SBI Cards initial public offer (IPO), which aims to raise around ₹9,600 crore (at a valuation of 53,000-60,000 crores) and is awaiting regulatory approval, is set to be India's biggest IPO this year.
With a market share of 18%, SBI Cards is the second-largest credit card issuer in the country with 9.46 million credit cards as on 30th September.
According to the draft prospectus, the company expects the number of credit cards to increase at an annual rate of 25% per year.
How do credit companies make money?
Interest income contributes to 50% of total revenues. All credit card companies want the credit card holder to roll over or revolve their credit payment, convert to EMI or take loan on their credit card. This allows them to charge hefty interest income on an annualised basis.
25% of income comes from intercharge fees. This is the fee charged from a merchant by a credit card company to undertake the risk of making the payment, and ensuring that the payment is credited to the respective merchant. This fee should grow well as consumption grows meaningfully in India.
Bulk of the remaining 25% of revenues is contributed by over limit fees, late payment fees, cash withdrawal fees and cheque bounce charges.
What are the key growth drivers for the industry?
SBI cards expects credit card industry spends to grow 2.5 times in the next five years. Key drivers of credit card industry over the next 5 years are as follows:
1. Large Millennial population: India has the largest millennial population in the world. Yet, the country’s overall credit card penetration in the economy measured by its domestic credit card as proportion of GDP is one of the lowest as compared to other countries.
2. Growth of unsecured loans: Unsecured loans of the financial services industry is only around Rs. 5 trillion - with 73% contributed by personal loans, 22% from credit cards & only 4% from consumer durable loans. The contribution of credit cards is expected to increase meaningfully with the passage of time.
3. Payments infrastructure: The number of POS terminals (required to process credit card transactions in retail outlets), has grown at a CAGR of 29.0% from fiscal 2015 to reach 3.7 million terminals in FY19.
4. The EMI factor: The EMI financing option is one of the major forces driving credit card growth. Credit card dues accrue when customers prefer to reduce their lumpsum payments by converting it to EMI, whereby they pay the minimum amount due and roll-over their payment.
5. Growth of e-commerce Industry: Credit card industry's fortunes are closely linked with those of the e-commerce industry. The e-commerce industry has helped in burgeoning credit card usage and spending in India. With the industry expected to grow substantially in the foreseeable future, it will give a meaningful impetus to credit card spending as well
Structure and market share of each of the players
There are a total of 74 players offering credit cards in India. But like most industries, it's heavily dominated by the top 4 players - HDFC Bank, SBI Cards, ICICI Bank & Axis Bank.
These 4 top players have a combined market share of 72% by number of credit cards & 66% by credit card spends. HDFC Bank is the market leader and has a market share of approximately 27%, followed by SBI Cards at 18% and ICICI Bank at 14%.
Credit card players use various distribution channels such as Banca (selling to existing bank customers) & the open market to acquire customers. Banca channels involve leveraging the bank’s existing customer base.
SBI Cards’ partnership with SBI provides them with access to SBI’s extensive network of over 22,000 branches across India. This enables them to market their credit cards to SBI’s customer base of over 430 million customers. They source 55% of their credit cards from SBI's customer base.
Where does SBI Cards stand in all of this?
The company earned a profit after tax of Rs. 863 crores in FY19. At the upper end of the market cap of 60,000 crores, the company will trade at a 70x multiple to FY19 profit ~ a rather steep valuation.
While the company does have promising prospects, the desired valuation is pricing in the most optimistic scenario. This leaves limited room for investors to make money.
Furthermore, in our opinion the biggest beneficiary of this IPO is Carlyle. They own 26% of the company that they bought from GE Capital at a valuation of about Rs. 7030 Crores in March 2017. At the upper end of the valuation, Carlyle would make a gain of around 8x in 2.5 years – a rather lucrative and cushy exit in such a short duration of time.
Also payment companies, emboldened by the UPI infrastructure, are biting at the heels of credit card companies. Hence, in light of all these factors, the IPO is recommended only for those who want to make a quick pop on the IPO listing, or have a high risk high return outlook.
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