Everyone wants to be rational. However, when you’re looking to list thru an IPO, the priorities are different. SBI Cards issues cards outsmarting every competitor. It doubled the workforce every year for last 2 years. See the employee expenses in 2017, 2018 & 2019 below. https://t.co/Tb1yeK9LRJ
Why does this happen ? Well because someone wants to issue cards at much faster pace vs the competition. Other banks don’t care as they want profitable growth with stable rates. But SBI cards wants a profitable exit, not sustainable growth. So, we get this. https://t.co/r2a3dgeKVh
While HDFC bank, is happy with stable market share, Kotak is in-fact reducing the cards to optimize profitability, one player is in a tearing hurry to issue cards, It issues 45% of credit cards in India in the most recent month reported. Who is this player in a hurry ?
SBI Cards
Lending business however works very differently. You can always grow by lending money fast. The real fun actually starts later when you have to get the money back. Doesn’t look like a top priority for the company as of now.
So, the below growth numbers in spends & market share doesn’t impress me. If HDFC & Kotak with their proven lending practices are not growing, I would worry if some else is. SBI Cards is stable till 2017 & then suddenly grew by 100% in 2 years till 2019. Not a consistent trend. https://t.co/RKIFaNAXkZ
Notice another pointer in the date above. Citibank with just 6% of cards share has 13% or spends. SBI cards takes 18% cards share to generate a 16% share in spends. Citibank is chasing profitable customers & is almost not increasing its cards base.
Another look at the channel sales data throws the same conclusion. Look how the share of sales from SBI branch channel has increased from 35% in 2017 to 45% in 2018 to 55% in 2019. Hmmm…..more PPF cards I guess. Will that issuance make money ? I doubt it. https://t.co/f37uI2ihN1
Armed with this background, lets get back to the IPO valuation. Is it worth a buy ? Let’s see.
So, with a FY’19 PE of 80 , if someone tries to sell me the story of growth in cards issued over last 5 yrs(which basically is in last 2 years), I’m not going to buy it.
The stable cards base of SBI cards is 3.6 Mn that it had till 2017, just before the window dressing started ¬ the 8 to 10 Mn number that SBI wants us to believe. The growth in last 2 years will produce lots of dead cards but not profits.
I see the rise in spends but that’s keeping in line with industry trend. The peak however is quickly reached in India & delinquencies follow soon-after. If HDFC, Kotak, have stabilized, I don’t see why SBI could grow so fast & not profitably. And it has seen bad debts in 2008.
Finally at US $ 10 Billion valuation, I think it is quite generously valued. While there are no Indian card companies listed, we can compare this broadly to Discover Financial & Capital One in USA.
Discover with $ 74 BN in credit card assets is valued with market cap of $ 20 BN. SBI cards with assets of just $ 3 BN is valued at $ 10 Billion ??? Someone is definitely being very bullish here.
Just to put this number in context, see the market cap of Indian banks below:
HDFC Bank - $ 92 BN
ICICI Bank - $ 45 BN
Kotak Bank - $ 44 BN
Axis Bank - $ 28 BN
IndusInd Bank - $ 11 BN
Do you think that credit card arm of SBI is equal to entire IndusInd bank & 1/3 of Axis bank?
Fair valuation for PE firm CA Rover looking to pull capital invested. For investors, I guess you’ll be buying something at 3 times the actual price. Will I put my money on it? Absolutely not. There is no money left on the table. And I don’t believe in paying for PE firm profits.
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