IPO Flash Index SBI Cards and Payment Services Limited - Sharekhan
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IPO Flash
February 26, 2020
Index
SBI Cards and Payment Services Limited
Issue details •
Key investment rationale •
Key risks •
About the company •
Financials •
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For Private Circulation onlyIPO Flash
SBI Cards and Payment Services Limited
IPO Details:
Issue Opens Monday, 2nd March 2020
Issue Close Thursday, 5th March 2020
Issue Size Rs 10,275 - 10,340 cr
Face Value Rs 10 per share
Price Band Rs.750/- to Rs.755/- per equity share
Bid Lot 19 Shares and in multiple thereof
Issue Structure
QIB 50 % of the offer
NIB 15 % of the offer
RETAIL 35 % of the offer
Source: Company RHP
Issue Details
SBI Cards and Payment Services (SBIC) is bringing an Initial Public Offer (IPO), which consists of
fresh issue of Rs. 500 crore and an offer for sale by existing shareholders of an aggregate of up to
130,526,798 shares held by them. The company will not receive any proceeds from the Offer for Sale.
Net proceeds of the Fresh Issue, i.e. gross proceeds of the Fresh Issue less the Offer Expenses
apportioned to the Company (“Net Proceeds”) are proposed to be utilised for augmenting the capital
base to meet the company’s future capital requirements.
Existing shareholding structure
Shareholder Pre-issue Post - issue
No. of Shares Holding (%) No. of Shares Holding (%)
Promoter and Promoter Group 689,927,363 73.9 652,633,992 69.5
Investor Selling Shareholder 242,406,915 26.0 149,173,488 15.9
Public & others 137,149,315 14.6
Total 932,334,278 100 938,956,795 100
Source: Company RHP, Sharekhan Research
Note: No. of additional shares issue calculated on the upper price band
Investment Rationale:
The second largest credit card issuer in India with deep industry expertise
According to RBI, SBIC is the second-largest credit card issuer in India both in terms of numbers of credit
cards outstanding and amounts of credit card spends, with 9.83 million credit cards outstanding as of
November 30, 2019, and Rs. 1,032.65 billion in total of credit card spends in fiscal 2019. SBIC operates a
nationwide business with a substantial cardholder base spanning each of India’s eight largest metropolitan
areas, India’s tier II and tier III cities as well as its rural areas.
Diversified customer acquisition capabilities:
SBIC deploys a sales force of 32,677 outsourced sales personnel as of December 31, 2019, operating out
of 145 Indian cities and engages prospective customers through multiple channels, including physical
points of sale, telesales and online.
Collectively, with its co-brand partners, SBIC is present in 3,190 open market physical points of sale in
India as of December 31, 2019, retail stores, malls, fuel stations, railway stations and airports. Out of the
aforesaid outsourced sales personnel, SBIC has 4,173 outsourced work force for tele-sales.
In addition to its open market customer acquisitions platform, its partnership with SBI provides them access
to SBI’s extensive network of 21,961 branches across India, which enables it to market its credit cards to
SBI’s vast customer base of 445.5 million customers as of December 31, 2019.
