INSTITUTIONAL EQUITY RESEARCH SBI Cards & Payment Services...

INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.

SBI Cards & Payment Services Ltd Play of Indian consumption story

INDIA | BFSI | IPO Note

2 March 2020

Credit cards are unique consumer-financial products that offer both credit and payment facilities simultaneously. As such, they have served as the means by which Indian consumer spent Rs 5.5 trillion in the nine months ending Dec 2019 – which has translated into outstanding credit-card loans of Rs 1.4 trillion as on Dec 2019! Credit cards provide fund-based revenue in the form of interest income and non-fund-based revenue in the form of subscription and spend based fees, resulting in an efficient capital structure, which provides strong return ratios for the business. The Indian market, being a growing consumption market with low penetration levels for credit cards, provides great opportunity and scope.

IPO rationale: SBI Card’s IPO size is Rs 103.5bn; it is planning to raise Rs 5bn. Its promoter, SBI, and investors (Carlyle) are selling holdings amounting to Rs 98.5bn. The IPO price band is Rs 750‐755. Bet proceeds to the company, of Rs 5bn, would be used as growth capital. At the upper band, on our FY21/22 estimates, SBI Cards trades at a PE multiple of 38.4x/30.3x.

Offer structure

Total issue size of 137.19 - 137.15mn shares amounting to Rs 102.9 - 103.5bn.

Employee Reservation Portion of 1.86mn shares (1.35% of total issue size).

SBI Shareholder Reservation Portion of 13mn shares (9.52% of total shares).

Investment arguments

Credit-card spending accounted for approximately 5.4% of PFCE in FY19, compared to approximately 2.7% in FY14. As the share of credit cards improves in overall consumption expenditure, the credit-card spend growth is expected to be much of more than the nominal PFCE growth.

Leading player in open-market customer acquisition, accounting for 59% of its total card base, with a presence in 3,190 open-market points-of-sale across the country. Out of SBI’s customer base of 445mn, only 2.1mn customers have SBI credit cards, providing it with data and behaviour of a wide range of in-house customers for cross-selling.

Migration from an ‘authorization-based’ model to an ‘authentication-based’ model. This is expected to pre-empt and eventually prevent fraudulent transactions before they occur and lead to significant efficiency gains.

All its cards are fee-based. It has focused on providing a value proposition by issuing co-branded cards that provide benefits to its customers.

Almost equal contribution of fund-based revenue and non-fund-based revenue results in efficient capital structure, which provides strong return ratios.

Key risks (1) Spend based fee income – known as merchant discount rate (MDR) – contributed 25% of its total revenue. MDR in India is charged on an ad-valorem basis. GoI has reduced the MDR on debit cards and any decline in MDR charges to the issuer bank would materially impact the profitability of SBI Cards. (2) Innovation in payment solutions can be a threat to the transactional business of SBI Cards. Payment product such as wallets, UPI, and any future innovation pose a risk to its profitability.

Outlook and valuation We value the stock on price-to-earnings (PE) multiple as we believe that the high contribution of fee-based income in total revenue is not linked to balance-sheet or net-worth growth. At the upper band of the issue price of Rs 755, it is valued at 38.4x/30.3x FY21/22 earnings per share of Rs 19.7/24.9. SBI Cards is likely to deliver superior earnings CAGR of 39% over FY19-22 translating into ROAA of 5.8%/5.7% and ROAE of c.29% in this period. SUBSCRIBE.

SUBSCRIBE COMPANY DATA ISSUE OPENS 02ndMarch 2020

ISSUE CLOSES 05thMarch2020

LISTING 16th March 2020

PRE- ISSUE EQUITY SHARES 932.3mn

PRICE BAND Rs 750 - 755

AT UPPER BAND

NO OF SHARES TO BE ISSUED 137.1mn

- FRESH ISSUE 6.6mn

- OFS 130.5mn

SBI 37.3mn

CA Rover Holding (Carlyle) 932.3mn

EMPLOYEE DISCOUNT (RS) Rs 10

ISSUE SIZE Rs 103.5bn

POST- ISSUE EQUITY SHARES 938.9mn

MKT CAP Rs 708.9bn

PRE-ISSUE PROMOTER HLDG 74.0%

POST ISSUE PROMOTER HLDG 69.5%

Source:DRHP

Manish Agarwalla, Research Analyst [email protected] Sujal Kumar, Research Analyst [email protected]

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

SBI CARDS & PAYMENT SERVICES LTD IPO NOTE

About the IPO Issue size: Rs 103.5bn.

Price band Rs 750-755 per share.

Lot size of 19 shares.

Fresh issuance of share up to 6.67 - 6.62mn shares amounting to Rs 5bn.

