Decisive Partnerships And Digital Expansion Poised To Boost India's Card Market Growth

Key Takeaways

• High-quality account acquisition and strategic alliances are set to improve net margins and boost earnings through enhanced customer engagement and spending.
  
• Expansion of digital capabilities and customer base aims to leverage growing digital adoption, driving future revenue and profitability growth.
  
• Increased credit costs, declining profit, and changing account sourcing suggest potential challenges for profitability and asset quality at SBI Cards and Payment Services.

Catalysts

A non-banking financial company, issues credit cards to individual and corporate customers in India.

• The credit card market in India is projected to grow significantly, with the number of credit cards expected to reach 200 million by FY '28-'29, with a CAGR of 15%, which should lead to increased revenue from higher transactional volume and value.
  
• SBI Card is focusing on high-quality new account acquisition, with a notable proportion of new customers being prime and above prime, which could help improve future net margins by reducing credit costs as these customers are less likely to default.
  
• The strategic alliance with Singapore Airlines to launch a premium co-branded credit card and other product developments are expected to enhance customer engagement and spending, boosting earnings and revenue.
  
• The company expects normalization of net interest margins (NIM) as spending patterns stabilize post-festive season and anticipates a reduction in the cost of funds with the possible easing of interest rates, potentially improving net margins.
  
• Continued focus on enhancing digital capabilities and expanding its customer base positions SBI Card to capture growth from increasing digital adoption and consumer spending, driving higher future revenue and profitability.

SBI Cards and Payment Services Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SBI Cards and Payment Services's revenue will grow by 33.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 20.8% today to 16.8% in 3 years time.
• Analysts expect earnings to reach ₹42.8 billion (and earnings per share of ₹44.36) by about November 2027, up from ₹22.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹33.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.2x on those 2027 earnings, down from 30.6x today. This future PE is greater than the current PE for the IN Consumer Finance industry at 12.7x.
• Analysts expect the number of shares outstanding to grow by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.77%, as per the Simply Wall St company report.

SBI Cards and Payment Services Future Earnings Per Share Growth

Risks

• The increase in credit costs and delinquency levels due to higher household debt and environmental factors suggests potential challenges in repayment, impacting earnings negatively.
  
• A decrease in profit after tax from ₹603 crore to ₹404 crore year-on-year due to higher credit and spend-based expenses could signal declining net margins.
  
• Elevated operating expenses during Q2 and projected for Q3 due to the festive season may pressure the cost-to-income ratio and reduce profitability.
  
• A decline in the share of new accounts sourced from SBI and an increase in open market sourcing might affect the quality of acquisitions, potentially impacting asset quality and revenues.
  
• The reduction in revolver share and dependence on seasonal fluctuations in margins implies uncertainty in sustaining interest income, affecting future revenue streams.

Valuation

• The analysts have a consensus price target of ₹692.04 for SBI Cards and Payment Services based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹960.0, and the most bearish reporting a price target of just ₹549.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹254.7 billion, earnings will come to ₹42.8 billion, and it would be trading on a PE ratio of 24.2x, assuming you use a discount rate of 15.8%.
  
• Given the current share price of ₹711.9, the analyst's price target of ₹692.04 is 2.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.