SBI Cards IPO ticks all boxes, but timing may be an issue
SBI Cards is one of the few large companies in the credit card business that is structured as a separate entity
SBI Cards is number two in the credit card market, with HDFC Bank leading on the basis of outstanding cards
Mumbai: Credit card interest payments are the dumbest money of all,” said US actor and author Hill Harper. But evidently, many are willing to make these payments, and the tribe is growing rapidly.
Stock market investors now have a unique opportunity to stake claim to this easy money, with SBI Cards and Payment Services Ltd (SBI Cards) set to list its shares. The largest credit card businesses in India are run by banks in-house, and SBI Cards is one of the few large companies in the sector that is structured as a separate entity. In stock market parlance, this means SBI Cards will command a scarcity premium. Besides, there are many other factors that work in SBI Cards’ favour, and the initial public offering (IPO) is generally expected to be a success. But more on this later.
Where the IPO falls short is with regard to market timing. Unlike Radhakishan Damani of Avenue Supermarts Ltd, who timed the sale of promoter group shares worth ₹3,000 crore at the peak of the market in mid-February, the SBI Cards issue is hitting the markets on the back of a 9% correction in the Nifty.
Investors are getting increasingly jittery due to the rapid spread of the coronavirus. And since shares issued in an IPO list with a slight lag, the uncertainty may result in relatively fewer bids.
What should have been a blockbuster listing, therefore, could well end up being a mellow one, depending on how the markets are positioned at the time of listing.
Some analysts are also concerned about valuations, especially now that the markets are correcting. At the upper end of the price band, the IPO would fetch ₹10,360 crore and value the company at ₹70,900 crore. That comes to around 45 times its annualized earnings per share for the nine months ended 31 December. Analysts at Motilal Oswal Financial Services Ltd said the price-to-book value multiple is roughly 12 times, which is steep when compared with that of a similar consumer credit business of Bajaj Finance Ltd, valued at 6.8 times its book.
If the markets stabilize, high valuations may still not be a deal-breaker, considering the nature of institutional investment lately. The markets have become increasingly narrow, with institutional investors in particular chasing a handful of stocks with high market capitalization, high growth and high return ratios. SBI Cards ticks these boxes. “SBI Cards’ strong growth prospects, superior return ratios and parental lineage call for premium valuations,” analysts at Emkay Global Financial Services Ltd said in a note to clients.
As the chart shows, growth has been spectacular. Even assuming there is no listing pop, the stock will have a market value ahead of companies such as HDFC Asset Management Co. Ltd, ICICI Prudential Life Insurance Co. Ltd and InterGlobe Aviation Ltd. SBI Card is currently number two in the credit card market, with HDFC Bank leading on the basis of outstanding cards. Besides, return on equity was an impressive 37% based on nine- month results till 31 December.
The scope for growth is high as well. In a country with a billion people, credit cards have reached just 3% of them, far lower than the world average of about 35%. With the advantage of SBI’s wide reach, the cards business of its subsidiary is poised well. It is this potential for growth that has most analysts recommending a buy for the IPO.
Such is the confidence of the company’s management that Hardayal Prasad, managing director and chief executive officer, said it was competing with cash.
But investors should also note that the objective of the IPO looks to be giving existing shareholders an exit. To that extent, Carlyle Group would pocket a cool ₹7,039 crore through a dilution of 10% of its stake.
Now that the markets have turned wobbly, investors are likely to pay more attention to the risks involved. In the past, the government has tinkered with the merchant discount rate (MDR) on debit cards and there is a risk of a similar regulatory burden on credit cards as well. “We believe that regulatory intervention on MDR could have an impact on card fees across players and so also for SBI Cards, while SBI Card’s higher instance-based fees do not seem sustainable,” said analysts at Emkay. Instance-based fees are fees imposed for late payments and redemption of reward points. The broker lists rising competition from alternative digital payment platforms, higher capital requirement and rising asset quality risk (given weakening macros/employment rates), as other risks the company faces.
The IPO, meanwhile, is priced to perfection. If the markets remain volatile when the IPO book is being built, the company’s selling shareholders may well need to settle for a more appropriate price.
- How to Disable WhatsApp Web’s Persistent Notification in 2021? | Know WhatsApp Web is Currently Active Meaning
- Best Methods to Freeze Last Seen on WhatsApp in 2021 | How to Hide Last Seen on WhatsApp?
- How To Know If Your WhatsApp Is Being Monitored? | How Can I Stop & Secure WhatsApp From Monitoring by Someone?
- Colored Text Generator Copy and Paste on WhatsApp | How to Change Text Color in WhatsApp Status
- Guide on WhatsApp Unblock Hack 2021 | Unblock Yourself On WhatsApp With These Hacks Easily
- How To Use WhatsApp on PC without QR Code? | Steps to Operate WhatsApp Web Messenger On Desktop Easily
- Happy Children’s Day 2021 WhatsApp Status Videos, Wishes, Quotes, Gifs, DP’s, Stickers, Posters | Essay & Speech on Children’s Day in English, Hindi, Telugu
- Multiple Ways You Can Try To Increase Your Whatsapp Group Limit To 10k
Instagram1 year ago
Top 200+ Best Cute Cool Instagram Bio Ideas of 2020 That You Can Copy-Paste Easily
Instagram1 year ago
300+ Best Instagram Username Ideas 2020 for Boys & Girls New Profiles on Insta
News1 year ago
Top 100 Funny Group Chat Names for WhatsApp & Other Social Media Apps | Best Cute Cool Fun Ideas for Group Names
News12 months ago
100+ Best Captions for Brother’s Handsome Photo That You Can Copy And Paste Easily
News2 months ago
How To Spot Fake Accounts on Social Media – Telegram, WhatsApp, and Signal
News3 months ago
Snapchat Usernames Guide: Snapchat Username Ideas, How to Change Username on Snapchat & Best Snapchat Names List
News12 months ago
Best Cute Funny Throwback Captions 2020 | Unique Flashback Quotes for Instagram Posts & Stories
News2 months ago
Happy Dasara WhatsApp Status 2021 Video Free Download | Share Vijaya Dashami Status Images, Wishes, Quotes on WhatsApp