CLSA Upgrades SBI Cards: A Mixed Bag for Investors
CLSA has upgraded SBI Cards to Hold from Underperform, citing an improving asset quality outlook. However, the brokerage firm also warned that fresh pressures on operating profitability could limit upside from current levels. In this article, we will delve into the reasons behind CLSA’s upgrade and what it means for Indian investors.
Improving Asset Quality: A Positive Trend
The upgrade is largely driven by an improving asset quality outlook. CLSA believes that SBI Cards is likely to see a gradual moderation in credit costs over the next few quarters as asset quality stabilizes. This is a positive trend for the company, as it will lead to lower provisions and higher profitability. However, the brokerage firm also cautioned that the benefit from lower provisions is increasingly being offset by rising pressure on pre-provision operating profit (PPOP).
Pressure on Profitability: A Cause for Concern
Despite the improving asset quality, CLSA warned that SBI Cards may face pressure on its profitability. The brokerage firm expects net interest margins (NIMs) to come under pressure, driven by lower yields. Unless there are further rate cuts by the Reserve Bank of India, margin compression is likely to persist. Additionally, fee income is emerging as another area of concern, with lower rental spending and reduced instance-based fees, such as late payment charges, expected to weigh on fee income.
Loan Growth: A Sluggish Trend
Industry-wide credit card spending growth has slowed sharply, falling from the high-20% range in FY24 to low-teens levels. CLSA believes that SBI Cards is not immune to this trend and has cut its FY26-28 loan growth assumption from 14% to 11%. While growth could recover modestly from a low base, CLSA does not expect a return to mid-teens growth. The brokerage firm added that loan growth remains sluggish across the sector, limiting operating leverage.
Valuation: Fair but with Limited Upside
At its revised target price of Rs 820, the stock trades at around 20x FY28 earnings — levels CLSA considers fair given the balance between improving asset quality and structural profitability headwinds. However, the brokerage firm warned that the expected improvement in asset quality is already reflected in consensus estimates, and therefore, there is limited upside from current levels.
Investment Strategy: A Cautious Approach
So, what does this mean for Indian investors? While the upgrade by CLSA is a positive development, the potential pressures on profitability and the limited upside from current levels suggest a cautious approach. Investors should carefully consider the risks and rewards before investing in SBI Cards. It is also essential to keep an eye on the company’s financial performance and any changes in the regulatory environment that could impact its operations. For more information on Indian stock market trends and analysis, visit our website.
Conclusion
In conclusion, the upgrade of SBI Cards by CLSA is a mixed bag for investors. While the improving asset quality is a positive trend, the potential pressures on profitability and the limited upside from current levels suggest a cautious approach. Investors should carefully consider the risks and rewards before investing in SBI Cards and keep an eye on the company’s financial performance and any changes in the regulatory environment that could impact its operations. To learn more about credit card spending trends and their impact on the stock market, read our Nifty today analysis.
