Five Star Business Finance IPO

About the company:

About the Company

Five-Star Business Finance Ltd (“Five Star”) was incorporated on May 7, 1984. Five Star is an NBFC-ND-SI providing secured business loans to micro-entrepreneurs and self-employed individuals, each of whom is largely excluded by traditional financing institutions.

Five Star had an extensive network of 311 branches as of June 30, 2022, spread across approximately 150 districts, 8 states, and 1 union territory, with Tamil Nadu, Andhra Pradesh, Telangana, and Karnataka being their key states.

The Company’s gross term loans have grown to INR 5,296.5 crore as of June 30, 2022, from INR 1,008.2 crore as of March 2018 at a CAGR of 49.7%.

Key Company Strengths

Fastest Gross Term Loans growth among the compared with strong return and growth metrics and a significant potential addressable market.

Five Star has the fastest Gross Term Loans growth among their compared peers (being NBFCs in India) with more than INR 3,000 crore in Gross Term Loans, with a CAGR of 65% (Financial Year 2017 to 6 months ended September 30, 2021), catering to the small business finance needs of unserved and underserved customers. While their Gross Term Loans have grown to ?5,067.08 crores as of March 31, 2022, from ?1,008.26 crores as of March 31, 2018, at a CAGR of 49.73% (between March 31, 2018, and March 31, 2022), their growth has primarily been volume led with consistent ATS and steady yields.

Presence in a Niche Market

The company primarily deals in giving out secured loans to small businesses and shopkeepers with a ticket size of 3-5 lacs in tier 2-6 cities. The company has created a strong niche in this segment and enjoys less competition from the formal segment. This segment is too far away from the geographies which banks target and the ticket size is too low for other leading NBFCs.

Among the select institutions to develop an underwriting model that evaluates the cash flows of small business owners and self-employed individuals in the absence of traditional documentary proofs of income.

Five Star has an underwriting model to provide secured financing solutions to small business owners and self-employed individuals and over the last 2 decades of operation in this particular product among the select institutions to have developed such a model in India. The model is customer centric and is underpinned by underwriting practices that triangulate the character, cash flow, and collateral of potential customers. The robust underwriting is reflected in its number.

They are among the 3 best for gross non-performing assets (being Stage 3 Gross Term Loans which are 90+ Days- Past-Due (“DPD”)) as a percentage of Gross Term Loans (they had Stage 3 Gross Term Loans as a percentage of Gross Term Loans of 1.05%) as of March 31, 2022, while they have the best asset quality among lenders identified by CRISIL as engaged in extending MSME business loans, with other lenders reporting 90+ DPD more than 2%.

100% in-house sourcing, the comprehensive credit assessment, and robust risk management and collections framework, leading to good asset quality.

Catering primarily to small business owners and self-employed customers while maintaining asset quality requires a special skillset in absence of traditional income evidence. The company’s 100% in-house sourcing, the comprehensive credit assessment, and robust risk management and collections framework allow them to identify, monitor, and manage risks inherent in their operations.

Access to diversified and cost-effective long-term financing with a conservative asset liability and liquidity management approach.

The company has secured financing from diversified sources of capital, including term loans; proceeds from loans securitized; proceeds from the issuance of NCDs; issuances of principal protected market linked debentures; and proceeds from loans assigned; from banks, financial institutions, mutual funds, and other domestic and foreign financial and development finance institutions to meet their capital requirements.

Key Company Risks

Ø  The company is affected by volatility in interest rates for both their lending and treasury operations, which could cause their net interest income (“NII”) and net interest margin (“NIM”) to vary and consequently affect their profitability, the result of operations, and cash flows.

Ø  Their operations are primarily focused in the states of Tamil Nadu, Andhra Pradesh, Telangana, and Karnataka and any adverse developments in these regions could have an adverse effect on their business.

Ø  They have experienced significant growth in recent years and they may not be able to sustain such growth in the future.

Conclusions

Five Star business operates in a segment that is highly underpenetrated and has sufficient legroom to grow. This is evident from the fact that the company has been growing its book at a very good pace. The company has created a niche for itself and is able to generate an impressive ROA of 7-8%. Despite generating a high ROA and NIMs the company’s GNPA has been below 1.5% which makes this business model value-generating and unique. Considering the improving macro environment, systemic credit growth of the country, strong underwriting of the company, and the ability to generate high return ratios, we recommend our investors to SUBSCRIBE to this IPO.

Key Financials