Offer for sale of up to 130.5mn shares (95.2% of total issue size) by promoter (SBI) & C A Rover Holding (Carlyle), amounting to Rs 98.5bn at the upper band.

Market capitalisation: Rs 704‐709bn (USD 9.38-9.45bn).

The objects of the offer are: (1) to carry out the disinvestment of equity shares by promoter (SBI) and investor (Carlyle) constituting 4.5% and 10.1% of the company’s paid-up equity share capital and (2) to issue fresh equity of 6.67-6.62mn shares amounting to Rs 5bn, which will be used as growth capital.

Issue details

ISSUE OPENS 02nd March 2020

ISSUE CLOSES 05th March 2020

LISTING 16th March 2020

PRE- ISSUE EQUITY SHARES 932.3mn

PRICE BAND Rs 750 - 755

AT UPPER BAND

NO OF SHARES TO BE ISSUED 137.1mn

- FRESH ISSUE 6.6mn

- OFS 130.5mn

SBI 37.3mn

CA Rover Holding (Carlyle) 932.3mn

EMPLOYEE DISCOUNT (RS) Rs 10

ISSUE SIZE Rs 103.5bn

POST- ISSUE EQUITY SHARES 938.9mn

MKT CAP Rs 708.9bn

Shareholding pattern post-issue

Source:DRHP

Shareholding pattern pre-issue

Name of shareholder

Pre-Offer No. of Post-Offer

No. of Eqt shares (mn) % of Eq. Share Capital shares offered (mn) No. of Equity shares (mn) % of Eq. Share Capital

State Bank of India 690 74.0% 37 653 69.5%

C A Rover Holding 242 26.0% 93 149 15.9%

Other Public 137 14.6%

Total 932 100.0% 137 939 100.0%

Source: DRHP, PhillipCapital India Research

Some of Related global comparison USD mn Except for per share data and ratios

Company BBG Code Country Revenue NOPAT EPS ROA ROE Earning growth P/E P/BV

FY19 FY19 1yr FWD 1yr FWD 1yr FWD 5 yr cagr 1yr FWD 1yr FWD

Aeon Financial 8570 JP Equity Japan 3,663 866 1.8 0.8 9.3 13% 8.1 0.9

Credit Saison 8253 JP Equity Japan 2,661 428 1.8 1.0 6.6 5% 8.1 0.5

Krungthai Card KTC TB Equity Thailand 566 272 0.1 7.3 29.1 12% 15.5 4.8

Samsung Card 029780 KS Equity Korea 2,634 681 2.7 1.6 3.9 6% 10.5 0.5

American Express AXP US Equity USA 43,556 10,184 9.0 3.6 31.9 5% 12.5 4.0

Capital One Financials COF US Equity USA 28,593 11,769 11.8 1.1 5.3 8% 7.6 0.8

Discover Financials DFS US Equity USA 11,459 6,186 8.9 2.5 25.0 10% 7.5 1.8

Mastercard MA US Equity USA 16,883 8,058 8.9 31.4 134.4 17% 32.0 48.8

Visa V US Equity USA 22,977 12,138 6.4 16.7 35.1 18% 28.2 11.9

SBI Cards NA India 933 195 19.7 5.8 28.8 26% 38.4 10.0

Source:PhillipCapital India Research

69.5%

15.9%

14.6%

State Bank of India C A Rover Holding Other Public



Credit cards: A fast-growing, under-penetrated segment PFCE CAGR of 12% over the last five years.

Credit-card spending accounted for approximately 5.4% of PFCE.

Credit-card penetration is just 3% in India vs. 320% in the US.

At the end of FY18, estimated unique-card users were between 18mn to 22mn, against individual tax payers of 80mn.

Number of credit cards saw 20% CAGR between March 2014 and December 2019 – to touch 55mn cards.

According to CRISIL, the unsecured credit market will reach Rs 14.4tn in FY24 from Rs 5tn in FY19.

Private final consumption expenditure (PFCE) forms 59% of our GDP and has been seeing a CAGR of 12% over the last five years from fiscal 2014 to fiscal 2019, on nominal terms. Aspiring and affluent households have helped spur domestic consumption and increased discretionary spending. Favourable demographics. India’s median population age is estimated at 28.4 years in calendar year 2020. With a low median age, India holds the advantage of having an increased working population going forward. This population group is aspirational, which will contribute to private consumption and GDP growth rate.

Private Final Consumption Expenditure (PFCE)

Source: RBI

Credit-card spending relative to PFCE has significantly increased in recent years. This spending accounted for approximately 5.4% of PFCE in FY19, compared to approximately 2.7% in FY14. As the share of credit-card improves in overall consumption expenditure, credit-card spending growth is likely to be much more than the nominal PFCE growth.

