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SBI Credit Cards - A Penser Pre-IPO Analysis

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Penser takes a look at the prospectus of SBI Cards as it prepares to launch its IPO in 2020

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SBI Credit Cards - A Penser Pre-IPO Analysis

  1. 1. SBI CREDIT CARDS A P E N S E R P R E - I P O A N A L Y S I S
  2. 2. SBI CARDS AND PAYMENT SERVICES DRHP Penser │ www.penser.co.uk │ Twitter: @PenserConsult │ +44-207-096-0061 | © Penser 2020 On December 2nd, 2019, SBI Cards and Payment Services, a subsidiary of the State Bank of India, filed its DRHP (“Draft Red Herring Prospectus”) with the Securities and Exchange Board of India (SEBI) for an upcoming IPO. We took a closer look at the prospectus SBI 70% 4% 10% CA Rover 16% The equity share capital as of the filing is 932.3 M shares. 74% is owned by SBI, and 26% is owned by CA Rover, an affiliate of the Carlyle Group. 14% of the total shares will be offered for sale. ISSUE DETAILS 1. SBI will contribute 4%, reducing their stake to 70% 2. Carlyle will contribute 10%, reducing their stake to 16% 3. Fresh issue of shares to the tune of Rs. 5 B (~$70 M) 4. Offer for sale of 130.5 M shares, which includes • Up to 37 M equity shares by SBI and up to 93M equity shares from Carlyle • Employee reservation portion of ~1.9 M shares • SBI shareholders reservation portion of up to 13 M shares. Investors can apply in this category if they hold SBI shares on the day when the DRHP is filed with SEBI. Carlyle is likely to make ~₹60 B (~$840 M) from the sale of their 10%, valuing their 26% stake at 7x its 2017 purchase price. 1INR=0.014USDasof5thFeb2020
  3. 3. THE INDIAN CREDIT CARD MARKET 320% 265% 214% 193% 155% 94% 88% 73% 42% 29% 7% 7% 3% USA Hong Kong Japan South Korea Singapore United Kingdom Australia Brazil China France Germany Indonesia India 1.5% 1.6% 1.8% 2.2% 2.7% 3.4% FY14 FY15 FY16 FY17 FY18 FY19 Unsecured Loans category was worth ₹5 Trillion (~$70 B) in FY19 with credit cards making up 22% of it. 22% ₹5T is the size of the credit card market Credit card spend in FY19 ₹6T (~$84 B) Credit card spend in FY24E 33% 3… 32% 29% 27% 48% 45% 41% 40% 38% 18% 22% 23% 24% 25% 1% 2% 4% 7% 10% FY15 FY16 FY17 FY18 FY19 > 40 Years 31-40 Years 26-30 Years <=25 Years Credit Card originations for people under 30 grew by 16%; originations for people under 25 increased 10X. ▲16% Credit Card penetration in India between FY14-FY19 grew at a CAGR of 18%, with 47M cards issued by end FY19. India’s 3% penetration is still very low by global standards - China = 42%; Brazil = 73%; USA = 320% 2.5X Growth drivers: - Demonetization - Digitalization - Cashless economy - eCommerce development - Improved payment infrastructure Penser │ www.penser.co.uk │ Twitter: @PenserConsult │ +44-207-096-0061 | © Penser 2020 ₹1.1T (~$15 B) ₹15T (~$210 B) 1INR=0.014USDasof5thFeb2020
  4. 4. Credit Card outstanding volume has grown by 20% CAGR; HDFC has maintained its leadership position through the years Credit Card transactions have grown at a 27% CAGR, with Axis registering the highest jump from 27M to 168M (+44%). Credit Card spend grew at a CAGR of 32%, with HDFC continuing to dominate the market The average spend per transaction has gone up for most players, with SBI cards recording the highest growth (7% CAGR) 18.9 21.4 24.3 29.3 36.9 46.3 FY14 FY15 FY16 FY17 FY18 FY19 27% 18% 14% 13% 6% 22% HDFC SBI Card ICICI Axis Citi Others FY19 46.3M In Millions 1.52 1.93 2.42 3.36 4.57 6.09 FY14 FY15 FY16 FY17 FY18 FY19 In