February 26, 2020 2IPO Flash Diversified portfolio of credit card offerings Its credit card portfolio caters to individual cardholders and corporate clients, and includes lifestyle, rewards, travel and fuel, shopping, banking partnership cards and corporate credit cards. SBIC offers four primary SBI branded credit cards: SimplySave, SimplyClick, Prime and Elite, each catering to a varying set of cardholder needs. In addition, they are the largest co-brand credit card issuer in India according to CRISIL Report, and the company offers a wide portfolio of co-brand credit cards in partnership with several major players in the travel, fuel, fashion, healthcare and mobility industries. Advanced risk management and data analytics capabilities SBIC advanced risk management infrastructure is robust and data-intensive, both in terms of frequency and volume of review, and is guided by data analytics capabilities. SBIC evaluate a large number of data points to generate credit decisions. SBIC analyze this data together with data obtained from credit bureaus and other sources to, among other things, generate underwriting scorecards tailored to cardholder demographics, proactively mitigate risks, and reduce losses and delinquencies. Strategy: Expand customer acquisition capabilities to grow cardholder base SBIC intend to grow cardholder base by continuing to expand customer acquisition capabilities, increase open market physical points. SBIC is banking on its legacy of brand to acquire new customers. In an effort to increase brand visibility, SBIC has introduced reward programmes and innovative marketing strategies. Tap into new cardholder segments by broadening portfolio of credit card products SBIC intend to tap into new cardholder segments by continuing to expand portfolio of credit card products to meet the needs of existing cardholders and prospective customers, particularly by offering new credit card products tailored for different income-based and lifestyle segments. Among planned new credit card product categories, SBIC intend to tap into the super-premium segment by offering new credit cards tailored for the needs of high-net-worth cardholders. SBIC expect the super-premium segment to generate higher spends and result in superior growth and profitability, while promoting additional brand recognition. Stimulate growth in credit card transaction volumes To increase credit card transaction, SBIC is constantly working to enhance value proposition to cardholders by rolling out new cash back rewards offers, bonus reward points and merchant discounts. SBIC is especially focused on rolling out such offers to cardholders located in India’s tier II and tier III cities, which has contributed an increasing proportion of new accounts in recent years. Continue to optimise risk management processes SBIC credit management focus on making credit decisions more data-driven, closely approximating a digital underwriting process. Credit management will be key to helping manage credit risk and detect early warning signs of credit difficulties. SBIC is also working toward making credit decision engines fully artificial intelligence-capable, as well as building artificial intelligence and machine learning capabilities into customer acquisition, portfolio management and transaction monitoring models. Continue leveraging technology across operations SBIC focuses on leveraging technology and data analytics in the Indian credit card industry and intends to continue investing to further enhance these capabilities and derive greater operating efficiencies. SBIC believes that the continued evolution of technological capabilities will drive increased efficiencies, improve operations and ultimately provide significant competitive advantage. February 26, 2020 3
