You can watch the video on SBI Cards IPO here and our investment philosophy here.
After Successful IPO by IRCTC, the IPO Market is again now heating up. CSB Bank and Ujjivan Small finance Bank gave good listing gains, CSB Bank Oversubscribed 87 times while Ujjivan Small finance bank IPO oversubscribed by 166 Times.
Will SBI Cards give similar returns ?
Before answering the question, let’s first dig deeper about its business model and valuations.
SBI Cards started operations in 1998 as a joint venture between SBI and GE Capital. They received approval from RBI to operate as non-banking financial institution on 6 Oct 1998. In 2017 GE Capital exited this joint venture as a part of its global strategy to exit financial services sector.
This stake was bought by SBI Bank and CA Rover Holdings, an affiliate of the Carlyle Group. Currently SBI Bank is holding 74% Stake in SBI Cards and Remaining 26% by the Carlyle Group.
Business Model :
SBI Cards is one of the leading providers of credit cards.
How credit card transaction takes place ?
Let’s first understand how basic credit cards transaction takes place :
1)Transaction begins when a customer purchases the services or goods from the merchant using credit card.
2)Once the credit card is checked by credit card issuer through the payment network then it pays the amount to payment network with interchange fees.
3)Then payment network pays the amount to the customer and finally customer pays it to the merchant.
Discretionary and non discretionary Spending :
Indians are increasingly spending more on discretionary items such as dining,entertainment,vacations and luxury goods while and less on non discretionary items like food,shelter and education.
Digital Vs Non Digital Transactions
There is a significant change in domestic money transfer in last 5 years. More and more people are moving towards digital payments as it is more convenient. After demonitization there is huge increase in digital transactions. In future it is expected that there will be a further increase in digital transaction as India will move closer to a cashless economy.
Credit card penetration:
As you can see in fig below India has one of the lowest penetration of credit cards in the world which is only 3%.
Out of 100 people only 3 use credit cards in India, while in the United States this is 320% which means every person has more than 1 credit card.
In 2014 credit card penetration was only 1.5% while it increased to 3.4% in 2019 and it is expected to increase in future as discretionary expenditure will increase.
Credit cards spend as a % of GDP :
India has one of the lowest Credit cards spend as a % of GDP which is only 3% while South Korea has 37%
Revenue Generation :
Credit card business earns their revenues from 2 sources,interest income and fee income.
They get almost 50% of their revenue from interest income in which credit card companies charge Annual Percentage Rate (APR) 36% to 48%. It can vary from customer to customer.
Apart from interest income, credit card companies can earn from fees income in which they charge annual credit card fees, late payment fees,interchange fees.
In FY 2019 SBI Cards got 51.1% revenues from interest income and 48.9% from Fee income.
Operating Expenses :
Credit card business has high operating expenses like marketing costs,rewards redemption costs, cost to payment network, collection and recovery costs.
Acquisition costs include the cost of acquiring customers through various channels. While marketing cost includes cost for the advertisement and discounts or cash back offered.
Market Structure :
There are a total of 74 players offering credit cards in India, but 4 player control 72% of the market share, which are HDFC Bank 27%, SBI Cards 18%, ICICI Bank 14% and Axis Bank 13%
SBI Cards increased market share in outstanding cards from 15% in 2014 to 18% in 2019.HDFC Bank is the market leader in credit card spend as well with 28% market share while SBI Cards have 18% market share.
Let’s compare some more parameters of top players in credit card industry
Number of credit cards in force (in million)
Number of transactions (in million)
Total spend (Rs million)
Average spend per transaction
Average spend per card in force (Rs)
Key Financials :
Revenues from operations grew at a CAGR of 44.6% between FY 2017 to 2019
Profit after tax (PAT) grew at 52.1% between FY 2017 to 2019
Return on equity (ROE) and Return on Assets (ROA)
Gross and Net NPA (in million Rs)
Indian credit card market is under-penetrated, only 3 people out of 100 are using credit cards currently while its 320% in the US which means everyone is carrying more than 1 credit card.
SBI Card is at no. 2 position in indian credit cards market with 18% market share.
Indian Government is focusing on a cashless economy, it will help credit card industry to grow in the future.
SBI Cards able to grew its profits with 52% CAGR from FY 2017 to GY 2019.
There are a total of 74 Players in Indian credit card Industry.
Credit card loans are unsecured, if customers not able to pay the loans, then credit card companies profitability can reduce.
It is expected that SBI Cards will come with 8000-9000 Cr IPO out of that 500 Cr will be fresh issue and remaining will be stake sell buy SBI and carlyle group. Currently SBI Bank is holding 76% stake in SBI Cards and carlyle group is holding 24% stake.
SBI is planning to sell 4% stake and carlyle 10% for the IPO, so it will be 14% together. If we consider 8500 cr from stake sell and 500 cr from the fresh issue then total IPO size will be 9000 Cr.
Now let us do some calculations with these assumptions.With 14% stake sell, market cap of SBI cards will be (8500/0.14) + 500 = 60714 + 500 = 61214. Let’s assume 62000 cr.
In H1 2020 Sbi Cards posted EPS of 7.79, so for FY 2020 it can be 2X7.79 =15.58, as we checked previously SBI Cards growing profit with 52% CAGR from FY 2017 to FY 2020, so let’s assume FY 2020 EPS to be 16.
As SBI will be offering 93.23 Cr shares. So Listing price can be 62000/ 93.23 = 665 Rs. With 665 Rs price, PE = 665/16 = 41.56
Now let’s find out price to book value. As you can see in the above image Net asset value is 46.99 which is the book value. So P/B = 665 / 46.99 = 14.15
India has very low penetration of credit cards, which is only 3 out of 100, thus creating very good opportunity with bigger players in this industry.
SBI Cards have 18% market share and its at no. 2 after HDFC bank and they are able to increase it from 14% in FY 2014 to 18% in FY 2019.
Only concern here is valuations. One should understand major part of IPO is a stake sale and only 500 Cr is offered as fresh equity.
In such a case it’s quite difficult to get it at fair valuations.
“The last time Buffett invested in an IPO was in Ford Motor company’s debut in 1955 ”
Note: It’s not a buy/sell recommendation. Consult your financial adviser before investing.