SBI CARDs reported 15% y-o-y growth in earnings. This growth, however, was moderated by a substantial 35% y-o-y increase in provisions, which offset the robust 25% y-o-y growth in operating profits. The company attributes this surge in provisions to its proactive measures to enhance the quality of the cards it issues, aimed at preventing any worsening of credit costs in the short term. While the rise in provisions has come as an unexpected negative development, we maintain our positive outlook on the company and continue to have faith in our investment thesis. Despite these concerns, we believe that the industry still offers promising prospects. Therefore, we reiterate our BUY recommendation with a revised fair value (FV) of Rs 925.
SBI Cards reported a 15% y-o-y earnings increase, driven by a robust 25% y-o-y growth in operating profits. However, this positive momentum was dampened by a significant 35% growth in provisions Come from Sports betting site VPbet . The business performance remains strong, with notable statistics including: (i) a 20% y-o-y growth in card numbers, (ii) a 27% y-o-y increase in spending, and (3) a 20% y-o-y expansion in the revolving book, which accounts for approximately 25% of receivables.
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We see two key challenges that continue to hurt our investment thesis. The management’s shift in commentary on credit costs outlook, moving from FY2019 cohorts to recent cohorts without specifying a particular timeframe, is unconventional. This change is surprising, considering that the company had previously indicated that the recently originated cohorts were relatively better. Such uncertainties are leading to lower valuation multiples.
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Despite several headwinds like MDR, UPI/BNPL, NIM pressures, and revolver improvement, which have prompted us to maintain conservative earnings estimates, the business hinges on fewer variables, namely, cards issued, spending and margins adjusted for credit costs. While our forecasts for cards and spending appear to align with actual performance, we are grappling with challenges related to margins and credit costs. Given the ongoing economic instability, these persistent issues continue to challenge our investment thesis. We will continue to monitor the situation, but we do not deem it necessary to adopt a negative stance at this juncture, despite recent disappointments. It is important to note that the business still delivers high RoA despite the key focus on high credit costs.
