SBI Cards & Payments Services Ltd. launched its four-day initial public offering today with an aim to raise up to Rs 10,350 crore.
India’s second-largest card issuer—a joint venture of State Bank of India and Carlyle Group—will sell 13 crore equity shares at Rs 750-755 apiece in the IPO, according to its red herring prospectus.
The maiden issue comprises a fresh issue worth Rs 500 crore and an offer-for-sale of Rs 9,850 crore. The offer will have a reservation of 18 lakh shares for employees and 1.3 crore shares for SBI shareholders. After the listing, the company will be valued at Rs 70,000 crore at the upper end of the price band.
Ahead of its IPO, SBI Cards told the bourses that it allocated 3.67 crore shares to 74 anchor investors at Rs 755 apiece. That aggregated to Rs 2,769 crore. Some of the institutional investors who were allocated shares include Government of Singapore, Monetary Authority of Singapore, HDFC Mutual Fund, Government Pension Fund Global, Birla Mutual Fund, Axis Mutual Fund, Pioneer Investment Fund and ICICI Prudential Mutual Fund, among others.
The funds raised, according to the company, will help unlock value for the existing shareholders SBI and CA Rover Holdings—a Carlyle affiliate.
SBI Cards has an 18 percent market share in the Indian credit card market by number of cards—the largest after HDFC Bank Ltd.—and a 17.9 percent share by total credit card spends as of November 2019, according to the red herring prospectus.
The company’s total credit card spends grew at an annualised rate of 54.2 percent over financial years FY17-19 compared with a 35.6 percent compounded annual growth rate of the overall credit card industry, according to Reserve Bank of India data. Its number of credit cards outstanding, too, grew at a 34.5 percent CAGR compared with 25.6 percent for the industry.
The company’s credit card portfolio caters to individual cardholders and corporate clients, and includes lifestyle, rewards, travel and fuel, shopping, banking partnership cards and corporate credit cards. It offers four primary SBI-branded credit cards—SimplySave, SimplyClick, Prime and Elite. Premium cards—having an annual fee of Rs 1,499 or above—accounted for 14.8 percent of its total credit card customer base as of 2018-19.
SBI Cards derives its income from interest income and fees. Interest Income is generated through revolving credits—customers pay minimum amount due and roll-over or revolve their payment—and term loans—customers convert outstanding payment into loans to be paid in EMI. SBI Cards charges its annual percentage rate over its revolving credit at 36-48 percent, while term loans’ is at 12-15 percent
SBI Cards’ fee income comprises subscription fees, instances fees and spend based fees/interchange fees. Interchange fees forms about 51 percent of the company’s fee income, followed by instance fees and subscription fees at 34.2 percent and 14.8 percent, respectively, as of December 2019.
The company has a diversified open market acquisition network, and, according to Crisil Research, it is the leading player in open market customer acquisition. As of December 2019, the company had 93.2 lakh customers, with 59.3 percent of the outstanding users sourced through open market. On an outstanding basis, customer acquisitions through bancassurance channel stood at 40.7 percent as of December 2019.
Non-metro areas accounted for 57 percent of customer acquisition by the card company in FY19 versus 33 percent in FY17. The same stood at 58.3 percent at the end of December quarter.
According to Crisil Research, the number of credit cards outstanding is expected to grow at 23 percent compounded annual growth rate by 2024, mainly on the back of issuance of cards in smaller cities, soaring of organised retail penetration and growth in payments infrastructure.
Credit card spends are expected to grow at a healthy rate to reach Rs 15.0 trillion by financial year 2023-24, a compounded annual growth rate of 24 percent and 2.5 times compared to FY19, according to Crisil Research.
India is an under-penetrated market with the penetration level at 3 cards per 100 people as against 320 in the U.S., 265 in Hong Kong and 214 in Japan.
The State Bank of India’s low credit-to-debit card ratio leaves ample scope for SBI cards to cross-sell and maintain the market leadership. SBI’s debit card holder base stands at 30 crores—30 times the SBI Cards’ credit card holder base at 90 lakhs.
The industry average for return on assets for FY19 stands at 3.5 percent, according to SBI Cards’ IPO prospectus. Analysts and executives had earlier told BloomberQuint that return ratios of HDFC Bank are even higher. Most large private sector banks would have post-tax RoA of 4.5-6 percent, while mid-sized lenders would be earning 1.5-2 percent.
As there is no other pure-play credit cards company in India, one can look at valuations in comparison with global peers.