IPO Flash Key Risks: SBIC uses the “SBI” brand of Promoter and is exposed to the risk that “SBI” brand may be affected by events beyond control and that the Promoter may prevent from using it in future. SBIC does not own the “SBI” name, brand or trademark. The “SBI” name, brand and trademark, as well as the associated logo as displayed in SBI Card brand are owned by the Promoter. Currently, the “SBI” logo is pursuant to a license agreement entered between SBIC and the Promoter, under which the Promoter has granted the non-exclusive right to use the name, brand and trademark “SBI” and the associated logo in consideration for payment of royalty fees to Promoter. Under this license agreement, the Promoter has the right to terminate the license on occurrence of certain events, which includes, among other things, the Promoter’s shareholding in falling below 26.00% of outstanding equity share capital, if undergoing a change of control event pursuant to any change occurring in the composition of board of directors or shareholding pattern, or if it fails to pay royalty fees to the Promoter. SBIC derives substantial benefits from its existing relationship with the Promoter, and loss or reduction in the level of support received from the Promoter could adversely affect it SBIC’s credit card portfolio consists primarily of SBI-branded credit cards and takes advantage of the Promoter’s large branch and customer networks to market credit cards. The Promoter is the largest customer referral partner, and referral arrangements with SBI allows to market products and services to SBI customers by utilizing the Promoter’s vast branch network. All of SBIC’s credit card portfolio is unsupported by any collateral that could help ensure repayment, and in the event of non-payment by a cardholder of credit card receivables Unsecured credit card receivables present a greater credit risk than a portfolio of secured loans because they are not supported by realisable collateral that could help ensure an adequate source of repayment for credit card receivables. Although it may obtain direct debit instructions from cardholders for such unsecured credit card receivables, it may still be unable to collect in part or at all in the event of non-payment by a cardholder. Further, any expansion in unsecured credit card receivables portfolio could require to increase provision for credit losses, which would decrease profitability. Face competition in the credit card market from other credit card issuers and payment solutions providers, and may not be able to compete effectively, which could result in fewer cardholders and lower account balances and could materially adversely affect financial condition, cash flows and results of operations. SBIC competes with other credit card issuers and payment solutions providers such as banks, payment banks, NBFCs and financial technology enterprises on the basis of a number of factors, including brand, reputation, customer service, product offerings, incentives, pricing, technology and other terms. In particular, mobile, e-wallet and tokenisation platforms, including the increasingly prevalent unified payments interface platform, present formidable competition as they are able to attract large payment volumes at low or no payment processing fees to merchants. Competition in credit cards is also based on merchant acceptance and the value provided to customer by rewards programmes. Provisions for credit losses may prove to be insufficient to cover losses on credit card receivables Maintains provisions for credit losses at levels that believe to be appropriate to provide for incurred losses in credit card receivables portfolio. However, the process for establishing provisions for credit losses under the “expected credit loss”model involves a high degree of judgment and complexity, and is susceptible to being incorrectly or imprecisely estimated. Provisioning coverage ratio (calculated as total provisions on Stage 3 assets divided by total Stage 3 assets) as of March 31, 2017, 2018 and 2019 was 67.9%, 67.3% and 66.5%, respectively, and 67.0% as of December 31, 2019. Although it maintains provisions for credit losses above the minimum levels prescribed by the RBI, it cannot fully predict such losses or give assurances that provisions will be adequate in future, and may underestimate incurred losses and fail to maintain sufficient provisions for credit losses to account for such losses. February 26, 2020 4
IPO Flash
Valuations:
Credit card spends have registered robust growth, reporting a CAGR of 32.0% from FY2015 to FY2019 and
