SBI Cards IPO opens today: Cards and Payment Services (SBI Cards) initial public offer(IPO), the much-awaited primary issue of the year, opens for subscription on Monday (March 2). The IPO comprises a fresh issue of Rs 500 crore and an offer for sale of Rs 9,855 crore. SBI Cards IPO is the fifth-biggest issue in India so far. Post this IPO, paid-up capital of SBI Cards will increase from Rs 932.3 crore to Rs 939 crore. Price band of the issue is fixed at Rs 750-Rs 755. This IPO can be applied in lot sizes of 29 shares and in multiples thereafter. Our of the total issue, 35% is reserved for retail investors. Also, 1.49 crore shares are reserved for employees and shareholders of SBI. Employees will get Rs 75 discount on the issue price. The last date to apply for the IPO is Thursday (March 5).

IPO Size

SBI Cards proposed to raise Rs 10,289 crore at the lower end of the price band (Rs 750 per share) and Rs 10,355 crore at the upper end (Rs 755 per share).

Here are 10 thing investors should know before applying for SBI Cards IPO

1) Company background: SBI Cards & Payment services, a non-deposit taking NBFC, is a subsidiary of State Bank of India, India’s largest bank. The company was established in 1998 as a joint venture between SBI and GE Capital Mauritius Overseas Investment. In December 2017, GE Capital sold its entire 40% stake to SBI (14%) and CA Rover Holdings (26%), an affiliate of the Carlyle Group. SBI Cards is the second-biggest credit card issuer in India, with a share of 17.6% as of March 31, 2019.

2) Objectives of the issue: Net proceeds from the fresh issue of Rs 500 crore are proposed to be utilized for augmenting capital base of the company. Through the OFS, the promoters SBI and CA Rover Holding are collectively selling 13.05 crore shares. Post this issue, SBI’s stake will decline from 74% to 69.5% and CA Rover’s stake will decline from 26% to 16%. At the upper price band of IPO, SBI and CA Rover Holding will garner Rs 2,816 crore and Rs 7,039 crore respectively.

3) Services offered by SBI Cards: The company offers various types of credit cards depending on the needs of the retail clients. It also offers corporate cards and is the largest co-branded credit card issuer in India. It also issues cards in partnership with smaller or regional banks.

4) Revenue source of SBI Cards: Main revenue source of the company is interested in credit card receivables and non-interest income comprising fee-based income such as interchange fees (fees received from credit card payment networks such as MasterCard, Visa and RuPay), late fees, annual membership fees from cardholders. In FY19, 40.8% of its revenue came as interest income, 49% as fees and another, 10.2% came from other incomes such as insurance commission, business development incentive, service charges etc.

5) Why should you invest in SBI Cards IPO: Analysts say there is immense growth potential in credit card business given the low penetration and large untapped potential customers. Outstanding cards of the company have grown at a CAGR of 28% over FY2015-19 as compared to the industry’s growth of 23%. According to Angel Broking, credit card penetration in India is only 3% as compared to more than 30% in developed countries. Also, the credit cards to debit card ratio of SBI is much less than its peers such as HDFC Bank, Axis Bank and ICICI Bank, which implies higher growth potential of its business.

6) Financials: For the first nine months of FY20, SBI Cards reported a net profit of Rs 1,161 crore on operating revenues of Rs 6,274 crore. In FY19, The company had reported a net profit of Rs 1,148 crore (43% growth over FY18) on operating revenues of Rs 6,270 crore (which grew 35% over FY18).

7) Return ratios: SBI Cards has reported average ROE/ROA of 29%/4.3% over the last 3 years. Spend base fees of SBI Cards contributes 26% of total income and increase in card spending will improve spend base fees, which will increase operating leverage, aiding further reduction in cost/income ratio of the company, said Angel Broking. Advances of the company grew at CAGR of 34% over FY2017-19.

8) Valuation: At the upper end of the price band (Rs 750-Rs 755), SBI Cards is valued at 45.5x of 9MFY2020 annualized earnings. This valuation is on a higher side as compared to the valuation of its international listed-peers like American Express Financial Services.

9) Risks: Interchanges fee is a major source of revenue (26%) for SBI Cards. If there is any adverse change by RBI on this fee, then it would impact the profitability and return ratios of SBI cards. In future, if RBI allows NBFCs to issue credit cards, it will increase competition for SBI Cards and others in the industry.

10) Should you subscribe?: Despite higher valuation, brokerages recommend subscribing to the issue because of strong future outlook of the company. “Although the valuations are a bit on the higher side, we are positive on the future outlook of the company given favorable industry scenario, large untapped SBI Bank customers and strong financial track record,” Angel Broking said in a note. The brokerage has a “subscribe” rating on the issue.

The company plans to raise up to Rs 10,341 crore by selling 13.71 crore shares at the upper end of the Rs 750-Rs 755 price band. The lot size has been decided at 19 shares, meaning one will have to shell out at least Rs 14,250 to bid for the issue.

Separate share quotas have been set aside for six different categories of investors — anchor, qualified institutional buyers, non-institutional investors, retail, SBI shareholders and employees.

Detailed criteria for each category of investors for the IPO:
Retail investors: Individual investors who wish to subscribe to the issue can apply under this category. The company has reserved 4,27,81,188 shares for this category, meaning it expects to raise up to Rs 3,229.98 crore from retail investors. As many as 22,51,641 lots are up for grabs in this category. A retail investor can apply for a maximum 14 lots as the upper limit of the investment is capped at Rs 2 lakh as per regulations.

SBI shareholders: Retail investors who also hold State Bank of India (SBI) shares can apply for shares reserved for this category. You are eligible even if you own just one share of the bank. SBI Card has reserved 1,30,52,680 shares for SBI shareholders and expects to raise up to Rs 985.48 crore from this category. There is no discount available under this category.

Employees: Employees of the company can apply for the 18,64,669 shares reserved for them. The company has offered a discount of Rs 75 per share to the employees. This means the price band for them will be at Rs 675-680. At the upper end of price band, the company expects to raise Rs 126.79 crore from the category.