Share of credit card in consumption expenditure

Source: RBI, DRHP

56 65

72 81

91 101

113

0%

3%

6%

9%

12%

15%

18%

0

20

40

60

80

100

120

FY13 FY14 FY15 FY16 FY17 FY18 FY19

PFCE (current price, Rs tn) % growth, rhs

2.7% 3.0%

3.6%

4.6%

5.4%

0%

1%

2%

3%

4%

5%

6%

FY15 FY16 FY17 FY18 FY19



Urban consumption in India has shown signs of improvement, and given India’s favourable demographics coupled with rising disposable income, this trend is likely to continue and drive economic growth for the country. However, urbanization in India is comparatively lower than in countries such as Indonesia, China, and Germany. This shows that there is potential for growth in urbanization in India and that the opportunity to cater to their credit needs exists. Credit-card spends have grown at a CAGR of 33% over FY15-19, driven by factors such as private consumption growth of c.12% in the economy and an increasing share of credit cards in consumption expenditure. The underpenetrated credit-card market and value proposition provided by credit cards to consumers throws up a great opportunity for credit-card players to increase their share in India’s consumption expenditure.

Credit Card Spends

Source: RBI

Growth in retail credit will be propelled by an increase in private consumption with a steady rise in disposable income and an attitudinal shift – consumers being increasingly open to taking on unsecured debt. The key factors driving growth in the unsecured loan market include: (1) a steady rise in discretionary spending, (2) increasing credit penetration due to higher data availability and a larger share of formal sector employment, (3) increasing usage of alternative data-sources such as payments and behavioural data in credit decision-making, enhancing the comfort level of lenders, (4) a steady rise in organized retail penetration, and (5) strong growth of the e-commerce industry, which has seen 32% CAGR in FY14-19. While personal loans form a major component of unsecured loans, according to CRISIL Research, credit-cards outstanding is forecasted to grow at the fastest pace (23% CAGR) over the next five years, driven by the rising issuance of cards in smaller cities, increasing organized retail penetration, and growth in payments infrastructure. The Indian market is under-penetrated in terms of the number of credit cards per capita, which provides ample scope for expansion of the existing card base. Credit-card penetration is just 3% in India, which means 3 per 100 people compared with 320 per 100 people in the US.

1.9 2.4

3.3

4.6

6.1

4.5

5.6

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY15 FY16 FY17 FY18 FY19 9MFY19 9MFY20

Total Credit card spends (Rs tn) % growth, rhs



Credit Card Penetration*

* average no of cards per 100 people

Source: DRHP

Demonetization was one of the significant factors that led to faster growth in credit cards. Further, the government’s emerging version of a cash-less society, focus on digitalization, developments in e-commerce, and the availability of POS infrastructure have significantly encouraged payments through credit cards. The number of credit cards has seen 20% CAGR between March 2014 - December 2019 to touch 55mn cards. Even if we compare this with the tax-payer base, outstanding cards were 37mn in FY18 against an individual income-tax-payer base of 80mn, which has been growing at a rate of 10% over the last five years. The number of outstanding cards does not reflect the unique user base due to multiple cards owned by customers. Were reckon that the unique-card user base would be 18-22mn customers.

No. Credit card outstanding (mn)

Source:DRHP, RBI

Unsecured loans, which comprise of credit cards, personal, and consumer-durables loans in India saw a 28% CAGR to reach c.5 trillion unsecured loans as of FY19. Many customers, especially millennials (people below 30 years of age), would access credit first through unsecured loans. According to CRISIL Research, approximately 25% of new-card additions in FY19 were to new-to-credit customers. High usage of technology is a strong growth driver of retail credit. Compared to retail credit, unsecured loans have grown at a faster pace. Today’s tech-savvy generation has pushed players to improve their offering through digital initiatives in order to boost their growth rates. In particular, for low-ticket-size offerings such as credit cards and personal loans, there is a higher preference for accessing the digital route from documentation to payment. According to CRISIL Research, the unsecured loan

320%

265%

214% 193%

155%

94% 88% 73%

42% 29% 7% 7% 3%

0%

50%

100%

150%

200%

250%

300%

350%

19 21

25

30

37

47

55

0

10

20

30

40

50

60

FY14 FY15 FY16 FY17 FY18 FY19 9MFY20



market in India will continue expanding to reach approximately Rs. 14.4 trillion by FY24.

Outstanding Credit Card loan (Rs bn)

Source: DRHP, RBI, PhillipCapital India Research

423

552

708

922

1198

1438

0

200

400

600

800

1000

1200

1400

1600

FY15 FY16 FY17 FY18 FY19 9MFY20



SBI Cards: Leading open-market player with an untapped pool of SBI customers

SBI Cards is the second-largest credit-card player with a card base of 55mn.

