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.

Most experts are positive on the company given it is the second-largest credit card issuer in India with deep industry expertise and a demonstrated track record of growth and profitability. It also has diversified customer acquisition capabilities and is supported by a strong brand and pre-eminent promoter, they added.

Here's what brokerages advise:

Motilal Oswal

Given its dominant position in the credit card market and strong parentage, SBI Cards is well placed to benefit from the rising trend of digital payments and e-commerce.

Strong growth, stable asset quality, and superior return ratios provide comfort and justify the premium valuation. Further, being the first in the segment to get listed, it could generate high investor interest. Thus the brokerage recommends subscribing to the IPO.

Anand Rathi

During FY14-19, SBI cards grew faster than the system in terms of transaction volume and also credit card outstanding. It expects this to continue with growth in credit card spend at 25 percent for the system during FY20-25. SBI Cards is likely to mine the huge debit card base for SBI more effectively.

Ambit

SBI Cards’ outstanding card base has grown at a CAGR of 28 percent over FY15-H1FY20 with a market share of 18 percent. With low credit card penetration in SBI customers, strong brand name and distribution, SBI Cards has the potential to grow its card base at 23 percent CAGR over the next 5 years leading to a market share of 22.5 percent by FY24.

Expected valuations are also at 83 percent premium to average valuation of high growth and/or high RoE lenders like HDFC Bank, Bajaj Finance, Bandhan Bank, AU Finance and Aavas Financiers.

However, unlike these other lenders, SBI Cards is a mono-line business with no optionality to get into other businesses given parent SBI’s presence in other businesses. This lack of optionality means that the company is exposed to vagaries of credit card business compared to other lenders and hence should also be a factor determining valuations.

HDFC Securities

SBI Cards intends to grow its cardholder base by continuing to expand its customer acquisition capabilities. As part of this strategy, it aims to increase the number of open market physical points of sale that it operates across India. In particular, it is focused on increasing its presence in India’s tier II and tier III cities where its cardholder base has historically been underrepresented, but which has contributed an increasing proportion of its new accounts in recent years.

SBI Cards also remain committed to entering into new co-brand partnerships, including leading organized retail chains, online aggregators and financial marketplaces, to tap into new cardholder segments by cross-selling into its new co-brand partner’s customer base.

Yes Securities

SBI Cards is a solid business having a large multifaceted distribution franchise, sophisticated and scalable core technology systems and a mature and capital-efficient revenue profile.

Being a proxy consumption play, the brokerage would prefer P/E as a valuation basis; wherein SBI cards is being offered at 45xFY20 (post-money) and 26xFY22 multiples. A 25 percent growth rate appears self-sustainable on current RoE and dividend pay-out. The asset quality cycle has been benign for nearly a decade now; thus, any disruption in the credit cost cycle could significantly impact valuation and sustainable growth rate.

Emkay Securities

SBI Cards IPO, at a higher band of Rs755/market cap of Rs 70,900 crore, implies a premium valuation (PE of 45x based on 9MFY20 annualized EPS) compared with developed and developing economy peers that are trading around 9-18x and even some retail-oriented high-growth Indian banks/NBFCs that are trading around 20-47x PE. We believe that SBI Cards, as the second-largest pure-play credit card player with a strong parental lineage, is well-positioned to maintain a strong growth trajectory and sustainably superior return ratios, thereby commanding premium valuations.

First Published:Feb 27, 2020 2:40 PM IST