Rising credit card culture may help SBI Card IPO

Current market conditions notwithstanding, industry and analysts are keenly watching the upcoming initial public offering by SBI Cards.

Banks with large credit card businesses believe that the planned IPO will add further momentum to the credit card market. The consumption story is also intact and consumers are still spending and repaying on time despite the slowdown, they aver. “It’s an interesting time and sets the tone for the industry, especially when the credit culture in the country is taking off,” noted an executive with a private sector lender recently, when asked about the planned IPO.

A new report by ICICI Securities said macro factors are likely to keep the credit card momentum unabated. “Steady escalation in discretionary spending, improved payment infrastructure and robust growth of e-commerce industry would further escalate an upswing in utilisation of credit cards addressing short-term credit needs of the customer unlike other payment modes,” it said.

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SBI Cards and Payment Services Ltd, which is the credit card subsidiary of State Bank of India, is set to launch its IPO on March 2. It will close on March 5. The price band is fixed at ₹ 750-₹ 755 per share. It plans to raise about ₹ 9,000 crore through a fresh issue of equity shares worth ₹ 500 crore and an Offer for Sale of up to 13.05 crore equity shares. The total dilution in equity would be 14 per cent.

The report noted that there are about 74 players in the Indian credit card market with HDFC Bank being market leader at 27 per cent market share followed by SBI Cards partaking a market share of 18.1 per cent (in terms of number of outstanding cards).

Volatility in domestic markets over Coronavirus could be a possible concern. There have also been some questions about valuation, where it aims to raise over ₹ 10,300 crore in the upper price band. “We believe that SBI Cards, being the second-largest pure-play credit card player with a strong parental lineage (SBI), is well-positioned to maintain strong growth trajectory and sustainably superior return ratios, thereby commanding premium valuations,” said Emkay Global Financial Services in a recent note.

SBI Cards IPO at a higher band of ₹ 755/market cap of nearly ₹709 billion implies a premium valuation (PE of 45x based on 9MFY20 annualised EPS) versus developed and developing economy peers that are trading around 9 to 18x and even some retail-oriented high-growth Indian banks and NBFCs such as HDFCB, AU SFB, Bandhan and BAF that are trading around 20 to 47x PE, it further said.

“Strong growth, stable asset quality and superior return ratios provides comfort and justifies premium valuation. Further, being the first in the segment to get listed, it could generate high investor interest,”Motilal Oswal noted in a report.