SBI Card's growth rate higher than market leader: Sidharth Purohit

What are you making of the price band and the valuation of SBI Card that is set to hit the market?
Our view on the issue has been quite positive. We have been recommending subscribing to it. There are a couple of points which we like about this particular issue and the company. I will let you know that probably this will be one of the first and only listed pure credit card companies in India and very few among the global companies. Now, if you look at their last three to four years growth history, then possibly they have one of the highest growth rate even compared to the market leader; the strongest player in the market is HDFC and they have been growing faster than HDFC Bank. If you look at the four to five years of history, then HDFC Bank might have grown, let us say, around 18-20% and they have grown much higher than that. Now, in terms of market share, they are the second largest as of now at 18% market share in terms of credit card outstanding whereas HDFC is almost 27%. The management has clearly articulated that they want to become number one going ahead. That means there is a lot of opportunity for them to scale up. Now, when you look at the entire industry per se--the retail credit for the entire banking industry is something close to 25-26% of the outstanding loan book and when you look at credit card, it is just 1% of the total book for the banking industry. So, that leaves a lot of scope for all the players including SBI Card to scale up because of the parentage and strong brand name. I think they will possibly exceed the industry growth rate per multiple years going ahead and that is what they have clearly mentioned yesterday.

What about some of the challenges? They are vulnerable to some of the risk on account of failure of adequate adhering to by the employees, there is competition from some of the banks, NBFCs and payment banks. There is over dependence on SBI and it is 100% unsecured lending with no collateral. How are you looking at some of these key concerns and the fact that the corporate NPAs are slowing down, which poses a bit of a threat?
Credit cards are purely an unsecured business. There is no doubt about it. It definitely carries a very high risk when you compare it to any other product. But historically, what we have seen is that the default rate compared to other loan products is higher. The rates are quite high, the yields are very high and that is why the risk-adjusted yield or the risk-adjusted return ratios for credit card business across most of the banks, including SBI Card has been pretty high. This is not seen in any other banking services or even in NBFC. So, while you might say that probably the risks are high, it is equally rewarding in terms of ROE. Like you do not see any NBFC really operating at 30% ROE for multiple years. But I think despite the credit cost that is involved, this business has the potential to deliver 30% ROE; so probably the market would not take too much cognisance into that risk factor. One also needs to factor in that a lot of the screening and the onboarding of clients is done through a lot of artificial intelligence. So, certainly the quality of customer that you are taking on board is much better than what it was a decade back because of the technology that you have. So, the default rates are naturally lower and certainly you have CIBIL rating and everything; so people normally do not tend to default so much in credit cards. So I am not really worried about the asset quality as of now and the many challenges. But as this industry grows much bigger from here, some challenges may come. When you talk about even the valuation part, like in the last four years, the companies’ PAT is almost close to four times and in the next two-three years, it can double from here. So, the risk whatever is there is being captured already and that is why we feel that it is a very good value proposition for investors. So, we are not worried about the risk part. Rather, I am looking at the brighter side for the company and the issue and that is why I am positive on it.