Bernstein initiates Paytm coverage with ‘outperform’ rating, ‘underperform’ for SBI Card

Bernstein has a target price of Rs 1,100 for Paytm, 31 percent higher from the current market price. SBI Card’s target price is at Rs 650, down 22 percent from its current market price

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Global research and broking firm Bernstein has initiated coverage on Paytm owner One97 Communications Ltd with “outperform” and SBI Cards and Payment Services Ltd with “underperform” ratings.

The brokerage firm has set a target price of Rs 1,100 a share for Paytm, 31 percent higher than the current market price. Conversely, SBI Card’s target price is projected at Rs 650, down 22 percent from its current market price.

Turbulence ahead for SBI Card

Digital payments are actively shaking up the Indian payments landscape. UPI payments, with their zero cost, have already disrupted debit cards, while the transformation of credit cards is currently unfolding, analysts at the brokerage said.

They predict that the blend of UPI payments and digital lending products holds a more compelling appeal than traditional credit cards and the combination will likely siphon off growth from the credit-card sector.

SBI Card face a significant risk from the emergence of the alternative lending models that provide instant consumer credit at much lower interest rates, they said.

“SBI Card’s margins will come under increasing pressure — both on the fee front as well as the lending front. The long-term trend of a declining fee revenue (as a % of spends) will intensify due to increased competitive intensity and higher incremental market share of RuPay based credit cards (with lower MDRs),” Bernstein said in the note.

The merchant discount rate or MDR is a fee charged to a merchant for the payment processing of debit or credit card transactions. There is no MDR on transactions done using RuPay cards.

On the lending front, Bernstein expects the revolver-to-spend ratio to remain low, driving down the net interest margins for the lending segment. SBI Card has limited room to diversify into other products as its parent SBI is present in all the adjacent product segments, the report said.

With the rapidly increasing digital credit alternatives SBI Card, which operates solely as a credit card provider, will directly feel the consequences, Bernstein said.

It expects SBI Card’s earnings growth to decrease from approximately 30 percent over the past ten years to around 15 percent in the upcoming five years. The decline is based on the expectation of no resurgence in credit revolvers and a sustained squeeze on fee margins, the analysts said.

Paytm has competition

Bernstein also said it is premature to label Paytm a victor in the digital lending space, considering Jio Financial Services‘ upcoming entry.

The brokerage house said Paytm is positioned favourably amid the ongoing disruption. Anticipating a rapid surge in loan disbursals, it expects Paytm to capture around 4 percent of the market share by FY26E in the high-yield household lending segment (interest rates above 13 percent).

In FY23, Paytm added more lending customers than the number of credit card additions by the top four private sector banks combined — signs of an edge in customer acquisition.

Its underwriting and collection outcomes are impressive, too, but remain untested through a full credit cycle.  As payment segment margins stabilise, the brokerage forecast the business to reach breakeven by FY25E and achieve an EPS of around Rs 130 by FY30E.

At 11.16 am, Paytm was trading at Rs 903.75 on the National Stock Exchange, down 0.11 percent from the previous day. SBI Card was at Rs 837.80, down 0.30 percent.

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