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SBI Cards IPO: long thread on valuation disasters in Indian markets & how these rip off the retail investors: Let’s start with basic statistics first:13 crore shares being offered our of total of 93 crore stocks. 14% float at Rs 750 per share gives a valuation of Rs 70 thousand crore to the credit card company. This US $ 10 Billion market cap. They say this is the only card company getting listed so a great opportunity. We’ll see some numbers & benchmarks internationally.At FY 19 profits of Rs 862 crore & EPS of Rs 9.43, we get a Price Earning ratio of 80 !! I know many will jump citing the growth prospects now citing certain consumer companies. I have a few questions to explore.Firstly, what is the highest PE of any mature financial company in India. Look at HDFC bank, Kotak, etc & we see much modest PEs of 25 to 35 for HDFC Bank & Kotak. This is when everyone acknowledges that these are very richly valued. But there is a track record of 20 yrs & more for these banks.Many argue that credit cards is a growing industry & has huge potential to penetrate, unlike some mature retail banks that are settling at much modest growth numbers of 20% now. Valuations & PE multiples have correspondingly matured.Do you think that credit card is different than retail banking & is in a super-normal growth phase in India? Think again. You just need to read beyond the headlines & dig in more data.SBI cards has been around for more than 20 years now in market. And last 20 years have seen the card industry mature & evolve reasonably well. It has hit the maturity phase quite sometime back in terms of penetration. Look at the table below to understand this:In-fact there are many players who chose to shrink in size after 2008 rather having paid the price of reckless growth that the Indian market is not ready for. Citi, ICICI, Amex, StanC & HSBC prove the point that card industry in Indian has limited penetration potential. See how the overall credit card lending shrank during 2009 & 2015. The red block is getting thinner. Same story happened with education loans that grew & then reached maturity soon enough. Then just receded from that point.ICICI bank has never seen cards as a growth engine again except very recently now. HDFC did well as it issued cards only to the bank customers where it has an implied collateral of bank deposits. As long the FD is intact, the customer won’t default on the card. If they do, well the bank & manage the rest. That strategy proved right.SBI cards has a different problem through. While SBI has crores of customers, most are not credit worthy & have marginal balance. Additionally, most SBI customers are old generation conservatives that don’t like to use digital payments at all. A small anecdote fits well here.I can recall 2003 when SBI cards issued free cards to all PPF customers under some agreement. The sales pitch was simple – “Sir, SBI is issuing you a free credit card since you hold a PPF account. Branch mgr wants us to give you this card. Did we say its free? Just sigh here pls.” Boom. A card is created.This policy got close to a million new customers to SBI cards but at what cost?. Card company doesn’t make money by issuing cards. It wants people to use cards for credit. The card usage for PPF customers of SBI was not even 20%. So 80% of those never used the card even once. Not surprising at all, at-least for those who “sold the free card”. They knew that half the folks aren’t even going to open the envelope.So, this talk of having access to SBI customer database is a tried tested theory that doesn’t work. Well it works to get the new card issues in the short run but lack of such card usage doesn’t get any money to SBI cards eventually. So it is just a window dressing.I see a similar narrative being built now. SBI cards IPO document doesn’t include much details around the history before 2015. The years before that were all about a shrinking industry, all this when the overall credit in retail was having a best of time. It’s just in the last few years that the industry has again seen some fresh spends & new cards. However, most banks are staying away from any reckless growth, They all have learned the history well & will expand only a limited pace that the market can absorb.Everyone wants to be rational. However, when you’re looking to list thru an IPO, the priorities are different. One player decides to issue cards thru the roof outsmarting every competitor. It doubles the workforce every year for last 2 years. See the employee expenses in 2017, 2018 & 2019 below. They are doubling every year.Why does this happen ? Well because someone wants to issue cards at much faster pace vs the competition. Other banks don’t care as they want profitable growth with stable rates. But SBI cards wants a profitable exit, not sustainable growth. So, we get this.While HDFC bank, is happy with stable market share, Kotak is in-fact reducing the cards to optimize profitability, one player is in a tearing hurry to issue cards, It issues 45% of credit cards in India in the most recent month reported. Who is this player in a hurry ? SBI Cards.Lending business however works very differently. You can always grow by lending money fast. The real fun actually starts later when you have to get the money back. Doesn’t look like a top priority for the company as of now. So, the below growth numbers in spends & market share doesn’t impress me. If HDFC & Kotak with their proven lending practices are not growing, I would worry if some else is trying to grow. SBI Cards is almost stable till 2017 & then suddenly grew by 100% in 2 years till 2019. Not a consistent growth trend one would like to see.Notice another pointer in the date above. Citibank with just 6% of cards share has 13% of transactions. SBI cards takes 18% cards share to generate a 16% share . Citibank is chasing profitable customers & is almost not increasing its cards base. SBI just wants to increase cards issued. The fact that many may not even open the envelope is not important for now it seems. I would less impressed by the “reach & depth” of SBI branch network. Those are not the credit card customers you need.Another look at the channel sales data throws the same conclusion. Look how the share of sales from SBI branch channel has increased from 35% in 2017 to 45% in 2018 to 55% in 2019. Hmmm…..more PPF cards I guess. Will that issuance make money ? I doubt it.Armed with this background, lets get back to the IPO valuation. Is it worth a buy ? Let’s see.So, with a FY’19 PE of 80 , if someone tries to sell me the story of growth in