SBI Cards Stock below IPO price – Analysis

SBI Cards Hit New Low – Down 32% from Issue Price

Introduction

SBI Cards Ltd stock crashed by almost 15% and hit a new lowest level Rs.505 after the anchor investors’ lock-in period ends on April 13, 2020. The stock is down 32% from its issue price Rs.755. Let do a detailed stock analysis of SBI Cards Ltd in this article.

SBI Cards Ltd – Stock Analysis

Company Overview

• SBI Cards is the second largest credit card issuer in India. It offers various types of credit cards considering the need of retail clients (viz. Lifestyle Cards, Rewards, Shopping, Travel and Fuel).
• It also offers corporate cards and is the largest co-brand credit card issuer in India. It also issues card in partnership with smaller or regional banks.
• An investment advisory firm, Macquarie in March recommended SBI Cards with a target price of Rs.1,025. Macquarie initiated the stock with ‘outperform’ rating on account of :
  • SBI Cards’ strong parentage – State Bank of India (SBI)
  • Market leadership
  • Brand and smart strategies
  • Strong customer base of SBI Bank will enable SBI cards to capture a rising share of India’s fast-growing credit card industry.

SBI Cards Hit New Low – Down 32% from Issue Price

• The SBI Cards IPO hit the bourses during March 2 to March 5, 2020 and issued at a price Rs.755 per share. The stock was expected to list at a decent premium on account of company’s strong fundamentals and a consistent sales as well as profit growth at a CAGR of 43-45% for last 3 years.
• The IPO got overwhelming response and oversubscribed by 26 times.
• However, the market sentiments negative amid Coronavirus outbreak and the stock market entered into the bearish zone.

• On April 13, 2020, the stock tanked almost 15% and hit a new low Rs.505, after Anchor investors’ lock-in period ends. The stock was trading at lowest level since its listing on March 16, 2020.
  1. After Listing on the bourses, the stock rose up to Rs.769. Thus, as compared with this 52-week high, the share price has corrected by almost 34.3%.
  2. Whereas, when compared with issue price of Rs.755 per share, the stock has fallen almost 33% and was trading at Rs.505 on April 13, 2020.

1. Reasons for Correction in Share Price of SBI Cards

1. Anchor Investors’ Lock-in Period Ends on April 13, 2020

• The Anchor investors are the institutional investors who are offered shares in an initial public offering (IPO) ahead of its opening.
• SBI Cards and Payment Services has raised Rs.2,769 Cr from 74 anchor investors, ahead of its IPO.
• The key anchor investors include : Singapore government, Monetary Authority of Singapore, HDFC Mutual Fund, Government Pension Fund Global and Birla Mutual Fund.
• These anchor investors have the lock-in period of 30-days from listing date (March 16, 2020), before which they can’t make an exit from the stock. On April 13, 2020, Anchor Investors’ lock-in period ended and thus, the stock tanked 15%.

2. Coronavirus Outbreak

• The market sentiments negative amid Coronavirus outbreak and the stock market entered into the bearish zone.
• SBI Cards stock also saw a weak debut due to prevailing market condition as the uncertainty regarding the effect of the coronavirus epidemic kept investor sentiment in check.
• COVID-19 pandemic is going to have an adverse impact on the spending culture. Credit Cards spending towards Discretionary goods and want-based spending will remained subdued. And it will definitely hurt Credit Cards business. So, Credit Cards business is likely to slow down significantly.

3. Rich Valuations of the Stock

• If we consider the trailing 12-months (TTM) earnings, Price to Earnings Ratio (PE Ratio) of the company was around 55-56.
• The PE ratio may get re-rated once the net profit numbers for FY2020 are announced. The earnings for FY2020 as compared with FY2019 will be of course at higher level. So, the stock’s PE Ratio will get re-rated and would be at around 25-30.

4. Business Risk Associated with Credit Cards segment amid COVID-19 pandemic

• The Credit card business is an unsecured lending business, where the credit card issuing company doesn’t ask for any type of securities. The credit cards limits are fixed according to the financial records and the credit score of the customer.
• Due to the Coronavirus outbreak, lot of NPA pressure may get built on these type of unsecured lending through credit cards.
• Thus, due to the business risk associated with credit card business, the company may have lower than anticipated profits in coming couple of quarters.

5. Banking & Financial Services – High Beta Sector

• There was a high level of aggressiveness seen in the overall Banking & Financial Services sector amid Coronavirus crisis.
• As Banking & Financial Services is a high Beta sector, it will fall at a much higher extent than Nifty 50 and Sensex. However, this sector will rebound at the much higher extent than Nifty and Sensex on market recovery.

2. Key Financial Highlights

• Strong Return Ratios :
  • Return on Equity (ROE) = 29.07%
  • Return on Capital Employed (ROCE) = 15%
• Healthy CAGR Growth of Sales & Net Profit :
  • Sales Growth : CAGR Sales Growth numbers for 3 years and 5 years are 43% and 37% respectively.
  • Net Profit Growth : CAGR Net Profit Growth numbers for 3 years and 5 years are 45% and 24% respectively. The 3-years CAGR growth is much higher than 5-years CAGR, mainly on account of improved operational efficiencies of SBI cards.
• Debt to Equity Ratio
  • D/E ratio is 3.81,which is lower when compared with other NBFCs.
  • Interest Coverage Ratio of 2.31 is also at a better level.

3. What Does the Changes in Shareholding Pattern Suggest?

• Rise in Stake by Institutional Investors
  • Domestic mutual funds and foreign portfolio investors (FPIs) have increased their stake in SBI Cards post its listing.
  • Total holding of institutional investors rose by 1.78% to 7.86% as on March 31, 2020. They held 6.08 per cent stake as on March 16, 2020.
    1. Mutual funds holding in SBI Cards increased to 3.04% from 1.6%, though the number of MF holdings decreased to 25 from 27.
    2. FPIs holding increased to 4.07% from 3.53%. The number of FPIs increased to 143 from 135.
• Fall in Stake by Retail Investors
  • As opposed to Institutional investors, Retail individual shareholders reduced their stake in the company to 5.57% as on March 31, 2020 from 7.33% stake as on March 16, 2020.
    1. Around 4.24 Lakh small retail investors (having share capital up to Rs.2 Lakh) made an exit from SBI Cards in 15 days (March 16 to March 31, 2020). Retail investors holding in the company has come down to 5% as on March 31, 2020 from 5.50%.
    2. High net worth individuals (HNIs) also reduced their holding in SBI Cards to 0.57% from 1.8%. In all, 184 HNIs exited from the company.
• There is no big change in other investors, such as alternative investment funds, insurance companies and NRIs.
• The company is having a strong promoter holding of about 69.55%, where State Bank of India holds around 69.50% in SBI Cards.