Diversified customer acquisition network has enabled SBI Cards to engage prospective customers across multiple channels.

SBI Cards is the leading player in open-market customer acquisitions, accounting for 59% of the its total card base. It has a presence at 3,190 open-market points-of-sale across India.

Out of SBI’s customer base of 445mn, only 2.1mn customers have SBI Credit Cards, providing it with data and behaviour of a wide range of in-house customers for cross selling.

Its loan book is Rs 248bn at the end of December 2019. It commands a similar share of total credit-card spends in India.

Market Share (based on no. of cards)

Source: RBI

SBI Cards offer four primary branded credit cards: Simply Save, Simply Click, Prime and Elite – each catering to a varying set of cardholder needs. Its credit cards portfolio is tailored to meet a diverse range of cardholder needs across the entire spectrum of its cardholders’ income profiles and lifestyles, from the “premium” cardholder category to the “affluent”, “mass affluent”, “mass” and “new to credit” categories. The annual spend per card is in the range of Rs 0.14mn and has been stable due to higher issuance of entry-level cards. Premium cards accounts for 14% of its total cards.

Annual spends per card

(Rs ‘000) FY15 FY16 FY17 FY18 FY19

Total 96 106 120 138 145

HDFC Bank 104 112 123 138 147

SBI cards 71 86 106 141 142

ICICI bank 66 76 92 111 116

Axis bank 87 88 100 113 119

Citi bank 128 147 173 188 198

Kotak M bank 67 75 77 86 96

RBL bank 44 92 152 139 136

IndusInd bank 94 152 198 228 273

Amex 342 375 395 422 423

Source: DRHP, RBI

25%

18%

15%

12%

5%

4%

4% 2%

3%

10% HDFC Bank

SBI cards

ICICI bank

Axis bank

Citi bank

Kotak M bank

RBL bank

Indusind bank

Amex

others



A diversified customer-acquisition network has enabled SBI Cards to engage prospective customers across multiple channels. It deployed a sales force of 32,677 outsourced sales personnel as of December 31, 2019. Operating out of 145 Indian cities, it engages prospective customers through multiple channels, including physical points-of-sale in bank branches, retail stores, malls, fuel stations, railway stations, airports, corporate parks and offices, as well as through tele-sales, online channels, email, SMS marketing and mobile applications. SBI Cards is a leading player in open-market customer acquisitions in India with a presence in 3,190 open-market points-of-sale across India as of 31 December 2019. Open market customers account for 59% of its total outstanding cards whereas the SBI distribution channel accounts for the balance 41%. In addition to open market presence, SBI’s extensive network of 21,961 branches across India, provides a platform to market its credit cards to SBI’s vast customer base – 445.5mn as on 31 December 2019. Out of total outstanding credit cards of 10mn, SBI customers accounted for only c.2.1mn cards. SBI’s wide customer base of 445mn remains largely untapped, providing data and behaviour for cross-selling. Loans outstanding on credit cards for SBI Cards has seen 36% CAGR between March 2015 and December 2019. The loan component comprises of three parts – (1) Revolver loan: The card holder pays the minimum balance due and rolls over the balance where the effective interest is c.42%. (2) Term loan: The card holder converts the loan into EMIs, where the effective interest is between 14-16%. Growth has been robust here. (3) Transaction loan: The card holder repays the entire outstanding on the due date and hence it does not attract interest rate. Higher revolver rate earns higher yield on the credit-card loan book, but it also increases the risk of delinquencies. Similarly, a low revolve rate or term loans earn low interest rate and the revenue stream of the card company is driven by fee-based income.

Credit card loan outstanding (bn)

(Rs bn) FY15 FY16 FY17 FY18 FY19 9MFY20

Total 423 552 708 922 1198 1438

HDFC Bank 162 205 260 361 466 576

SBI cards 58 74 103 146 185 248

ICICI bank 40 55 73 94 123 163

Axis bank 22 42 67 83 123 146

RBL bank 4 8 23 53 94

IndusInd bank 7 12 17 27 44 46

Source: Bank Annual report, DRHP



Provides a value proposition to customers In order to remain relevant, SBI Cards, as a strategy, does not issue free

cards.

90-day active account comprises 69% of total card base.

SBI Cards has focused on providing a value proposition by issuing co-branded cards, which provides certain benefits to its customers.

SBI Card has 18 co-branded partnerships, the highest in the industry.

In order to enhance customer experience, SBI Cards is focused on continuing to invest in digital and mobile capabilities.

