On Monday, HSBC (LON:HSBA) analysts upgraded SBI Cards and Payment Services (SBICARD:IN) stock rating from Hold to Buy, significantly raising the price target to INR1,000 from INR560. The upgrade comes with a detailed analysis from HSBC, stating that a drop in credit costs for SBI Cards could lead to substantial earnings upgrades due to the company's high sensitivity to such costs.
HSBC has incorporated credit costs of 9.4%, 7.4%, and 6.4% for the fiscal years 2025, 2026, and 2027, respectively, into their projections. The analysts highlighted that a 100 basis points reduction in credit costs might result in a 14% increase in earnings per share (EPS). They also noted that consensus operating profit estimates are 18-23% below HSBC's expectations, while EPS estimates are around 10-16% lower.
The analysts believe that improving asset quality and a corresponding decrease in credit costs could act as a trigger for earnings upgrades. SBI Cards is trading at 18 times the estimated EPS for FY27, 4 times the FY27 estimated book value per share (BVPS), and at a price/earnings to growth (PEG) ratio of 0.5 times for FY27. The forecasted improvements in earnings and return on equity (ROE) are expected to be significant and could also lead to higher target multiples.
HSBC has applied a higher target price-to-book (PB) ratio of approximately 5.8 times, up from the previous 3.2 times, justifying the new price target of INR1,000. This target implies a valuation of 4.6 times the FY27 estimated BV and 21 times the FY27 estimated EPS. Along with the rating upgrade to Buy, HSBC also adjusted their cost growth estimates downwards, resulting in a 3-4% increase in the estimated EPS for FY26 and FY27.
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