Jefferies has upgraded its target price on SBI Cards and Payment Services Ltd., citing that its margins are nearing a bottom and India's growing credit card spending does not face a risk from growing UPI usage.
The research firm increased SBI Card's earnings per share estimate by 3-5% for financial years 2024-26 and raised the 12-month target price to Rs 1,100 apiece, implying a potential upside of 19%. It maintains a 'buy' rating on the stock.
Margins are expected to trough in the ongoing April-June quarter and slowly inch up in FY24-26 to 12%, according to Jefferies' June 12 note.
While credit costs are expected to stay elevated in the near term because of some pressure on asset quality from the pool of customers that originated in 2019, they should normalise in the second half of the fiscal as the rate hike cycle as peaked, the research firm said. Rate cuts would boost SBI's earnings as 65% of its liabilities are of short-duration, Jefferies said.
While the share of Unified Payments Interface in retail digital spending rose to 56% in the past three years, credit-card share has remained stable at 6%, Jefferies said.
According to the research firm, the industry's card spending has risen at a 25% compounded annual growth rate in FY20–23. It estimates a 21% annualised growth from 2023 to 2026.
Weak net card additions in April due to seasonality should get normal in the future, Jefferies said, and the company can integrate with its parent's network to tackle its low addressable customer base.
By extending cards to the UPI, SBI Card can grow its 35–40% share of RuPay cards further, it said.
Jefferies On SBI Card
Expects spending and receivables to grow at a 23% CAGR in FY23–26.
Expected profit growth at 26% CAGR in FY23–26.
Expects return on equity to expand by 2026 from a 24% trough in 2024.
The stock's key risk is the potential cap on merchant discount rates.
Shares of SBI Card fell 0.50% to Rs 921.60 apiece as of 1:30 p.m., compared with a 0.16% gain in the NSE Nifty 50 as of 12.50 pm. Its relative strength index stands at 67.45, indicating that the stock is neither overbought nor oversold.
Of the 28 analysts tracking the stock, 22 recommend a 'buy' rating, three maintain a 'hold' rating and as many maintain a 'sell' rating, according to Bloomberg. The average of 12-month price targets implies an upside of 3.9% in the next 12 months.
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