cards issued over last 5 yrs(which basically is in last 2 years), I’m not going to buy it.The stable cards base of SBI cards is 3.6 Mn that it had till 2017, just before the window dressing started &not the 8 to 10 Mn number that SBI wants us to believe. The growth in last 2 years will produce lots of dead cards but not profits. I see the rise in spends but that’s keeping in line with industry trend. The peak however is quickly reached in India & delinquencies follow soon-after. If HDFC, Kotak, etc have stabilized, I don’t see why SBI could grow outside of the trend. At-least not profitably. And it has seen that high bad debt cycle before in 2008.Finally at US $ 10 Billion valuation, I think it is quite generously valued. While there are no Indian card companies listed, we can compare this broadly to Discover Financial & Capital One in USA. Discover with $ 74 BN in credit card assets is valued at $ 20 BN. SBI cards with assets of just $ 3 BN is valued at $ 10 Billion ??? Someone is definitely being crazy bullish here.Just to put this number in context, see the market cap of Indian banks below:HDFC Bank - $ 92 BNICICI Bank - $ 45 BNKotak Bank - $ 44 BNAxis Bank - $ 28 BNIndusInd Bank - $ 11 BNAre you telling me that the credit card arm of SBI is equal to the entire IndusInd bank & one third of entire Axis bank ? Fair valuation for PE firm CA Rover looking to exit with capital invested. For investors from here on, I guess you’ll be buying something at three times the actual price. Will I put my money on it? Absolutely not. There is no money left on the table. And I don’t believe in paying for PE firm profits. Your call !!Feel free to mail or write to me on twitterHonest - Unbiased - Simplified, as always.References:Credit card penetration remains dismally low

QUICK SUPPORT BANK SCAMI was given an offer of lifetime free credit card by a HDFC employee last year. Though I don't use credit card, I felt it may be required in the future in case of emergency. After confirming it doesn’t have any annual maintenance fee or renewal charges, I agreed to get it. However I received an e-mail for membership charges (Rs. 500 plus taxes) last week.Since companies tend to respond to social media faster, I posted my issue in face book.The bank replied they’ll look into this issue and asked to enter contact details privately in messenger which I did and they said they’ll look into it.I received a similar message from the bank after some time regarding my inquiry. Though unable to understand why they are asking again, I still replied my issue to them.Shortly, I received a call from HDFC bank employee. He noted down my problem and said he’ll resolve it. He asked me to open Quick Support app. Believing it’s an app used for support purposes, I downloaded and installed it. When I opened it, it felt like a screen sharing app. He asked me to give my 10 digit pin. Since he was a bank representative I didn't think much and gave him the access.Here is where the scam starts. He asked me to enter into my HDFC App and login. HDFC had launched a new app which I installed. But I forgot my customer id. I searched through my e-mail to check whether I had received any during initially. I was searching for 5 minutes. Then, he said he can help and asked me to login to my net banking where I can find my id. When I opened the page I found out my customer id and used it to login to my app.He asked to check exact amount to be paid. I checked and informed him. Then he mentioned my credit card no and asked if it was right. It was mine. Then, He asked to authorize third party transaction. I accepted. It needed my ATM Pin. I didn’t remember my pin since I got this HDFC account only for getting shopping discounts from Flipkart, Amazon and such online transactions and have ICICI as primary. When I mentioned this he said, no problem and login to imobile app.At this point I got confused. Why a HDFC bank employee wants to open an imobile account. Anyway he said my membership charges will be credited to my account. So, I opened the app. In between, he said he’ll be sending messages from his side. When I saw the messages, it looked like this.I realized something was wrong. Why so many messages for transaction of Rs. 10000 (I needed only Rs.590) and having merchants like Flipkart, Nearbuy. I suddenly realized all my activities are watched by him and he could hack my data. I immediately closed my Quick Support app and asked him to prove he is a HDFC representative. He calmly said these transactions are only to credit to my account and asked to open Quick Support. He said he’ll be sending another message. Just open the message. Don’t disclose the OTP. I once again received the same set of messagesBy now I was aware that, he’s using my account to transact and if I use quick support and open messages, he can easily see my OTP and transfer the amount. I quickly cut the call.I searched for internet to find if any scam has happened like this before. To my shock, I found that this scam exists with a similar app named AnyDesk and RBI has warned about this.I was relieved I didn’t lose money but couldn’t understand how anyone could get my number as I had posted it only in messenger. I even informed HDFC about the scam.No reply from them. I found it odd since it was a sensitive matter. I even commented in fb. Still no reply.After going through this confusion, I decided to check my messenger once again. There was something odd in the Hdfc bank name. It was Hdfc and not HDFC. On opening the info, I found Hdfc is not a bank page but was just a page created by scammers to cheat the HDFC customers.This is their page with 5 followers and no content whatsoever. They check for grievances in HDFC official fb site and act as their representative to scam you. The worst part is when I informed this to official HDFC, they didn’t even acknowledge that such an incident happened and simply said I need to pay my credit card amount.More than the scam or having to pay membership fees without even opening the card, the apathy of HDFC towards the scam worries me. They overlooked it in messenger and didn’t even reply in fb. I’m pretty sure if I had lost my money, there was no getting back.I thought I was well educated and well informed to fall for these traps. But when someone calls you and speaks very politely in impeccable language, it’s easy to believe him momentarily and give him the information only later to understand what an idiot I am.So, people, please be aware and raise awareness on these scams extensively. It’s very difficult to overcome seeing your hard earned money vanish within 5 minutes because of a scam.

