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This article is more than 1 month old.

SBI Cards drops nearly 5%; Morgan Stanley maintains 'overweight'; check target on credit card stock

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SBI Cards and Payment Services Ltd’s shares declined almost 5 percent even as global brokerage Morgan Stanley maintained an ‘overweight’ rating on the stock citing unclarity on RBI’s intent to cap credit card MDR and the potential magnitude.

SBI Cards drops nearly 5%; Morgan Stanley maintains 'overweight'; check target on credit card stock
SBI Cards and Payment Services Ltd’s share price fell almost 5 percent on Monday in a weak market as benchmark indices, Sensex and Nifty50, tumbled sharply amid omicron woes and inflation concerns. The negative sentiment in the SBI-backed credit card company stock price continued even as global brokerage Morgan Stanley maintains an ‘overweight’ stance.
An overweight rating implies that an analyst is of the view that a company's stock price should perform better in the future and merits a higher weightage than what the benchmark currently has for that stock.
Morgan Stanley has set a target price of Rs 1,350 per share of SBI Cards citing the Reserve Bank of India’s (RBI’s) intent to cap credit card merchant discount rate (MDR) and the potential magnitude, which the brokerage says is unclear.
SBI Cards stock is in uncharted territory, with the price fall implying significant impact, the brokerage said. The statement comes as the scrip has corrected nearly 13 percent in the past six months. It, however, has returned investors 2.29 percent in 2021 (year-to-date) as against benchmark index BSE Sensex’s return of 16.14 percent during the period.
Morgan Stanley believes the market could be underestimating offsetting factors and arguments in favour of the stock.
A report by Motilal Oswal Financial Services last week echoed a similar sentiment. It said the stock was facing selling pressure lately due to fear of a reduction in MDR charges, which can adversely impact the company's profitability.
What happens if MDR charges are reduced?
Earlier this month, RBI proposed to float a discussion paper that will cover all aspects related to charges involved in various channels of digital payments such as credit cards, debit cards, prepaid payment instruments (cards and wallets), UPI, etc. The paper will also seek feedback on issues related to convenience fee, surcharging, etc., and the measures required to make digital transactions affordable to users and economically remunerative to the providers.
“Entities involved in providing digital payment services incur costs, which are generally recovered from the merchant or the customer or are borne by one or more of the participants. While there are both advantages and disadvantages of customers bearing these charges, they should be reasonable and should not become a deterrent in the adoption of digital payments,” the central bank said on December 8.
According to Motilal Oswal, if MDR on credit cards is reduced by 10-20 percent, SBI Cards’ earnings can take a hit of about 8-17 percent. “As the company mitigates this impact by effecting a reduction in payment processing charges, cost of reward points, and the interest-free payment period to customers, the earnings hit could be shielded by 5-12 percent. This would limit the RoA (return on assets) /RoE (return on equity) damage to 21-37bp/87-155bp," the brokerage firm said.
At 12:05 pm, SBI Cards shares were 3.52 percent lower at Rs 873.05 apiece on BSE whereas they were down 3.32 percent on NSE trading at Rs 873.10 per share.
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