Virus panic weighs on India’s blockbuster SBI Cards IPO

By Zhen Hao Toh, Abhishek Vishnoi and Nupur Acharya

As India’s first billion-dollar share sale in more than two years and the only credit card firm in the nation to go public, SBI Cards and Payment Services Ltd.’s float may exceed the $1.4 billion target. The question is by how much in the face of the coronavirus outbreak.

SBI Cards began taking orders on Monday, the day the nation’s stocks fell for the seventh day amid the virus scare. At the upper end of the price band of 755 rupees apiece, the offering will fetch 103 billion rupees ($1.4 billion) and value the issuer at over 49 times its trailing 12-month earnings -- the costliest among global peers including Visa Inc. and American Express Co.

With the world reeling from one of the biggest risk sell-offs since the global financial crisis, further coronavirus-fueled declines in India may impact the IPO’s over-subscription rate, which in turn may limit the premium on listing. For instance, Indian Railway Catering & Tourism Corp.’s share sale in October attracted bids 112 times the IPO size and the stock went on to list at double the offer price.

“The subscription will be good but it will not be up to its true potential had it come three weeks ago,” Sameer Kalra, a strategist at Mumbai-based Target Investing, said by phone. Kalra said he won’t bid for the IPO due to high valuation and increasing competition from alternative digital payment platforms. “I’d rather buy it after the listing.”

The sale was 39% subscribed as of 5 p.m. in Mumbai on Monday, with bidding to continue until Thursday. SBI Cards is 74% owned by State Bank of India, the nation’s largest lender, and Carlyle Group has the remaining 26%. SBI is selling 4% stake, while Carlyle is paring 10% of its holding, according to the sale document.

SBI Card’s expensive valuation isn’t deterring investors who are buoyant over the industry’s prospects.

Smaller Towns

The company has a 18% share of the market where there were less than 3 cards per every 100 consumers in 2017 versus 320 in the U.S., 73 in Brazil and 42 in China, according to Axis Securities. Card usage in smaller towns is adding to growth, Chief Executive Officer Hardayal Prasad said in an interview with BloombergQuint, adding 58% of new cards have gone to second- and third-tier towns.

“The comparison with Visa and Mastercard may not be right as they have already penetrated the market, while SBI Cards is part of a developing market,” said Deven Choksey, who oversees investment and research at K.R. Choksey, a Mumbai-based wealth manager. “Growth outlook and the unique proposition may keep valuations higher for this company.”

The company on Saturday raised 27.7 billion rupees from as many as 74 anchor investors including the Singapore Government and Kuwait Investment Authority, at the upper end of the price band.

Also Read: SBI Cards mops up Rs 2,769 cr from anchor investors

Brokerage’s take on the IPO:

Emkay Global

• Strong growth prospects, superior return ratios and parental lineage call for premium valuations
• Issue offers opportunity for investors to invest in a direct play on India’s consumerism, digital payment story

ICICI Direct

• High business growth, strong return ratios justify valuation
• Technology upgrade, tie-ups and reward offers to help increase transaction volumes, support business growth and profitability

HDFC Securities

• Company plans to tap new segments in high-income category to generate higher card spends
• Technology infrastructure and systems are key strength

Motilal Oswal Securities

• Company has grown its business faster than market over the past two years both on number of cards (35% CAGR over FY17-19) and card spends (54% CAGR)
• Likely to generate high investor interest as it is the first in credit card segment to get listed; recommend subscribe