SBI Card IPO - SBI Cards & Payment Services Limited IPO

Objects of the SBI Card IPO:

a) The Offer for Sale:

The object of the Offer for Sale is to allow the Selling Shareholders to sell an aggregate value up to Rs.8000 Crores of shares held by them.

b) Fresh Issue( 500 Crores ) The net proceeds of the Fresh Issue are proposed to be utilized for augmenting the capital base to meet the future capital requirements.

Overview of SBI Card

(a) They are the second-largest credit card issuer in India, with an 18.0% market share of the Indian credit card market in terms of the number of credit cards outstanding as of September 30, 2019. SBI Card is a subsidiary of State Bank of India.

(b) They 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.

(c) SBI Card has 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 our co-brand partners’ brands.

It offers four primary SBI Cardbranded credit cards: SimplySave, SimplyClick, Prime and Elite, each catering to a varying set of cardholder needs.

It is also the largest co-brand credit card issuer in India according to the CRISIL Report, and 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.

(d) It has a sales force of 33,086 outsourced sales personnel as of September 30, 2019, operating out of 133 Indian cities. Had a presence in 3,009 open market points of sale across India as of September 30, 2019.

In addition, its partnership with SBI provides access to SBI’s extensive network of 22,007 branches across India, which enables it to market credit cards to SBI’s vast customer base of 43.6 Crores customers as of March 31, 2019.

Revenue Model

They generate three types of income:

(a) Non-interest income (primarily comprised of fee-based income such as interchange fees, late fees, and annual fees, among others)

(b) Interest income on credit card loans.

(c) MDR( Merchant Discount Rate)- The fees credit card company charges from the merchant for providing a facility to pay when a customer buys the product from the shop. Here, three business comes into the picture.

Credit Card Company ( 1st Business) charges a 2-3% MDR fee from the merchant to facilitate the buying option for customers. Now, the credit card company alone can’t do this transaction. It is only providing the credit facility to customers. The transfer of money from a credit card company to a merchant’s bank account is facilitated by the Network providers ( 2nd Business), such as Master Card, VISA and payment gateways companies. Now, finally without POS Machine( 3rd Business) both the above business is of no use. So, here comes the third business, i.e. Swap machine provider.

Here if the Credit Card company is charging Rs.100 as MDR Fees from the merchant, then 75-80% goes to Credit Card company, 20-25% to the network provider or rest to POS machine provider.

Financial Performance

(a) The total income increased from ₹3471 Crores in fiscal 2017 to ₹7286 Crores in fiscal 2019 at a CAGR of 44.9% and revenues from operations have increased from ₹3346 Crores in fiscal 2017 to ₹6999 Crores in fiscal 2019 at a CAGR of 44.6%.

(b) The net profit increased from ₹372 Crores in fiscal 2017 to ₹862 Crores in fiscal 2019 at a CAGR of 52.1%.

(c) The ROAE has remained stable at 28.5% in fiscal 2017 and 28.4% in fiscal 2019, while ROAA increased from 4.0% in fiscal 2017 to 4.8% in fiscal 2019.

Opportunity:

The business of credit cards in India is at a very nascent stage. As per DRHP, our country has an urban population of approximately 45 Crores. We may assume that a credit card is used mostly by the urban population. In India, as on date, we have approximately 5 Crores credit cards, so in terms of the urban population, this is very thin.

In the e-commerce industry, only 30-35% payment is made through Credit card and the majority of the payment is done through cash on delivery model. Nowadays, these e-commerce companies are giving an option to the user to pay via debit or credit card instead of cash by providing a POS machine while delivering a product. This will also give impetus to credit card companies. Moreover, the e-commerce industry itself at the nascent stage, so the growth of the e-commerce industry will have a direct impact on the credit card business.

Millennials( age below 30 ) are using a credit card more often than our old age counterparts. India has one of the youngest populations in the world. The median age of India’s population is 28.4, which is the youngest as compared to the USA( 38.4), China(38.4), Russia(39.6) and Japan(48.4). This factor is also a driving force for credit card companies.

As we are moving towards a cashless economy, the growth of a Credit Card is inevitable.

Risk:

The only risk credit card companies have is the impact on business due to the slowdown in the economy. In the slowing economy, the loss of jobs happened quite fast. Loss of job has the first casualty on Credit card payment. As these companies don’t have any other business, the risk will be more in a prolonged slowdown.

Promoters And Management:

The promoter of the Company is SBI and it currently holds (along with its nominees) 689,927,363 Equity Shares, constituting to 74.00 % of the pre-Offer issued, subscribed and paid-up Equity Share capital.

Our View:

1. SBI Card has shown tremendous growth in terms of revenue in the last 3 years. After demonetization, the demand for cash reduces which has given impetus to credit card companies.

2. SBI Card PAT has grown from Rs. 372 Crores to Rs.859 Crores in the last 3 years.

3. The company has ROE( Return on Equity ) of 25%, 25% and 23% in FY16-17. 17-18 and 18-19, which is excellent.

Comparison With Peers:

There is no listed peer in the market.