India’s second-largest credit card issuing company SBI Cards & Payment Services Ltd, which went public in March last year with a mega IPO, has lost all its ground it recovered after its poor market debut.

SBI Cards’ shares quoted at Rs 882.85 apiece on the NSE in afternoon trade on Tuesday, down 0.42% from the previous close. The stock has fallen 8-9% in the last one year compared with the 27-28% gains by the benchmark Nifty 50 index.

New York-based American multinational investment bank and financial services company Goldman Sachs has now initiated a ‘sell’ rating on the stock with a target price of Rs 654 – a downside of over 25% from current levels. The target price is a discount to the SBI Cards’ IPO price of Rs 755 per share.

Rahul Jain, head of India research at Goldman Sachs, expects stronger headwinds driven by competition and regulatory changes, leading to a slower growth trajectory.

Challenges ahead

Despite a six-percentage-point increase in spends between fiscal 2017 and the second half of fiscal 2022, an increase in credit losses (11% in FY21 versus 4% and 2% for HDFC Bank and ICICI Bank) indicates structural challenges in new-to-credit-card customers which will only intensify due to rising competition, Goldman said.

“We expect earnings growth to moderate to 18% in FY22-25e versus 27% in FY17-21 on increasing popularity of alternatives, regulatory changes, and competition from capital-rich fintech firms and banks,” Jain said in a note to clients.

Goldman Sachs estimates the total addressable market (TAM) of alternatives like ‘Buy Now-Pay Later’ (BNPL) in India to grow to $35 billion by the end of fiscal 2026. This will represent an estimated 13% of credit card spends as opposed to low single digits at present.

More importantly, regulatory changes such as challenge to the merchant discount rate (MDR) and interchange rate may impact fee earnings that contribute roughly 50% of its revenue.

Jain said competition from capital-rich fintechs and banks will put upward pressure on marketing and reward management expense. “Even the upside from SBI appears relatively overstated due to lower spends and higher attrition in SBI customer pool,” he said.

Valuation

Goldman Sachs said SBI Cards trades around 43 times its one-year forward earnings per share (EPS) estimates, anticipating an 18% compound annual growth rate and nine times its one-year forward book value per share (BVPS) at 5.2% return on assets (RoA) and 21.8% Return on Equity (RoE).

“This makes the risk-reward fairly skewed within our coverage universe as we see our buy-rated names delivering near-20% RoE coupled with loan growth of 18-20% CAGR over FY22-25e and trading at substantially lower valuations including the market leader in the credit card space, HDFC Bank,” Jain said.

Goldman Sachs believes the market is likely not appreciating the rising competitive headwinds in the credit card space and that the market valuations are pricing in strong visibility on earnings growth and return ratios. 

Using its in-house analysis of residual income, Goldman Sachs believes the market to be assuming a 20% growth over the long-term with a strong profitability coupled with a 5% consistent ROAs.

“To us this appears a challenge considering rising competitive intensity and SBI Cards’ limited optionality given it is a monoline entity and can only do credit card related businesses,” Jain said.