The key element in the credit-card business is to keep the card active in the wallet. The 30-day active account comprises 55% of the total card base. Similarly, the 90-day active account comprises 69% of total card base. In order to remain relevant, SBI cards as a strategy do not issue free cards. All its cards are fee based so that it remains a relevant card in the wallet. In order to increase customer engagement and remain relevant, SBI cards has focused on providing value proposition by issuing co-branded cards which provides certain benefits to its customer. SBI Cards offer an extensive credit card portfolio to individual cardholders and corporate clients, which includes lifestyle, rewards, travel and fuel, shopping, banking partnership cards and corporate cards covering all major cardholder segments in terms of income profiles and lifestyles. SBI Cards have a broad credit-card portfolio that includes SBI Card-branded credit cards as well as co-branded credit cards that bear both the SBI Card brand and its co-brand partners’ brands. Co-branded cards thus act as an important and differentiated product that offer additional value to customers. Co-branded cards refer to credit cards issued by players in conjunction with partners, which are usually consumer-facing entities with strong and loyal customer bases. The features of co-branded credit cards are designed to address specific needs of customers, thus increasing customer loyalty and further enhancing customer experience. Customers earn high reward points along with special offers and promotions for each transaction at partner merchants. SBI Cards have partnerships with several major players in the travel, fuel, fashion, healthcare and mobility industries, including Air India, Apollo Hospitals, BPCL, Etihad Guest, Fbb, IRCTC, OLA Money and Yatra, among others.

Co-Brand partnership

Co-branded

Partnerships

No. of Co-

branded

partner

Travel Shopping

/Entertainment

Payments Lending Health Care Others

HDFC Bank 6 3 1 0 1 0 1

SBI cards 18 7 7 0 0 1 7

ICICI bank 12 8 1 0 0 0 3

Axis bank 4 2 1 1 0 0 0

Citi bank 3 1 1 1 0 0 0

RBL bank 8 1 1 0 2 1 4

IndusInd bank 1 1 0 0 0 0 0

Amex 1 1 0 0 0 0 0

Source: DRHP

SBI Card has 18 co-branded partnerships, the highest in the industry compared to other players, followed by ICICI Bank at 12 and RBL Bank at 8. In the travel and fuel category, SBI Card has 8 co-branded partnerships. Apart from partnerships with airline companies, they also have partnerships with metros and online hotel booking platforms. SBI Cards is the only player who has a tie up with IRCTC, which provides offers on railway ticket booking.



In the shopping and entertainment category, with increasing spends on e-commerce platforms, players such as SBI Card, ICICI, HDFC and Axis Bank provide cashbacks or instant discounts in partnership with Amazon, Snapdeal and Flipkart. SBI Card and Citi Bank also offer rewards and discounts to customers for shopping on partner stores such as Central, FBB or First Citizen. SBI Cards is the only credit-card company to offer a co-brand credit card specifically targeted at doctors, which offers specialized medical professional liability insurance to cardholders. Apart from this, it has also tied up with Apollo Hospitals in the healthcare segment. In order to enhance customer experience, the company is focused on continuing to invest in digital and mobile capabilities. It constantly seeks to provide additional payment capabilities and other functionalities to promote greater ease and convenience for cardholders. Product innovation such as contact-less cards, digital credit cards, which are delivered directly to our cardholders’ mobile phones, etc., provide additional convenience factors. It is committed to enhancing its customer-service capabilities by leveraging artificial intelligence-enabled knowledge-management tools that assist customer-service representatives in providing faster information, and more accurate resolution, real-time to its customers.

It employs data-analytics to more effectively market credit cards to potential customers and develop new product offerings. Its technology systems also leverage artificial intelligence and process automation for routine activities such as customer service and credit analysis, enhanced by its operating efficiencies. Focus on technology and data analytics is one of its key competitive advantages.



Delinquency ebbing due to robust analytics and bureau check

Delinquency levels at SBI Cards has remained stable at c.2.5%.

Credit costs in the last three years has been 5.2-6.2%.

SBI Cards has built in-house technology enablement, which is a core element in its unsecured loans business.

Focus is on migrating from an authorization-based model to an authentication-based model, which is expected to pre-empt, and then prevent fraudulent transactions before they occur and lead to significant efficiency gains going forward.

Credit-management practices such as making credit decisions more data-driven, closely approximating a digital underwriting process, has enabled SBI Cards to manage credit risks and detect early warning signs of credit difficulties. SBI Cards is also working toward making credit-decision engines fully artificial-intelligence-capable, as well as building artificial intelligence and machine-learning capabilities into customer-acquisitions, portfolio-management, and transaction-monitoring models. The idea is to migrate from an authorization-based model to an authentication-based model, which is expected to pre-empt, and then prevent fraudulent transactions before they occur, and lead to significant efficiency gains.

