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SBI Cards IPO: long thread on valuation disasters in Indian markets & how these rip off the retail investors: Basic stats first:
13 crore shares offered out of total of 93 crore stocks. 14% float at Rs 750 per share is valuation of Rs 70 thousand crore to SBI Cards. #sbicards
This US $ 10 Billion market cap. They say this is the only card company getting listed so a great opportunity. We’ll see some numbers & benchmarks internationally. At FY'19 profits of Rs 862 crore & EPS =Rs 9.43, we get a Price Earning ratio of 80 !!
I know many will justify citing the growth prospects. I have a few questions to explore.Firstly, what is the highest PE of any mature financial company in India? Look at HDFC bank, Kotak, etc & we see much modest PEs of 25 to 35 for HDFC Bank & Kotak. And they are richly valued.
But there is a track record of 20 yrs & more for these banks. Many argue that credit cards is a growing industry & has huge potential to penetrate, unlike some mature retail banks that are settling at much modest growth numbers of 20% now. PE multiples have accordingly matured.
Do you think that credit card is different than retail banking & is in a super-normal growth phase in India? Think again. You just need to read beyond the headlines & dig in more data. SBI cards has been around for more than 20 years now in market.
And last 20 years have seen the card industry mature & evolve reasonably well. It has hit the maturity phase quite sometime back in terms of penetration. Look at the table below to understand this: https://t.co/ibqMnTiXvz
In-fact there are many players who chose to shrink in size after 2008 rather having paid the price of reckless growth that the Indian market is not ready for. Citi, ICICI, Amex, StanC & HSBC prove the point that card industry in Indian has limited penetration potential.
See how the overall credit card lending shrank during 2009 & 2015. The red block is getting thinner. Same story happened with education loans that grew & then reached maturity soon enough. Then just receded from that point. https://t.co/g10BEwDt3K
HDFC did well as it issued cards only to the bank customers where it has an implied collateral of bank deposits. As long the FD is intact, the customer won’t default on the card. If they do, well the bank & manage the rest. That strategy proved right.
SBI cards has a different problem through. While SBI has crores of customers, most are not credit worthy & have marginal balance. Additionally, most SBI customers are old generation conservatives that don’t like to use digital payments at all. A small anecdote fits well here.
I can recall 2003 when SBI cards issued free cards to all PPF customers under some agreement. The sales pitch was simple – “Sir, SBI is issuing free credit card since you hold a PPF account. Branch mgr wants us to give you this gift ! Just sigh here pls.” Boom. A card is created.
This policy got close to a million new customers to SBI cards but at what cost? Card company doesn’t make money by issuing cards. It wants people to use cards for credit. The card usage for PPF customers of SBI was not even 20%. So 80% of those never used the card even once.
So, this talk of having access to SBI customer database is a tried tested theory that doesn’t work. Well it works to get the new card issues in the short run but lack of such card usage doesn’t get any money to SBI cards eventually. So it is just a window dressing.
I see a similar narrative being built now. SBI cards IPO document doesn’t include much details around the history before 2015. The years before that were all about a shrinking industry, all this when the overall credit in retail was having a best of time.
It’s just in the last few years that the industry has again seen some fresh spends & new cards. However, most banks are staying away from any reckless growth, They all have learned the history well & will expand only a limited pace that the market can absorb.
By: via @AlliesFin Serve T.ME/ALLiESFiN
