Global financial service firm Nomura has designated Five-Star Business Finance Ltd as a highly-profitable NBFC. One of the fastest-growing companies in the segment, the NBFC provides secured business loans to micro-entrepreneurs and self-employed individuals (secured by self-occupied residential property) with a strong presence in south India.
“Five-Star Business clocked an AUM CAGR of 47 percent (largely volume-led) over FY18-23, with an average ticket size of INR0.3 mn. Its focus on a large underbanked market provides superior pricing power (yields >24 percent) and strong underwriting leading to robust profitability with average ROAs of 7.6 percent and PAT CAGR of 61 percent over FY18-23.”
Large untapped opportunity with limited competition
Nomura believes that the NBFC has a large untapped opportunity to grow rapidly, “We estimate the company to deliver 30 percent AUM CAGR during FY23-26F driven by significant untapped opportunity in MSME, specifically in niche small business loans (MSME loans with ticket size <INR0.1 mn) segment with higher growth than overall MSME loans (22 percent CAGR for SBL vs 7 percent for MSME during FY18-22). The contiguous expansion with 50-60 new branches is expected every year along with an increase in the fleet on the street leading to higher customer addition and enhanced productivity (loans disbursed per branch/officer- INR91/8mn in FY23 vs INR59/6mn in FY21); and a gradual increase in ticket size back to pre-COVID levels of INR0.34-0.36mn and then in line with inflation.”
Also Read: Will BlackRock’s spot Bitcoin ETF breathe life into the comatose crypto market?
“Five-Star’s key strength is in its strong underwriting practices, which have led to superior asset quality performance through cycles. The company follows a multi-layered underwriting approach with all loans sourced in-house with a strong focus on maker checker across all credit functions. Even for NPAs, the haircut has been negligible with not more than 2 percent IRR loss on settled NPLs. All these have led to credit cost (as a percent of net loans) of only 80bps during FY15-23, and we expect it to be 90bps during FY24-26F," the brokerage added.
Noumra has initiated coverage with a 'buy' rating on the stock. The valuation premium will be sustained going ahead, it said, adding “We believe Five-Star is uniquely positioned with superior growth and best-in-class profitability among financial peers."
"We estimate EPS CAGR of 25 percent during FY23-26F with RoA/RoE of 7.7 percent/16.6 percent. We value the company using the residual income method with a TP of INR750, implying 3.6x FY25F BVPS and 24x FY25F EPS (current valuation- 2.9x/19x FY25F BVPS/EPS). Key risks: Inability to scale up in new states, rising competition from lenders/fintechs and worse-than-expected asset quality deterioration," it said.
Monarch Network Capital views
Monarch Networth Capital has also initiated a 'buy' coverage on the stock with a potential upside of 16.5 percent and a target price of Rs 700. The coverage was initiated by the brokerage house when the stock was trading at Rs 601. Five-Star Business Finance Ltd currently trades 6.35 percent higher at Rs 637 on NSE.
Also Read: Boom-bust cycle of NBFCs recovering again; Bajaj Fin, L&T Fin top picks: JPMorgan
Monarch said that Five Star’s decentralized and layered credit appraisal team and deeper understanding of its customer base are its key moats which have enabled it to maintain asset quality better than peers. This high-growth-good-asset-quality in a continually volatile and vulnerable underlying sector is no mean achievement.
“Strong tailwinds in mortgage-backed small business loans along with its three-pronged approach to growth - expand in its key southern states, deploy more feet on the street and increase ticket size in tandem with inflation, should drive 30 percent AUM CAGR over FY23-26E. With normalising margins and credit costs and stable operating cost metrics, sustainable RoA for Five Star could be around 6-6.8 percent, but higher leverage should push RoE to 18-22 percent levels," it added.
“We initiate with a 'buy' rating on Five Star with a target price of Rs 700 (3.5x FY25E ABV). We believe premium valuations to sustain are backed by strong growth, better asset quality, a professional management team, a healthy CAR and the ability to deliver 18 percent RoE by FY26E. Our blue-sky scenario suggests a potential TP at Rs 815. The bear-case TP is Rs 490," it said.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
