SBI Cards IPO: Why SBI Cards' valuation is on higher side

SBI Cards, the credit card company of India's largest lender State Bank of India, is coming out with an IPO (initial public offering) at Rs 750 to 755 per share. SBI Cards' annualised EPS (earning per share) of Rs 15.58 apiece for 2019-20 puts the company's valuation at a price to earnings (P/E) multiple of 48 times, which is on the higher side.

Kotak Mahindra Bank, though, valued on the basis of price to book like any other banks, gets P/E of 52 times its earnings. Kotak is the best in class in terms of returns. Similarly, the well-diversified Bajaj Finance enjoys P/E of 79 times because of consistent growth in its income and profits.

The P/E of 48 times for SBI Cards, which is a single product company, looks to be on a higher side because of its high-risk high-return potential in the credit card business. In terms of price to book the method of valuation, SBI Cards is valued at 14.49 times. The banks in India do not get such kind of high price to book valuations.

For instance, Kotak Bank enjoys the highest price to book of 6.97 times amongst the banks. Even HDFC Bank, which has consistently given returns despite its big size, has a price to book of just 4.22 times. Most banks are below 2 in terms of price to book.

But the market always rewards a player who has the growth potential with high returns. In the last two years ending March 2019, SBI Cards' total income has grown by a compounded growth of 45 per cent to Rs 7,286 crore and net profits at a compounded rate of 52 per cent to Rs 862 crore. Such growth is very high, which also pushes the market price on the hope of higher returns in future. But will the company maintain its high growth momentum in future, given the dark clouds in the economy?

SBI Cards IPO: This clause will open more revenue sources for SBI

In terms of market share, SBI Cards is already next to HDFC Bank. SBI Cards has a market share of 18 per cent against HDFC Bank's 27 per cent. There are also no parallels in the market for valuing a credit card company as the card business is part of the overall banking business. In fact, SBI Cards will be the first company to be listed on the stock market. The banking business is the only business closer to it to in terms of valuations.

For investors, there are risks too. SBI Cards is a single product company dealing in unsecured credit. There are no other products to de-risk the book in bad times. In a slowing economy, a rise in default could impact its portfolio quality. Currently, the company's gross NPAs are low at 2.33 per cent and net NPAs are at 0.78 per cent as on September 2019.

SBI currently holds 74 per cent stake in the company and the balance 26 per cent is held by CA Rover Holdings, a Carlyle Group company. This company was started two decades ago with GE Capital. But SBI and Carlyle Group acquired GE Capital's stake in the company two years ago.

The current offer comprises a fresh issue and a sale offer by the existing shareholders. The Rs 9,000 crore IPO will hit the market in March first week. SBI Cards is the second SBI subsidiary to be listed on bourses in the last few years. SBI Life Insurance Company, listed two years ago, offered shares at Rs 700 per share. Its stock value today is Rs 916 per share, and the market capitalisation is Rs 91,630 crore. Besides, the lender plans two more listings in the next one-two years, SBI Mutual Fund and SBI General Insurance.

Also read: SBI Cards IPO: Issue to open on March 2; price band likely at Rs 745-775