Although I usually tip in the neighborhood of 20% when I have acceptable service I am honestly uncomfortable with the whole tipping economy and what I am going to share is not in the politically correct zone.First, a few facts about tipping in my hood. In Oakland the minimum wage is $12.25 per hour, and all tips are on top of that. Voluntary tips can be shared with other employees who have direct contact with customers, like bussers and non-manager hosts, but cannot be shared (except when totally voluntary with back of the house workers like cooks and dishwashers. Mandatory services charges may be distributed or retained by the owner in their discretion.Things I don't like about the tipping economy:1: I don't like that if the tip is on the customer's credit card the employer is required to pay the 2-3% service charge and the employee gets the entire tip (California) I don't think that is fair to the employer. I believe that the employee should be receiving net of the credit card expense.2: I don't like that owners who also work serving customers are not allowed to participate in tips that are given to the house. For example, and this is typical of client situations. A single mom opens a coffee place and works her ass off, by herself because she can't afford employees for the first six months. Everything in the till goes back into the business while it builds its customer base. She has a fabulous way with customers who stuff her tip jar and that is what she lives on. Now she's busy enough to hire an employee for 6 hours a day, and they both work together. During that six hours she is still fabulous with customers and now with more customers there is even more in the tip jar. RULE: 100% of the tips accrued during the six hours the employee is there must go to the employee and none to the owner who works at least just as hard serving customers and is the one primarily responsible for the tipping abundance. What is fair about that. It's just not right.3: When one takes into account the entire customer experience, aren't the back of the house employees just as responsible for the customer experience and just as worthy to participate in tips.4: I don't understand why managers, and especially assistant managers who serve the public are not just as worthy of participating in tips. If an Assistant Manager is waiting on you at Starbucks (you won't find me at Starbucks, so its you there) they may be earning 50 cents an hour more than their non-manager counterparts and doing all the same work.5. I don't honestly understand why tips are based on the size of the check, rather than on the number of people or the type of establishment. I don't understand why a server who brings me a $20 pasta dish gets 1/3rd of the tip than a waiter who brings me a $60 steak, or why a wine bottle that cost twice as much is worth twice as much for the service of opening and pouring it. The size of the check to me seems to have nothing to do with the amount of service or the quality of service. I get that its historical but for me its a non-sequitur.6. I don't understand why the minimal level of service at counters are still expecting a tip in the ranger of 15-25% as if it was full service. They don't take my order at the table, bring it to the table or remove the dishes. Why doesn't the level of service impact the expected level of time.7. I am totally against food delivery services defaulting your tip to 20% (you can change it) for the delivery plus plus a $2.50 to $5.00 delivery charge. And like above, why is the delivery service worth twice as much if the food costs twice as much. I have contacted a few of these and asked if my designated tip can be shared with the folks who prepare and expedite the food and I am told no.8. Although the profusion of credit card transactions has limited this I do not think it is right that servers choose to under report their cash tips for tax purposes. I know its kind of square of me, but for me, that's wrong.9. And finally, so long as tipping is what it is, quality does matter, and a tip is an acknowledgment of quality and appreciation for it, and not some amorphous obligation based on a server's right to tips regardless.For me, I prefer mandatory service charges or increased menu prices and no tipping allowed (Bocanova in Oakland) and expect that to compete for the best servers and cooks and other employees that employers will pay high enough salary to compete for the best people. In the meantime I tip, really.I welcome all thoughtful comments, especially those which express disagreement. Try to avoid name calling. But remember, I umpire baseball and almost surely, I've been called worse.