INDIA DAILY December 29, 2020 India 28-Dec 1-day 1-mo 3-mo Sensex 47,354 0.8 7.3 24.7 Nifty 13,873 0.9 7.0 23.6 Contents Global/Regional indices Special Reports Dow Jones 30,404 0.7 1.8 11.9 Nasdaq Composite 12,899 0.7 6.7 18.2 Initiating Coverage FTSE 6,502 0.1 1.7 11.3 SBI Cards and Payment Services: Swipe to earn Nikkei 27,163 1.2 1.9 15.4 Hang Seng 26,315 (0.3) (2.2) 13.1 Initiate coverage with ADD: an attractive long-term compounding story. KOSPI 2,812 0.1 6.8 20.8 A two-pronged play on payments and lending on small-ticket consumption Value traded – India items Cash (NSE+BSE) 510 724 443 13,86 Derivatives (NSE) 16,425 15,566 International experience shows credit card business quite favorably 8 Key risks: micro and macro risks that are typical of this nature of businesses Deri. open interest 5,010 3,897 3,360 Forex/money market Change, basis points 28-Dec 1-day 1-mo 3-mo Rs/US$ 73.5 (5) (54) (28) 10yr govt bond, % 6.2 (1) 4 (21) Net investment (US$ mn) 24-Dec MTD CYTD FIIs (68) 6,382 22,488 (2,626 MFs (157) (6,062) ) Top movers Change, % Best performers 28-Dec 1-day 1-mo 3-mo TATA in Equity 633 1.7 9.6 71.0 SHTF in Equity 1,016 2.0 (5.1) 66.7 IIB in Equity 867 1.7 1.1 61.7 BAF in Equity 5,204 0.4 6.0 58.0 KMB in Equity 1,989 1.4 4.3 57.4 Worst performers RIL in Equity 2,003 0.5 3.8 (10.8) UPLL in Equity 453 0.9 8.5 (8.1) BOS in Equity 12,841 1.2 0.2 (5.9) BRIT in Equity 3,604 (0.4) (0.9) (3.6) HMCL in Equity 3,083 0.3 (0.8) (2.9) [email protected] Contact: +91 22 6218 6427 For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. Company Report SBI Cards and Payment Services (SBICARD) ADD Banks December 28, 2020 INITIATING COVERAGE Sector view: Attractive Swipe to earn. We initiate coverage on SBI Cards (SBIC) with an ADD rating and Fair CMP (`): 840 Value of Rs900. We believe that the positives of (1) strong revenue growth led by rising and underpenetrated payments play, (2) highly profitable lending book and (3) benefit Fair Value (`): 900 of a strong parentage that can lower the origination risk are partly offset by expensive BSE-30: 47,354 valuations. We like the space as it is one of the few areas where we see strong growth prospects and we like SBIC given its strong market share. Initiate coverage with ADD: an attractive long-term compounding story We initiate coverage on SBI Cards (SBIC) with an ADD rating, valuing the company at a Fair Value of Rs900, which implies a valuation of 30X FY2023 EPS and ~8X PBR. This implies a 7% INSIDE upside from current levels. SBIC has delivered strong earnings growth of 40% CAGR for Superior growth FY2017-20 and we expect 30% CAGR for FY2020-24. With a reasonably long growth runway, we see valuation premium to remain high in the medium term which, in our view, metrics for SBI should result in lower risk to multiple de-rating and remain a solid compounder. Cards…….pg12 A two-pronged play on payments and lending on small-ticket consumption items Long growth runway......pg27 There are two distinct characteristics that differentiate SBIC from other lending products – (1) rapid expansion in infrastructure for accepting digital payments (online and offline) that has led to better digital adoption trends leading to a solid play on low risk payment-related income Low card penetration and (2) ability to build a long-term lending relationship which is high yielding, granular, short in India…...pg43 term and yet, highly profitable. Low penetration of digital products implies that the growth trajectory is quite healthy. International experience shows credit card business quite favorably In this report, we discuss (1) trends on retail payment behavior across time periods and different geographies, (2) stakeholders’ perspectives on credit cards and (3) the earnings model of the M B Mahesh, CFA credit card business. On a risk-adjusted basis, we believe that this business is quite profitable on a through-the-cycle basis. Nischint Chawathe Key risks: micro and macro risks that are typical of this nature of businesses Abhijeet Sakhare There are several risks to our thesis: (1) SBIC is a standalone credit card company with limited access to data as compared to a traditional bank. (2) The business is cyclical and expensive with greater emphasis on analytics. (3) Earnings