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SBI Cards Shares Gain After Jefferies Initiates Coverage With 'Buy'

SBI Cards target price is set at Rs 900, implying a potential upside of 27%.

<div class="paragraphs"><p>(Source:&nbsp;SBI Cards website)</p></div>
(Source: SBI Cards website)

Shares of SBI Cards and Payment Services Ltd. gained after Jefferies initiated coverage with a 'buy rating, betting on its strong franchise in credit cards.

"SBI Cards should gain share in card spends, as the scope to increase penetration within SBI's large customer base is large," the brokerage said. The credit card to debit card ratio is 14% below the peer average of 29%, and penetration within SBI's addressable customer pool is only 6%.

The brokerage initiated coverage on the stock with a 'buy' rating and a price target of Rs 900, implying a potential upside of 27%.

The co-branded card tie-ups are about double its peers', and its open market channel is larger than most of its peers',  Jefferies said.

"We forecast SBI Cards card spends to grow at a 23% CAGR over FY23–26e," the brokerage said.

Shares of the company gained 1.39% to Rs 730.15 as of 10:13 a.m., as compared to a 1.05% gain in the benchmark Nifty 50.

Of the 29 analysts tracking the stock, 22 maintain a 'buy', four recommend a 'hold', and three suggest a 'sell', according to Bloomberg. The 12-month consensus price target implies a potential upside of 28.7%.

Net Interest Margins Likely To Bottom

SBI Cards' net interest margins will likely bottom in the first half of fiscal 2024 and could inch higher over fiscal 2024 through 2026, Jefferies said.

The financial company has faced NIM pressure due to a fall in the mix of higher-yielding revolvers from over 35% pre-Covid to 24% in the third quarter and a rise in funding costs, the brokerage said. "An increase in the sourcing of customers with a higher propensity to revolve can lift revolver mix slowly by 150 basis points over fiscal 2024–26, though it should still stay well below pre-Covid levels," said Jefferies.

The recent push to convert transaction spends to EMI can also lift margins even though it may cannibalise some revolver spends, the brokerage said, citing that a 1% change in the EMI mix changes earnings per share by 1.5%.

The brokerage also expects funding costs to stabilise as rates peak.

Profit To Grow 23% CAGR Over FY23-26

Jefferies expects SBI Cards' profits to grow at a rate of 23% per year from fiscal 2023 to 2026. During the same period, the topline should grow at a 22% CAGR, led by a 24% CAGR in net interest income and a 21% CAGR in fee income.

Credit costs will stay the same because asset quality pressure is going down, it said. The risk reward is favourable for the company, the brokerage said.

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