Five-Star Business Finance (Five-Star) is a direct play on the increasing formalisation of credit, especially in the small-ticket business loan segment (total lending opportunity: Rs22trn). Peers include SCUF, Aavas, Aptus, HomeFirst, Equitas, AU, Repco, Can Fin, Veritas, Vistaar, etc. Barring SCUF and Repco, key players in similar ticket-size SME loans reported >30% AUM CAGR during FY18-FY23 while Five-Star delivered an industry-leading 47% during the same period. Notably, gross stage-3 assets and credit cost remaining at 2 decades of experience in the segment in urban and semi-urban locations. While its low leverage (‘debt to equity’ ratio at an average of 1.2x during FY15-FY23) has aided NIM at >17% since FY15, stable asset yield at ~24% (given ~30% new-tocredit customers imparting high pricing power) and ~135bps reduction in average cost of borrowing, even during rising rate cycle, improves visibility on it sustaining spread at 12-13% going ahead.
OutlookWe expect >25% AUM CAGR for Five-Star over FY23- FY25E on the back of: 1) one of the most extensive branch network of ~370 vs 7% and deliver RoE of >15% over FY23-FY25E. Initiate with BUY and a target price of Rs765, valuing the stock at 4x on Sep’24E BVPS.
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