AVCJ Awards 2020: Exit of the Year - IPO: SBI Card

How does a private equity firm help stage India’s fifth-largest IPO ever, achieving a 7x return through the sale of less than half its stake? According to The Carlyle Group, give the company some space.

The wisdom here was borne out in March 2020 with the $1.3 billion listing of SBI Cards & Payments, State Bank of India’s (SBI) credit card issuing arm. Importantly, the big bang was not followed by a whimper – the stock had gained 13% on its IPO price as of January 2, representing a market capitalization of $10.9 billion.

Carlyle, which bought a 26% stake in SBI Card from GE Capital for about $274 million in late 2017, generated $847 million by offloading a 10% interest. Its remaining 16% is worth $1.7 billion.

This was a play of timing and restraint. Carlyle identified that the company, already India’s second-largest credit card provider, was laying groundwork for massive scaling and a future as the only player of its kind on the domestic bourses. All that was needed was light-touch support.

“The single biggest takeaway from the IPO is about recognizing that the work done before listing was done by management,” says Sunil Kaul, a managing director at Carlyle. “The role we and SBI played was to empower the management, make sure they felt supported, and give them the resources they needed without any pressures around maximizing quarterly numbers. The most important thing is to have strong alignment between stakeholders and to provide management with the room to do well.”

Two become one

During Carlyle’s holding period, SBI held the balancing 76% interest in the business and worked hand-in-hand with the private equity firm on a number of value-add fronts. Perhaps the most important of these was the initial merger of SBI Card with a separately operated backend unit called SBI Business Process Management Services.

Running these two entities as an integrated unit meant combing teams and technology platforms and reconfiguring hundreds of processes. Carlyle and SBI established the governance mechanism for this transition, which included moving all overseas data center activity back to India. This has since become an industry-wide requirement.

The merger streamlined a number of issues around regulations and compliance but may have been most crucial in its enhancement of technology infrastructure and data usage. Much effort went into creating systems for contactless cards and e-commerce – which have played well during COVID-19 – as well as improved capacities in data-related risk management, analytics, and customer service tools, including artificial intelligence-enabled chatbots.

However, the key outcome of the integration of the two platforms and the data systems upgrade was the creation of enough certainty at the parent company level to let a combined entity of subsidiaries access the broader SBI client base, which encompasses some 500 million individual customers and 740 million accounts.

“When you want to cross-sell, you have to give confidence to the people in that bank that their customers will not get the runaround,” Kaul says. “In a parent company, there will be trust, but you have to deliver on that trust. You need to have a systematic technology linkage that works flawlessly from the customer and salesperson point of view.”

SBI Card sourced only 35% of its customers from SBI at the time of Carlyle’s investment; within two years, it was 57%. This was achieved without relinquishing industry leadership in terms of open-market customer sourcing, resulting in a significantly larger – and diversified – pipeline.

The number of new cards issued increased from 950,000 in financial 2017 to 2.3 million in the 2020 financial year. The company now serves 10.5 million cardholders, roughly 45% of which were sourced from open market and co-brand channels, with the rest coming from SBI.

There are at least two major effects of this activity. First, SBI Card is now the largest provider of co-branded cards in India, which is seen as enabling rewards and benefits partnerships with heavy car-use industries such as travel, fuel, retail, and mobility. Second, expansion of the customer-sourcing playbook has translated into a deeper analytics database. The company now evaluates more than 1,700 attributes for every credit decision.

“Not only did SBI Card get access to these customers, but they were able to run data analytics to find out which products would be most suitable for them and how they could offer those products with minimal overhead for the customer,” says Kaul. “There was a whole host of wiring and plumbing that needed to be done for that, some of which was already underway when we invested. We definitely saw the benefit in that.”

Major player

The top four credit card players now include three private banks – HDFC Bank, ICICI Bank, and Axis Bank – and SBI Card as the dominant pure-play card issuer by far. At the time of the IPO, SBI Cards had 18% market share versus 27%, 14%, and 13% for HDFC, ICICI, and Axis. Revenue rose 32% during the 2020 financial year to about $1.3 billion. Net profit was up 44% to about $170 million.

Meanwhile, SBI Card claims to have invested heavily in technology, with recent initiatives a digital credit card application program called Sales24, and a data lake that serves as an end-to-end analytics platform facilitating real-time, location-based customized offers to cardholders.

Products now also include an e-credit card with an instant generation of virtual credit and electronic PIN, so that new cardholders to immediately start online transactions without waiting for the physical card delivery.

“A lot of people will tell you credit cards are going away because fintech is coming, but that’s fundamentally not true because a card doesn’t have to be plastic,” says Kaul. “It is just an account from which money is paid for a transaction, and if you can make it convenient and rewarding, there’s no need for plastic. You can use it either way – with or without plastic.”

Pictured: Sunil Kaul of The Carlyle Group

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• Topics
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