are expected to reach Rs. 15.0 trillion by FY2024, which is 2.5x over FY2019. SBI Cards is the second largest
credit card issuer in India, with 18.1% market share of the Indian credit card market in terms of the number of
credit cards outstanding as of November 30, 2019.
Return on net worth on equity shareholders stands at 24% for 9M ended December 2019 and is attractive.
Notably, gross NPA as of December 2019 was 2.5% (was 2.44% on March 2019), which given the credit card
business is reasonable.
At the upper end of the price band, the issue is priced at 80x its FY2019 EPS and 60.6x its 9MFY2020
EPS. There are no listed companies in India that engage in a business similar to that of the company.
Accordingly, it is not possible to provide an industry comparison in relation to the company. However, there
is always investor interest into companies that have a high-growth trajectory along with dominant market
share and very attractive return ratios.
Peer Comparison
Market
CAGR
Particulars FY14 FY15 FY16 FY17 FY18 FY19 share as
growth
of FY19
Number of credit cards in force (in million)
HDFC 5.1 6.0 7.3 8.5 10.7 12.5 27% 19%
SBI Card 2.9 3.2 3.6 4.6 6.3 8.3 18% 24%
ICICI 3.2 3.3 3.7 4.3 5.0 6.6 14% 16%
Axis Bank 1.4 1.7 2.4 3.3 4.5 6.0 13% 34%
Citi Bank 2.4 2.4 2.4 2.5 2.7 2.7 6% 2%
Number of transactions (in million)
HDFC 161 198 253 333 405 486 27% 25%
SBI Card 65 78 110 155 212 280 16% 34%
ICICI 72 91 109 150 189 241 14% 27%
Axis Bank 27 41 59 88 128 168 9% 44%
Citi Bank 96 112 131 173 219 239 13% 20%
Total spend (Rs million)
HDFC 4,57,408 5,77,599 7,49,981 9,74,749 13,24,039 17,04,208 28% 30%
SBI Card 1,64,928 2,12,845 2,93,324 4,38,545 7,70,232 10,38,353 17% 44%
ICICI 1,72036 2,15,646 2,68,101 3,62,055 5,15,331 6,73,006 11% 31%
Axis Bank 88,487 1,36,023 1,83,862 2,87,305 4,43,288 6,20,827 10% 48%
Citi Bank 2,67,476 3,08,629 3,55,839 4,25,583 4,88,652 5,32,185 9% 15%
Average spend per transaction
HDFC 2,847 2,918 2,964 2,929 3,273 3,504 - 4%
SBI Card 2,520 2,726 2,669 2,835 3,635 3,713 - 8%
ICICI 2,376 2,380 2,454 2,409 2,724 2,795 - 3%
Axis Bank 3,243 3,350 3,098 3,257 3,453 3,695 - 3%
Citi Bank 2,785 2,764 2,716 2,458 2,236 2,227 - -4%
Average spend per card in force (Rs)
HDFC 84,252 1,03,964 1,14,485 1,19,356 1,35,181 1,44,770 - 11%
SBI Card 60,458 71,547 86,011 1,07,737 1,40,975 1,44,813 - 19%
ICICI 56,543 65,685 77,555 90,611 1,12,042 1,17,203 - 16%
Axis Bank 72,304 88,227 90,193 1,00,167 1,12,877 1,21,220 - 11%
Citi Bank 1,11,642 1,28,731 1,49,410 1,74,225 1,87,045 1,99,881 - 12%
Average outstanding per card in force (Rs)
HDFC 23,853 27,044 28,180 30,428 33,781 35,909 - 9%
SBI Card 15,311 18,125 20,431 22,490 23,281 22,398 - 8%
ICICI 10,377 12,103 14,989 17,511 18,563 18,514 - 12%
Axis Bank 12,713 12,889 17,218 20,078 18,408 20,622 - 10%
Citi Bank NA NA NA NA NA NA -
Number of POS terminals
HDFC Bank 2,15,524 2,44,991 2,83,274 4,29,749 4,03,567 4,90,180 13% 18%
SBI Card NA NA NA NA NA NA - -
ICICI BANK 2,93,166 2,21,663 2,00,759 3,06,593 3,25,358 3,91,625 11% 6%
Axis Bank 2,48,482 2,48,786 2,63,951 4,33,034 5,02,226 5,07,409 14% 15%
Citi Bank 17,844 20,238 23,676 28,261 34,732 34,744 1% 14%
Source: Company RHP
February 26, 2020 5IPO Flash About the company: SBIC is the second-largest credit card issuer in India, with a 17.6% and 18.1% market share of the Indian credit card market in terms of the number of credit cards outstanding as of March 31, 2019, and November 30, 2019, respectively, and a 17.1% and 17.9% market share of the Indian credit card market in terms of total credit card spends in fiscal 2019 and in the eight months ended November 30, 2019, respectively, according to the RBI. It offers 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. SBIC is a subsidiary of SBI, India’s largest commercial bank in terms of deposits, advances and number of branches as of September 30, 2019, according to the RBI. It started operations in 1998, and since then SBI’s parentage and highly trusted brand have allowed the company to quickly establish a reputation of trust, reliability and transparency with its cardholders. The company has a diversified revenue model, whereby it generates both non-interest income (primarily comprising fee-based income such as interchange fees, late fees and annual fees, among others) as well as interest income on its credit card receivables. The share of its revenue from operations that SBIC derives from non-interest income has steadily increased over the past three fiscal years, from 43.6% in fiscal 2017 to 48.9% in fiscal 2019. The company believes this has made its capital structure more efficient and provides it with a relatively stable revenue composition that is less susceptible to market fluctuations, such as interest rate volatility. February 26, 2020 6
