Buy Five Star Business Finance; target of Rs 900: Motilal Oswal

Motilal Oswal's research report on Five Star Business Finance

Five Star Business Finance (FIVESTAR) had calibrated its AUM growth in light of the macroeconomic environment, the overleveraging of certain customers with unsecured loans, and regulatory expectations. FIVESTAR calibrated its disbursements in 3QFY25, and its AUM growth moderated to ~25% YoY as of Dec’24. During Jan-Mar’25, lenders such as FIVESTAR also faced disruptions from the Karnataka ordinance, which may lead to slightly weaker disbursements and AUM growth. We estimate ~24% AUM growth in FY25. Given the broad weak macroeconomic environment and disruptions in states like Karnataka, our assessment suggests that the last three and the next three months could very likely be a period of stabilization rather than a period of asset quality improvement. The recent calibration in AUM growth and this period of stabilization in asset quality would create a foundation for stronger growth in the years to come. As conditions improve over the next few quarters, we expect the company to regain business momentum and potentially exceed its current AUM growth guidance of ~25%.

Outlook

We estimate FIVESTAR to deliver ~26%/19% AUM/PAT CAGR over FY24-FY27 and RoA/RoE of 7.1%/17.4% in FY27. We reiterate our BUY rating on the stock with a TP of INR900 (based on 3.0x Mar’27E BVPS).

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