’s almost 2.5 times increase.

In the long term, India’s strong macroeconomic performance, together with its large working population, aspirational youth population, rising affluence, rapid urbanisation, and an increasing shift from cash transactions to card and digital payments will continue to propel the growth of India’s largely underpenetrated credit card industry. Overall, on the future growth prospect, I would rate it 10/10.

Financials

1. Growth Ratio: In the last 6 years, the revenues of SBI card have grown at a CAGR of 36% and profits have grown at a CAGR of 27%. That’s phenomenal performance. Hence, on growth ratio, I would rate it 10/10.

2. Profitability Ratio: ROE has been consistently above 20% till Mar 2020. It has falling in the 1st half of 2021 due to COVID. ROA has also been consistently good. Overall, on profitability, I would rate it 9/10.

3. Capital Adequacy Ratio: 22.4% & Net Interest Margin: 16.6% which is great. Hence, on liquidity, I would rate it 10/10.

4. Gross NPA:

Valuations

SBI card is currently trading at Rs 975 which is a PE of 82 and a PEG ratio of 2.28. When I started analyzing this company a week ago, it was trading at a level of 850 and suddenly now it is at a level of 975 in 1 week. Since SBI card is a newly public listed company, there is no historical PE to compare if the PE of 82.3 is high or low. There is also no pure play company in card space in India to compare the valuation. But in general we can say that SBI card is a high growth company and generally high growth companies have higher valuations because everyone knows that card business in India is highly under-penetrated and there is a high growth potential in this segment in India.

Having said this, a PE of 82.3 is certainly on the higher side which makes SBI card slightly overvalued and on valuation, I would rate it 6/10. But, SBI is fundamentally a superstrong company and it is worth investing for a good long time. So better strategy would be not to wait for the fall but keep investing a specific amount periodically or buy on dips.

I hope you enjoyed the analysis!

PS: If you want to learn every aspect of fundamental analysis of stock and other important concepts of personal finance, you can explore my video course on "Everything about money management".

Disclaimer: This article is only for education purpose. Consult your financial Advisor before investing your money.

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Can SBI Card give multibagger returns in next 5-10 years? SBI Card Fundamental Analysis

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