Asset Quality

Source: DRHP

SBI Cards has built in-house technology enablement – which is a core element in the unsecured loan business. Its business is technology-driven and underpinned by data analytics capabilities, which cut across all aspects of operations. Its core technology systems are scalable, modern, and sophisticated, with considerable capacity to support its future growth. They possess a large database of cardholder demographic and socio-economic data (such as cardholders’ purchase patterns, behaviours, and payment histories) derived from the numerous transactions carried out by millions of cardholders each year, which are analysed to generate underwriting scorecards, proactively mitigate risks, and reduce losses and delinquencies.

2.34%

2.83%

2.44% 2.47%

67.90%

67.32%

66.49%

66.95%

66%

66%

67%

67%

68%

68%

69%

0%

1%

1%

2%

2%

3%

3%

FY17 FY18 FY19 Dec-19

Stage 3 (%) Stage 3 provision (%), rhs



Key risk: Reduction in MDR to dent the business model Average spend-based fee works out to 1.4% of annual card-based spend for

SBI Cards.

Merchant discount rate (MDR) contributed to 25% of its total revenue.

Any decline in MDR charges to issuer banks would materially impact its profitability.

Innovation in payment solution can also be a threat to its transactional business.

Fee income is majorly a function of the interchange fee applicable on spends, membership fees, and other costs related to lending. Other fees include any event-based fee such as over limit fees, late payment fee, and cash withdrawal fees, among others. Fees earned on spends or interchange fees is a percentage of the merchant discount rate (“MDR”) which goes to the issuing bank. This is usually approximately 75-80% of the overall MDR. Average spend-based fee works out to 1.4% of annual card-based spend for SBI Cards.

% spend based fee to total revenue

Source: DRHP

MDR in India is charged ad valorem. GoI has reduced the MDR on debit cards and any decline in MDR charges to issuer bank would materially impact the profitability of SBI cards. Innovation in payment solution can be threat to transactional business of SBI cards. Payment product like wallets, UPI and any future innovation pose a risk to the profitability of the company.

24%

25%

26%

25%

22%

23%

23%

24%

24%

25%

25%

26%

26%

27%

FY17 FY18 FY19 9MFY20



Valuation SBI Cards has a diversified revenue model – it generates both non-interest income (primarily comprised of fee-based income such as interchange fees, late fees and annual fees, among others) as well as interest income on credit card receivables. The share of revenue from operations that it derives from non-interest income has steadily increased over the past three fiscal years – from 43.6% in FY17 to touch 48.9% in FY19. This has made its capital structure more efficient and provides it with a relatively stable revenue composition that is less susceptible to market fluctuations, such as interest-rate volatility. SBI Cards has a proven track record of consistently generating profits over the past three financial years.

Revenues from operations have increased from Rs 33.5bn in FY17 to Rs70bn FY19 – at a CAGR of 44.6%.

Net profit increased from Rs 3.7bn in FY17 to Rs 8.6bn in FY19 – at a CAGR of 52.1%.

ROAE has remained stable at 28.5% in FY17 and 28.4% in FY19.

ROAA increased from 4.0% in FY17 to 4.8% in FY19. We value the stock on price-to-earnings multiple as we believe that the high contribution of fee-based income in total revenue is not linked to balance-sheet growth or net-worth growth. At the upper band of the issue price of Rs 755, it is valued at 38.4x/30.3x FY21/22 EPS of Rs 19.7/24.9. SBI Cards should deliver superior earnings CAGR of 39% over FY19-22 translating into a ROAA of 5.8%/5.7% and ROAE of c.29% in this period. We recommend SUBSCRIBE to the issue.

