Analysts believe that the superior valuations of SBI Card and Payment stock would likely hold despite the near-term challenges
Shares of SBI Card and Payment Services gained 4.8 per cent to Rs 964 on the National Stock Exchange (NSE) in the intra-day deals on Tuesday after net profit of State Bank of India’s credit card arm more-than-doubled to Rs 175 crore in the March quarter (Q4) of financial year 2020-21 (FY21) compared with the Rs 84 crore it reported in the corresponding period last year. This was because of lower provisions and a significant jump in other income and income from fees and services.
Its interest income however, declined 20 per cent year-on-year (YoY) to Rs 1,072 crore in Q4, while other income more than doubled to Rs 159 crore. The company’s asset quality front worsened on a yearly and squential basis with the gross non-performing assets (GNPAs) at the end of Q4 at 4.99 per cent as against 2.01 per cent as on March 31, 2020 and 4.5 per cent at the end of Q3FY21. Net NPAs were at 1.15 per cent as against 0.67 per cent at Q4FY20. READ Q4 REPORT CARD HERE
The stock eventually settled at Rs 952.5 apiece on the NSE, up 3.6 per cent, as against a 1.16 per cent rise in the Nifty50 index.
Here is how brokerages interpret the results:
Recommend: Overweight | Target price: Rs 1,200
Q4FY21 PAT was 40 per cent below our estimate, largely owing to weaker revenues. Net interest income (NII) (up 18 per cent YoY, 9 per cent QoQ) was 16 per cent below our estimate despite sharp QoQ decline in cost of funds. This was mainly because yields on average receivables, by our computation, shrank further sequentially, to 16.9 per cent compared with 18.8 per cent for 3QF21 and from a peak of 23.8 per cent for Q1FY21.
That apart, the company took significant write-offs during the quarter. Of the bad loan formation in Q4 (worth Rs 1,150 crore), Rs 685 crore came from slippages from the RBI-RE portfolio and the rest largely from accounts not hitherto classified as NPA owing to a Supreme Court ruling. The brokerage has cut earnings forecasts 12 per cent for FY22 and 5 per cent for FY23, assuming weaker business and higher credit costs given the second COVID-19 wave.
Anand Rathi Shares
Reco: Buy | TP: Rs 1,190
FY21 spends slid 6.5 per cent YoY to Rs 1.22 trillion because the company returned to pre-covid levels in Oct itself. We raise our card-spends estimate FY22/23 for SBI Cards 5.5/4.7 per cent to Rs 1.6 trillion/2.1 trillion. The market share in spends over Apr-Feb’21 rose to 19.6 per cent compared with FY20’s 17.9 per cent. The new offerings focus on premium cards and huge co-branded portfolio should drive spends.
Credit costs were a high 11.4 per cent though less than the estimated 12.2 per cent. We continue to factor in 9 per cent/8.5 per cent FY22e/23e credit costs owing to the uncertain situation. We lower our FY22e/23e yields 1 per cent/0.9 per cent and cost of funds 0.2/0.3 per cent.
Reco: BUY | TP: Rs 1,205
Considering the unique impact of lockdowns and consequent payment moratoriums in FY21, the elevated credit cost (11 per cent in FY21) is expected to decline hereon. While the card addition, yield, spend and receivable mix remains impacted due to the pandemic, SBIC is now better prepared to make a calibrated journey post the experience in FY21. We remain positive on SBIC’s long-term fundamentals (PPOP / PBT grew 38 per cent / 23 per cent between FY17-FY21).
Motilal Oswal Financial Services
Reco: Buy | TP: Rs 1,200
SBI Cards and Payment Services reported a weak quarter, with sequential decline in receivables/spending. On the other hand, margins declined ~130bp, affected by interest income. Fee income stood stable QoQ (up 16 per cent YoY) as spends declined 5 per cent QoQ (up 11 per cent YoY). However, decline in opex led to stable operating profit. Retail spends remained higher relative to pre-COVID levels, while corporate spends reached pre-COVID levels.
Gradual decline in the RBI RE book and an increase in the revolver mix, coupled with controlled funding cost, would support margins over the medium -term. We estimate a loan book / earnings CAGR of 24 per cent/60 per cent over FY21–23E – as a strong PCR of ~78 per cent, coupled with additional management overlay provisions of Rs 297 crore, should keep credit costs in check. We estimate RoA/RoE to improve to 6.8 per cent/28 per cent in FY23E.
Kotak Institutional Equities
Reco: Add | TP: Rs 975
The results for the quarter show that the stress in the book is gradually abating – either through write-offs or through the riskier customer segment running down their debt. Given the current construct of loan mix, we would probably place a lower probability to a repeat of this high credit cost in FY2022 even if the recent resurgence in Covid cases results in a slower-than expected recovery in the economy.
We believe that the superior valuations would likely hold despite the above near-term challenges. Credit cards is a unique space offering higher growth, healthy revenue mix (lending and payment) and superior profitability. We like SBI Cards given its high market share, strength of its parent, which lowers acquisition costs and high quality customers leading to better tie-ups.
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