Million Rs. 28% 17% 11% 10% 9% 25% HDFC Bank SBI Card ICICI Bank Axis Bank Citi Bank Others FY19 421 520 662 899 1153 1414 FY14 FY15 FY16 FY17 FY18 FY19 In Millions 34% 20% 17% 12% 17% HDFC SBI Card ICICI Axis Citi FY19 1.4B 0 1 2 3 4 HDFC SBI Card ICICI Axis Citi Thousands FY14 FY15 FY16 FY17 FY18 FY19 ▲4% ▲7% ▲3% ▲2% ▼4% CAGR 3507 3708 2793 3695 2227 HDFC SBI Card ICICI Axis Citi FY19 ₹6.1M (~$86K) Penser │ www.penser.co.uk │ Twitter: @PenserConsult │ +44-207-096-0061 | © Penser 2020 THE INDIAN CREDIT CARD COMPETITIVE LANDSCAPE 1INR=0.014USDasof5thFeb2020
  5. 5. 56% 53% 51% 39% 42% 44% 4% 5% 5% 33.46 51.87 69.99 FY17 FY18 FY19 Other Income from fees & services Interest Income REVENUESCOSTS SBI Card’s revenue has grown at 28% CAGR, with +95% of it coming from Interest and Fees & Services In Billion Rs. 16% 15% 14% 53% 54% 53%31% 31% 32% 13.12 21.77 30.72 FY17 FY18 FY19 Instance based fees Spends based fees Subscription based fees In Billion Rs. Fees & Services income is largely driven by spend- based fees (+50%) and instance-based fees (+31%) Costs have gone up by 27% CAGR, with a 75-25 split between Variable and Fixed costs Increased Operating expenses were driven largely by sales promotion costs, which grew at a CAGR of 39% 60% 61% 55% 18% 18% 19% 18% 16% 17% 4% 5% 8% 28.99 44.51 59.55 FY17 FY18 FY19 Other Finance costs Impairment losses and bad debts Operating and other expenses In Billion Rs. 35% 44% 49%13% 11% 13% 8% 8% 9% 27% 16% 17% 21% 29% 17.32 27.12 33.05 FY17 FY18 FY19 All other costs Processing charges (SBIBPMSL) Card transaction charges Reward points redemption Sales promotion costs In Billion Rs. Penser │ www.penser.co.uk │ Twitter: @PenserConsult │ +44-207-096-0061 | © Penser 2020 THE SBI CREDIT CARD BUSINESS MODEL 1INR=0.014USDasof5thFeb2020
  6. 6. RISKSOPPORTUNITIES 1. Slowdown in economic growth and parameters like consumer confidence, unemployment rates, consumer spending and demand for credit will impact the credit card business. 2. A weak distribution channel and scalability model would adversely affect the business. 3. An increase in regulations could impact profits. Today, interchange fees and interest rates of credit cards are not regulated. Interest rates do not move with the market. 4. The rapid expansion of UPI payments and payment wallets is moving the economy towards a cashless future. UPI volumes have increased 300x from FY17. Spends on UPI have gone up by 150x in the same period. POSSIBLERoI 1. Credit cards account for 30- 35% of the payment value on ecommerce platforms. 2. Cards issued to NTC (new to credit) customers are growing rapidly. NTC customer base has increased by 20% CAGR between FY15- FY18. 3. POS terminals have grown by 22% CAGR between FY14 and FY19, and are expected to reach 5M by 2021. The company will sell 14% of its shares and is expected to fetch between ₹ 80-95 billion (~$1.1-1.3 B), which implies a valuation of ₹ 570-700 billion (~$8-10 B). Profits were ₹8.63 B (~$121M) in FY19, making the price-to-earnings (P/E) ratio in the range of 65-80x. Average Return on Equity for the last three years was 30%, while profits grew by 52%. If the company continues to generate 30% RoE and reinvest it, the profits after tax could almost triple in two years. It’s likely that the P/E ratio will go up from here, assuming the risks mentioned do not occur in the near future. Penser │ www.penser.co.uk │ Twitter: @PenserConsult │ +44-207-096-0061 | © Penser 2020 THE SBI CREDIT CARD IPO GROWTH POTENTIAL 1INR=0.014USDasof5thFeb2020

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