DuPont Analysis

(%) FY18 FY19 FY20 FY21 FY22

Interest income to asset 20.9 19.9 19.5 19.2 19.0

Cost of fund to asset 5.4 5.7 5.4 5.5 5.5

NII to Asset 15.5 14.2 14.1 13.7 13.5

Fee to asset 19.7 20.7 20.8 19.6 19.2

Operating cost to asset 22.2 21.1 20.0 18.7 17.9

Operating profit to asset 13.0 13.8 15.0 14.7 14.8

Provision to asset 6.0 6.4 6.6 7.0 7.1

PBT to asset 7.0 7.4 8.4 7.7 7.6

Tax to asset 2.4 2.6 2.3 1.9 1.9

PAT to asset 4.5 4.8 6.1 5.8 5.7

Leverage 6.9 6.0 5.3 5.1 5.0

RoAE 31.5 29.0 32.1 29.3 28.8

Source:PhillipCapital India Research



Financials

Balance sheet

Rs mn FY18 FY19 FY20 FY21 FY22

ASSETS 156860 202396 274480 357631 451015

Financial assets 147829 190127 264949 346689 440316

Cash and cash equivalents 3119 7335 5428 6239 7170

Bank Balance other than cash and cash equivalent 1608 433 966 2143 3489

Receivables 1507 2950 2428 2639 2873

Loans 140455 179087 255776 335284 426361

Investments 0 15 15 15 15

Other financial assets 1139 306 337 370 407

Non-financial assets 9031 12269 9530 10941 10699

Deferred tax assets (net) 880 1665 1332 1399 1469

Property plant and equipment 419 575 585 669 767

Capital work in progress 133 43 117 141 169

Intangible assets (incl under development) 657 804 869 1170 1565

Right of use assets 1559 1643 1828 2050 2419

Other non-financial assets 5383 7538 4799 5514 4310

TOTAL ASSETS (1+2)

LIABILITIES AND EQUITY 156860 202496 274480 357631 451015

Financial liabilities 125901 153828 209486 272429 341483

Derivative financial instruments 29 1095 351 491 564

Payables 1191 1191 1191 1191 1191

Debt securities 29489 40793 68030 94991 134022

Borrowings (other than debt securities) 74659 83744 108725 138556 162137

Subordinate liabilities 9980 11968 14122 16664 19664

Other financial liabilities 6449 9577 10925 13654 16206

Non-Financial liabilities 7429 12851 15121 19087 23328

Current tax liabilities (net) 104 762 0 0 0

Provisions 3924 6284 8133 10778 13796

Other non-financial liabilities 3400 5805 6989 8309 9532

Equity 23531 35817 49873 66115 86203

Equity Share capital 7850 8372 9323 9323 9323

Other equity 15681 27445 40549 56792 76880

Source: Phillipcapital India Research



Profit and Loss account

Rs mn FY18 FY19 FY20 FY21 FY22

Revenue from Operations 51871 69992 91946 119774 150199

Interest Income 27600 35757 47074 61635 77882

Income from fees and services 21773 30720 40235 52608 66129

Service charges 796 1259 1638 2104 2598

Business development incentive income 1628 2167 2888 3286 3417

Insurance commission income 73 87 109 140 173

Net gain on fair value change 0 1 0 0 0

Other income 1832 2877 5325 4785 6071

Expenses 44509 59554 77131 99856 125016

Financial costs 7115 10173 13065 17516 22568

Employee benefits expenses 1931 3904 5116 6706 8101

Depreciation amortization and impairment 245 811 774 643 675

Operating and other expenses 27119 33046 42110 52440 64162

CSR expenses 98 142 122 195 278

Impairment losses & bad debt 8001 11477 15943 22356 29232

Pre-Provision operating profit 17195 24793 36084 47060 60486

Profit Before tax 9194 13315 20140 24704 31254

Tax expenses 3182 4689 5552 6218 7867

Profit after tax 6012 8627 14588 18486 23388

Other comprehensive Income -18 -31 -25 -25 -25

Total comprehensive income for the year 5994 8595 14563 18461 23362


Key Ratios

FY18 FY19 FY20 FY21 FY22

Per share Data (Rs)

BVPS 30.0 42.8 58.4 75.7 97.1

ABVPS 28.3 41.0 56.1 72.5 93.2

EPS 7.6 10.3 15.5 19.7 24.9

DPS 0.0 1.0 1.6 2.4 3.5

Yield & Cost %

Yield on loan book 22.2 21.6 20.9 20.1 19.7

Cost of borrowings 7.2 8.1 8.0 7.9 8.0

Spread 15.0 13.5 12.9 12.2 11.7

Margin 16.9 15.9 15.6 14.9 14.4

Cost to income ratio 63.1 60.5 57.1 56.0 54.8

Growth %

Loan book 40.7 27.5 42.8 31.1 27.2

Borrowings 38.0 19.6 39.8 31.1 26.2

NII 50.7 24.9 32.9 29.7 25.4

PPoP 55.8 44.2 45.5 30.4 28.5

PAT 61.2 43.5 69.1 26.7 26.5

Return ratios %

ROA 4.5 4.8 6.0 5.8 5.7

ROE 31.5 29.0 32.1 29.3 28.8

Asset quality %

Stage 3 ratio 2.8 2.4 2.6 2.7 2.7

Stage 3 coverage 67.3 66.5 67.0 68.0 69.0

Stage 1 & 2 ratio 97.2 97.6 97.5 97.3 97.3

Stage 1 & 2 coverage 6.0 5.7 5.7 5.7 5.7

Capital Adequacy ratio

Tier 1 12.41% 14.74% 14.73% 14.72% 15.02%

Tier 2 5.87% 5.26% 3.94% 3.58% 3.36%

Total 18.28% 19.99% 18.67% 18.30% 18.38%

Valuation

Issue Price 755 755 755 755 755

P/EPS 98.9 73.5 48.7 38.4 30.3

P/ BVPS 25.2 17.6 12.9 10.0 7.8




Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. We have different threshold for large market capitalisation stock and Mid/small market capitalisation stock. The categorisation of stock based on market capitalisation is as per the SEBI requirement.