can be extremely volatile and different models in Ashlesh Sonje the credit card business can lead to wide variation among players in this segment. (4) Regulatory intermediation on inter-change fees can lead to lower adoption rates. (5) Intermediation of Dipanjan Ghosh credit- or payment-related function through alternate products can disrupt SBIC’s business model. (6) Relationship with SBI is crucial to build better returns. Company data and valuation summary Company data Stock data High Low Price performance 1M 3M 12M Rating: ADD 52-week range (Rs) 919 495 Absolute (%) 5.1 (0.2) NA Rel to BSE-30 (%) (2.7) (21.2) NA CMP (Rs) Price at close of: December 28, 2020 840 Capitalization Forecast / valuation 2021E 2022E 2023E Market cap (Rs bn) 790 EPS (Rs) 13.3 20.0 29.2 Promoter (%) 69 P/E (X) 63.1 41.9 28.8 Free float (%) 31 P/B (X) 12.2 9.6 7.3 Shares outstanding (# mn) 940 RoE (%) 21.1 25.6 28.8 [email protected] Contact: +91 22 6218 6427 Source: Company data, Kotak Institutional Equities estimates For Private Circulation Only. In the US, this document may only be distributed to QIBs (qualified institutional buyers) as defined under rule 144A of the Securities Act of 1933. This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. 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SBI Cards and Payment Services Banks BUSINESS OVERVIEW: KEY FINANCIALS Exhibit 1: SBI Cards: key financial metrics March fiscal year-ends, 2018-24E Cost- Credit PAT EPS BVPS RoA RoE Cards Loans Spends NIM income costs (Rs bn) (Rs) (Rs) (%) (%) (# mn) (Rs bn) (Rs bn) (%) (%) (%) 2018 6.0 7.7 30 4.6 31.7 6.3 140 765 15.5 63.1 6.6 2019 8.6 10.3 43 4.8 29.1 8.3 179 1,033 14.4 60.4 6.4 2020 12.4 13.3 57 5.5 27.9 10.5 228 1,309 15.6 56.6 9.5 2021E 12.5 13.3 69 4.6 21.1 12.0 264 1,056 15.4 49.1 12.0 2022E 18.8 20.0 88 5.9 25.6 15.6 317 1,764 14.7 59.1 7.5 2023E 27.4 29.2 115 6.9 28.8 20.1 416 2,311 15.6 59.7 6.5 2024E 36.3 38.7 152 7.0 29.0 25.7 541 3,007 15.8 60.9 5.8 Source: Company Exhibit 2: SBI Cards: financial summary March fiscal year-ends, 2018-24E (Rs mn) 2018 2019 2020 2021E 2022E 2023E 2024E Income statement NII 20,524 25,664 35,404 41,961 46,919 62,314 81,321 Other income 26,102 37,110 49,104 49,106 68,302 88,232 113,708 Total income 46,626 62,774 84,508 91,067 115,222 150,547 195,029 Operating expenses 29,406 37,947 47,809 44,748 68,124 89,886 118,686 PPOP 17,221 24,827 36,699 46,319 47,098 60,660 76,343 Impairment losses and bad debts 7,990 11,477 19,402 29,528 21,805 23,838 27,521 PBT 9,230 13,350 17,296 16,791 25,293 36,823 48,821 Taxes 3,195 4,701 4,848 4,299 6,475 9,427 12,498 PAT 6,036 8,649 12,448 12,493 18,818 27,396 36,323 EPS 8 10 13 13 20 29 39 Growth (%) 55 43 44 0 51 46 33 Balance sheet Assets Cash and bank balances 4,727 7,768 6,760 7,436 8,180 8,998 9,898 Net loans and advances 140,455 179,087 228,116 264,016 317,453 416,015 541,246 Fixed assets 1,754 2,164 3,346 3,802 4,961 6,385 8,143 Other assets 8,890 12,440 14,806 16,286 17,915 19,706 21,677 Total assets 155,826 201,459 253,028 291,540 348,509 451,104 580,963 Liabilities Borrowings 113,040 135,494 173,649 197,528 234,107 307,713 399,659 Other financial liabilities 6,449 9,577 6,713 8,055 8,861 9,747 10,722 Other liabilities 12,769 20,513 19,254 21,179 23,297 25,627 28,189 Total liabilities 132,258 165,584 199,616 226,762 266,265 343,087 438,570 Shareholders' equity Paid up capital 7,850 8,372 9,390 9,390 9,390 9,390 9,390 Reserves and surplus 15,719 27,506 44,023 55,389 72,854 98,628 133,004 Shareholders' equity 23,569 35,878 53,412 64,778 82,244 108,017 142,394 RoE decomposition (% of average assets) NII 15.5 14.4 15.6 15.4 14.7 15.6 15.8 Other income 19.8 20.8 21.6 18.0 21.3 22.1 22.0 Total income 35.3 35.1 37.2 33.4 36.0 37.7 37.8 Operating expenses 22.3 21.2 21.0 16.4 21.3 22.5 23.0 PPOP 13.0 13.9 16.1 17.0 14.7 15.2 14.8 Provisions 6.1 6.4 8.5 10.8 6.8 6.0 5.3 PBT 7.0 7.5 7.6 6.2 7.9 9.2 9.5 RoA 4.6 4.8 5.5 4.6 5.9 6.9 7.0 Average assets/average equity (X) 6.9 6.0 5.1 4.6 4.4 4.2 4.1 RoE 31.7 29.1 27.9 21.1 25.6 28.8 29.0 Source: Company, Kotak Institutional Equities KOTAK INSTITUTIONAL EQUITIES RESEARCH 3 Banks SBI Cards and Payment Services VALUATIONS We initiate coverage on SBIC with an ADD rating and Fair Value of Rs900.