Motilal Oswal has recommended 'subscribe' to the upcoming SBI Cards IPO. The SBI Cards IPO will open for subscription between March 2 and 5. The initial public offering (IPO) by the second-largest credit card issuer in India, SBI Cards and Payment Services, is expected to raise around Rs 9,000 crore.

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The price range has been fixed at Rs 750-755 per share, while the lot size of SBI Cards IPO, or the minimum number of shares to be subscribed, has been fixed at 19 shares.

The SBI Cards IPO comprises a fresh equity issue worth Rs 500 crore and a total dilution of around 14 percent is expected to be done through SBI Cards IPO via an Offer For Sale (OFS) route.

SBI holds 74 percent in SBI Cards and the rest of the stake is held by Carlyle Group. While Carlyle is looking to sell a 10 percent stake in the company via IPO, SBI would sell 4 percent.

Here are the three key factors why Motilal Oswal has a positive recommendation on the SBI Cards IPO:

Premium brand, strong distribution

SBI Cards has grown its business faster than the market over the past two years both in terms of number of cards outstanding (with 35 percent CAGR over FY17-19) and card spends (54 percent of CAGR). This has helped in improving the SBI Cards' market share to around 18 percent in both the category as of November 2019 against 15 percent in FY14. Furthermore, it offers as many as 46 types of cards with 40 percent being in the premium range, which is the second-highest in the credit card industry. As much as 48 percent of the cards are issued using SBI's distribution channels while 52 percent are through its vast customer acquisition network spread across 145 Indian cities.

Huge growth potential

SBI Cards penetration among State Bank of India's vast customer base stands at just 2.2 percent, creating scope for a huge growth. In fact, the overall Indian credit card market remains highly under-penetrated at just 3 percent, according to CRISIL. The rating agency expects the industry to grow at 23 percent CAGR over the next five years, driven by growth in digital payments and its infrastructure in rural areas particularly. The demographic changes and e-commerce drive consumption pattern could further boost credit card spend by 2.5 times over the next 5 years, as per CRISIL.

Sound Financials

Over FY17-19, SBI Cards's financials grew at a robust pace with Revenue/PAT CAGR of 45 percent/52 percent. The share of non-interest income has steadily increased to 49 percent in FY19, which was 44 percent in FY17, thus making its capital structure more efficient and stable revenue. ROA has improved from 3 percent in FY17 to 6.6 percent in 9MFY20 while ROE improved to 33.6 percent (25.7 percent in FY17).