Large cap stocks Rating Criteria Definition

BUY >= +10% Target price is equal to or more than 10% of current market price

NEUTRAL -10% > to < +10% Target price is less than +10% but more than -10%

SELL <= -10% Target price is less than or equal to -10%.

Mid cap and Small cap stocks Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%

SELL <= -15% Target price is less than or equal to -15%.

Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.

This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.

Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the

company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this

research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

Sr. no. Particulars Yes/No



1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of thecompany(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No

4 PCIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the company(ies) covered in the Research report

No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.

Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current.Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.

Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.

Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. Investment in securities market are subject to market risks, you are requested to read all the related documents carefully before investing. You should carefully consider whether trading/investment is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by you. You are further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek independent third party trading/investment advice outside PhillipCapital/group/associates/affiliates/directors/employees before and during your trading/investment. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PhillipCapital and any of its employees, directors, associates, and/or employees, directors, associates of PhillipCapital’s group entities or affiliates is not inducing you for trading/investing in the financial market(s). Trading/Investment decision is your sole responsibility. You must also read the Risk Disclosure Document and Do’s and Don’ts before investing.

Kindly note that past performance is not necessarily a guide to future performance.

For Detailed Disclaimer: Please visit our website www.phillipcapital.in IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report is a product of PhillipCapital (India) Pvt. Ltd. which is the employer of the research analyst(s) who has prepared the research report. PhillipCapital (India) Pvt Ltd. is authorized to engage in securities activities in India. PHILLIPCAP is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not a Major Institutional Investor.

Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 40 Wall Street 59th Floor, New York NY 10005, a registered broker dealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through PHILLIPCAP. Rosenblatt Securities Inc. accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor.

The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and may not be an associated person of Rosenblatt Securities Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Ownership and Material Conflicts of Interest Rosenblatt Securities Inc. or its affiliates does not ‘beneficially own,’ as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of any of the equity securities mentioned in the report. Rosenblatt Securities Inc, its affiliates and/or their respective officers, directors or employees may have interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein. Rosenblatt Securities Inc. is not aware of any material conflict of interest as of the date of this publication Compensation and Investment Banking Activities

http://www.phillipcapital.in/



Rosenblatt Securities Inc. or any affiliate has not managed or co-managed a public offering of securities for the subject company in the past 12 months, nor received compensation for investment banking services from the subject company in the past 12 months, neither does it or any affiliate expect to receive, or intends to seek compensation for investment banking services from the subject company in the next 3 months. Additional Disclosures This research report is for distribution only under such circumstances as may be permitted by applicable law. This research report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient, even if sent only to a single recipient. This research report is not guaranteed to be a complete statement or summary of any securities, markets, reports or developments referred to in this research report. Neither PHILLIPCAP nor any of its directors, officers, employees or agents shall have any liability, however arising, for any error, inaccuracy or incompleteness of fact or opinion in this research report or lack of care in this research report’s preparation or publication, or any losses or damages which may arise from the use of this research report.

PHILLIPCAP may rely on information barriers, such as “Chinese Walls” to control the flow of information within the areas, units, divisions, groups, or affiliates of PHILLIPCAP.

Investing in any non-U.S. securities or related financial instruments (including ADRs) discussed in this research report may present certain risks. The securities of non-U.S. issuers may not be registered with, or be subject to the regulations of, the U.S. Securities and Exchange Commission. Information on such non-U.S. securities or related financial instruments may be limited. Foreign companies may not be subject to audit and reporting standards and regulatory requirements comparable to those in effect within the United States.

The value of any investment or income from any securities or related financial instruments discussed in this research report denominated in a currency other than U.S. dollars is subject to exchange rate fluctuations that may have a positive or adverse effect on the value of or income from such securities or related financial instruments.

Past performance is not necessarily a guide to future performance and no representation or warranty, express or implied, is made by PHILLIPCAP with respect to future performance. Income from investments may fluctuate. The price or value of the investments to which this research report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation or opinion contained in this research report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein.

No part of the content of this research report may be copied, forwarded or duplicated in any form or by any means without the prior written consent of PHILLIPCAP and PHILLIPCAP accepts no liability whatsoever for the actions of third parties in this respect.

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