IPO Flash
Financials
Income Statement
For the nine For the nine
For the year For the year For the year
months ended months ended
Particulars (Rs in million) ended March ended March ended March
December 31, December 31,
31, 2019 31, 2018 31, 2017
2019 2018
Interest Income 34,931 26,263 35,757 27,600 18,882
Income from fees and services 30,193 21,586 30,720 21,773 13,116
Service Charges 824.57 814 1,259 796 533
Business development incentive income 2,404 1430 2,167 1,628 883
Insurance commission income 79.93 64 87 73 48
Net gain on fair value changes -1.04 682 1
Total Revenue from operations 68,431 50,839 69,991 51,870 33,462
Other Income 3,971 1,948 2,877 1,832 1,248
Total Income 72,402 52,787 72,868 53,702 34,710
EXPENSES
Finance costs 9,664 7,426 10,172 7,115 5,284
Employee benefits expenses 3,344 2,880 3,904 1,931 953
Depreciation, amortisation and impairment 740 581 811 245 48
Operating and other expenses 31,412 24,432 33,046 27,119 17,319
CSR expenses 33.68 33.6 142 98 70
Impairment losses & bad debts 11,021 7,960 11,477 8,001 5,320
Total expenses 56,215 43,312 59,552 44,509 28,994
PBT 16,187 9,475 13,316 9,193 5,716
Tax expense 4,575 3,330 4,689 3,182 1,988
PAT 11,612 6,145 8,627 6,011 3,728
Source: Company RHP
Key Ratio
As of December 31, As of March 31,
Particulars
2019 2018 2019 2018 2017
EPS 12.5 6.8 9.4 7.4 4.8
Return on Networth 24% 18% 24% 25% 26%
NAV 51.7 38.4 39.9 29.8 18.5
GNPA (%) 2.5 2.6 2.4 2.8 2.3
NNPA (%) 0.8 0.9 0.8 0.9 0.8
Provision Coverage Ratio(%) 67.0 67.3 66.5 67.3 67.9
Source: Company RHP
February 26, 2020 7IPO Flash
Balance Sheet
As at As at
As at March As at March As at March
Particulars (Rs in million) December December
31, 2019 31, 2018 31, 2017
31, 2019 31, 2018
Cash and cash equivalents 4,528 4,452 7,335 3,119 1,747
Bank Balance other than (a 550.19 1,554 433 1,608 1,082
Receivables 1,773 1,549 2,950 1,507 1,325
Loans 239,332 172,404 179,087 140,455 99,829
Investment 15 15 15 0 0
Other financial assets 295 552 307 1,139 25
Total financial assets 246,492 180,526 190,127 147,829 104,008
Non- financial assets
Deferred tax assets (Net) 1,374 1,082 1,665 880 1,292
Property plant and equipment 572 463 575 419 17
Capital work in progress 183 55 43 133
Intangible assets 738.23 543.44 646 440
Intangible assets under development 146.22 153.47 158 217
Right-of-e Assets 1,711 1,548 1,643 1,559 222
Other non Financial assets 8,719 6,616 7,538 5,383 2,112
Total non-financial assets 13,443 10,461 12,269 9,031 3,642
Total Assets 259,935 190,987 202,396 156,860 107,650
LIABILITIES AND EQUITY
Derivative financial instruments 322.82 2222.9 1,095 29 -
Payables 790 498 6,615 5,182 1,189
Other payables 62 34 36 113 2
Debt Securities 67,150 35,177 40,793 29,489 75,098
Borrowings (Other than Debt Sec 106,162 86,446 83,744 74,659 2,197
Subordinated Liabilities 12,464 9,983 11,968 9,980 5,389
Other financial liabilities 8,107 7,276 9,577 6,449 2,883
Total financial liabilities 195,058 141,636 153,828 125,901 86,758
Non- financial liabilities
Current Tax liabilities (Net) 38 3.68 762 104 17
Provisions 12,484 11,193 6,284 3,924 4,952
Other non financial liabilities 4,840 3,935 5,705 3,400 1,434
Total non financial liabilities 17,362 15,131 12,751 7,429 6,404
Total liabilities 212,420 156,767 166,579 133,329 93,162
Equity
Equity Share capital 9,323 8,372 8,372 7,850 7,850
Other equity 38,190 25,847 27,445 15,681 6,638
Total equity 47,513 34,219 35,817 23,531 14,488
Total liabilities and equity 259,933 190,986 202,396 156,860 107,650
Source: Company RHP
February 26, 2020 8Know more about our products and services
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