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Sbi Cards IPO Review -Subscribe

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SBI Cards & Payment Services Ltd – Initial Public Offer (IPO) Note


The much anticipated offer of SBI Cards & Payment Services Ltd. (hereinafter referred to as “SBI Cards”) will open for subscription on 2nd of March 2020.


The Price Range for the IPO has been fixed at Rs 750- 755 per share.


Business Overview


SBI Cards is the second largest credit card issuer in India, with a market share of 18% in the Indian Credit card market. The company offers Indian consumers access to a wide range of world-class, value-added payment products and services. With a customer base of over 9 million, SBI Card operates through a footprint of more than 130 cities in India


SBI Card was launched in October 1998 by the State Bank of India and GE Capital. In December 2017, State Bank of India and The Carlyle Group acquired GE Capital`s stake in the Company. SBI holds 74% while Carlyle holds 26% in SBI Card.


An extensive product basket


SBI Card has a wide portfolio catering to both individual and corporate customers. SBI Card offers several cards under each of the following categories:

  • Premium Cards
  • Classic Cards
  • Travel & Shopping Cards
  • Corporate cards
  • Banking partnership cards


SBI Card has a broad credit card portfolio that includes SBI Card-branded credit cards as well as co-branded credit cards that bear both the SBI Card brand and co-brand partners’ brands.


It offers four primary SBI Card branded credit cards:  SimplySave, SimplyClick,  Prime  and  Elite,  each catering to a varying set of cardholder needs.


SBI Cards is also the largest co-brand credit card issuer in India according to the CRISIL Report, and have partnerships with several major players in the travel, fuel, fashion, healthcare and mobility industries including Air India, Apollo Hospitals, BPCL, Etihad Guest, Fbb, IRCTC, OLA Money and Yatra, among others.


They issue credit cards in partnership with the Visa, MasterCard and RuPay payment networks, and are continuously looking to expand their payment network partnerships to broaden the reach and functionality of the credit card offerings.


Modern and scalable technology infrastructure


Since 2012, the company has made significant investments in technology infrastructure, having redesigned and digitized the majority of their technology processes, risk management protocols and data analytics capabilities, among other initiatives.


They have a scalable, modern and sophisticated technology infrastructure capable of servicing the entire credit card life cycle. Their core technology systems are capable of handling a much higher number of accounts and transaction volumes than they currently handle, which gives us the operating leverage to support the expansion of current cardholder base.


In fact, they have successfully tested key technology systems’ ability to support between three to five times the current level of  business volumes, which we believe provides a with a solid foundation for their future growth


Revenue Model


The credit card business is based on two major revenue streams:

(a) Fee Income:  Fee is majorly a function of interchange fee applicable on spends, membership fees,  and other costs related to lending. Other fees include any event-based fee such as over limit fees, late payment fee, and cash withdrawal fees, among others. Fees earned on spends or interchange fees is a percentage of the merchant discount rate (“MDR”) which goes to the issuing bank. This is usually approximately 75.0% to 80.0% of the overall MDR.


Credit Card Company charges a 2-3% MDR fee from the merchant to facilitate the buying option for customers. The credit card company alone can’t do this transaction. It is only providing the credit facility to customers. The transfer of money from a credit card company to a merchant’s bank account is facilitated by the Network providers, such as Master Card, VISA  and payment gateways companies. Now, finally without POS Machine both the above business is of no use. So, here comes the third business, i.e. Swap machine provider.


If the Credit Card company is charging Rs.100 as MDR Fees from the merchant, then 75-80% goes to Credit Card company, 20-25% to the network provider & to POS machine provider.


(b) Interest income : Interest income refers to debt when customers wish to pay the minimum amount due and roll-over or revolve their payment, reduce their lump-sum payment by converting it to EMI or take loans on their credit card.


The annual percentage rate (“APR”) ranges from 36.0% to 48.0%. With the increasing usage of the EMI facility in credit cards offered at a lower interest rate (of up to 24.0%), interest income as a proportion of average assets is expected to remain stable going forward, even though credit card dues is expected to grow at a healthy rate.




  • The Credit card portfolio falls under the retail unsecured category. The business thrives during the period of strong economic growth and high consumer spending. The periods when the economy is going through a bad phase or when the consumer sentiments are low the business may face a slowdown


  • Credit card interchange fees – MDR are one of the largest components of  total revenue from operations. Interchange fees comprised 21.1% and 21.9% of total revenue from operations in the six months ended September 30, 2018 and 2019, respectively, and 22.5% in fiscal 2019, 21.5% in fiscal 2018 and 19.3% in fiscal 2017.Any change in laws or regulations which, among other things, prescribes a ceiling on, or otherwise restricts the ability to charge interchange fees or similar fees, may require them to restructure their activities and incur additional expenses to comply with such laws and regulations, which could adversely affect business and financial performance.Launched in 2016, the UPI is the country’s flagship real-time payments system, the Government is promoting digital modes of payment but by doing away with the high MDR  charges.

    In her Budget speech, Sitharaman had proposed that businesses should offer low-cost digital modes of payment such as BHIM UPI, UPI QR Code, Aadhaar Pay, Debit Cards, NEFT, RTGS etc to their customers, and no charge or MDR shall be imposed on customers to promote digital payment.

  • Changes in market interest rates could have a material adverse effect on net earnings, funding and liquidity.


  • The credit card business depends on ability to manage our credit risk, and failing to manage this risk successfully may result in high charge-off rates, which would materially adversely affect business, profitability and financial condition.


  • Changes in consumer behaviors, the increasing adoption of digital technologies, may affect retail customer sourcing strategies and may adversely impact the competitive advantages the company derives from its physical retail customer sourcing assets.


Suggested read : how popular is UPI ? Google wants US Fed to Replicate India’s UPI model




Qualitative Factors


  • Huge scalability potential – In an interview to Economic Times,  Ashish Banga, Ex-CEO of Master Card, USA said that there are approximately  5-6 million merchants in India accepting the credit cards and 4 years back this figure was 1 Million. And there are 65 million merchants in India as on date.


  • Second largest credit card issuer in India with deep industry expertise and a demonstrated track record of growth and profitability


  • Diversified customer acquisition capabilities supported by a strong brand and pre-eminent promoter


  • Diversified portfolio of credit card offerings


  • Advanced risk management and data analytics capabilities


  • Modern and scalable technology infrastructure


  • Highly experienced and professional management team


This makes the valuation really compelling.

Particulars                           FY20E             FY21P

EPS (Rs.)                               16                    22

PE                                           47                    34

PEG                                                                0.85

(Expected ROE Growth 40%)


As mentioned above, Mr. Ashish Banga, Ex-CEO of Master Card, USA said that there are approximately 5-6 million merchants in India accepting the credit cards and 4 years back this figure was only  1 Million. And there are 65 million merchants in India as on date.


Considering market potential, we can safely assume EPS CAGR of 30-35% over next 3years.


Return on Equity (ROE) over Fy21-FY23 is projected to be around 28%. The cost of equity for SBI cards could be estimated at 16%.


Hence, projected Economic Value Added (Return on equity – Cost of equity) works out to 12%.


So, Superior financials, Revenue and Margins visibility, Highly Competitive market position and capable management are the key drivers for the rich valuation.


Our Recommendation – SUBSCRIBE & BUY


DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at own risk. Investors should bear in mind that any investment in stock markets are subject to unpredictable market related risks. Above information is based on RHP and other documents available as of date coupled with market perception. Author has plans to invest in this offer.