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Five Star Business Finance Limited

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Brief Introduction

Five-Star Business Finance Limited is a non-banking financial company headquartered in Chennai, India. The company provides a range of financial products and services to micro, small and medium-sized enterprises and individuals in India. It offers a wide range of financial products and services, including secured and unsecured business loans, working capital loans, machinery loans, trade finance, invoice discounting, and loan against property. The company also provides loans to individuals for personal and home-related expenses. It has a pan-India presence, with a network of 70 branches across 10 states in India, including Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, Kerala, Maharashtra, Gujarat, Rajasthan, Madhya Pradesh, and Delhi. It has a robust risk management system in place, which includes credit appraisal, monitoring, and recovery processes. The company’s asset quality is one of the best in the industry, with a low level of non-performing assets (NPAs).

Detailed Results:

  1. The company has moved from INR 4,767 crores to INR 6,242 crores year on-year, registering a growth of 31%.
  2. On Q-on-Q, the company has moved from INR 5,732 crores to INR 6,242 crores with one of the best Q-on-Q growth of 9%.
  3. In disbursement the disbursement, the company has moved from INR 426 crores to INR 910 crores comparing year-on-year with 114% growth and comparing with Q-on-Q, from INR 802 crores to INR 910 crores with a healthy disbursement growth of 13%.
  4. 90-plus has been flat, compared to last quarter, at 1.16%.
  5. NPA stands at 1.45%.
  6. The difference between 1.16% of 90-plus and NPA of 1.45% is 0.29% which is INR 18.10 crores of loans, which have been categorized as NPA even though it is less than 90 DPD as per the new circular which got kicked in from 1, October 2022.
  7. Incremental cost of borrowing has moved from 8.5% last year to 8.7% this year with the increase of 20 bps even though repo rate has moved from 4% to 6.25% with an increase of 225 bps.
  8. Cost of borrowing on the book has come down from 10.50% in last year to 10.35% now
  9. The company has moved from INR 118 crores of PAT to INR 151 crores of PAT, registering a 28% growth year-on-year. And from INR 144 crores to INR 151 crores, Q-on-Q, with registering a growth of 5%. 
  10. On a year-on-year basis, loan base has  represented a growth of 24% from about INR 2.15 lakhs.
  11. AUM has been at about 31% year-on-year and 9% quarter-on-quarter.
  12. NIM is at a very healthy number of about 18.55% for the quarter.
  13. Year-to-date, the NIM has improved to 17.91%
  14. Cost to income stands at a very healthy number of about 35.56% for the first nine months as compared to 35.62% for the nine months ended December 2021.
  15. The restructured book as a proportion of overall AUM stands at 1% at INR 62 crores.
  16. Cost to income ratio is at 38%.

Investor Conference Call Highlights 

  1. The management stated that the disbursement growth has been led by increase in the number of branches.
  2. The management informed that they have added close to 89 branches last year and about 17 branches during the quarter. So as of now, the total branches stands at 369 branches for Five Star.
  3. The management stated that NPA has been changed which is in line with RBI circular dated 12, November 2021 which got implemented from 1, October, 202.
  4. The company has raised more than INR 1,000 crores in a single quarter which is the first of its kind in Five Star. They have raised over INR 1,050 crores of incremental debt at an all-in cost of about 9.1%
  5. The management thinks that their growth has been both branch-led as well as customer-led, with a very minimal increase in ticket sizes.
  6. The management stated that NIM is at a healthy number due to lower leverage but a large part of it is also being on the back of lower funding costs.
  7. The management stated that a healthy cost to income is because of a return of assets of 8.64% year-to-date and a return on equity of 14.66%.
  8. The management informed that  banks contribute about 56% of their debt and they have diversified their borrowings, across non-convertible debentures, market linked debentures.
  9. The management stated that their borrowing cost has actually gone up by about 42 basis points despite the fact that RBI has raised their repo rate by about 225 basis points.
  10. The company is clocking a collection efficiency of over 98% in the last six quarters with four quarters showing over 100% in collection efficiency.
  11. The company holds about 44.78% provision on the Stage 3 assets and 1.66% provision on overall AUM.
  12. The management thinks that the overall provision coverage on the AUM will gradually start normalizing in the coming quarters.
  13. The management stated that 30-plus stands at 12.1%.
  14. SMA 1, which is one to 30 stands at about a little over 7%, 31 to 60, which is SMA2, stands at 5.42%, 61 to 90 stands at 5.23%, and NPA stands at 1.45%.
  15. The management stated that they had a credit cost of about a little over close to 100 basis points, about 94 basis points because that was also the time post first wave, second wave, they were consciously building more provisions that had started normalizing.
  16. The management informed that almost 85% of our loans get sanctioned for a seven-year tenure.
  17. The company was at INR 3.5 lakh average ticket size which has come down to INR 2.5 lakhs during COVID consciously.
  18. The management stated that their bulk of the branches are in states where they already have a very-very significant and a strong presence. So, they are consolidating our positions in the core states of the South.
  19. The management explained the division of their clients in three segments. The first segment are people who are single shop owners. Second category is the self-employed individuals and third category is self-employed individuals, not doctors and engineers, but more in the category of plumbers, painters, masons.
  20. Five Star has always relied on 100% in-house collections, meaning that they handle all collections internally rather than outsourcing it to third-party agencies. Additionally, the person who originates the business is responsible for collections, which makes them more accountable and responsible.
  21. At Five Star, there are three core verticals. The first is sourcing. The second is underwriting and the third is collections. These three define who a lender is and across the three verticals, we will not have anything which is outsourced.
  22. The management stated that the net interest margins are inflated to some extent because of lower leverage.
  23. The management stated that the thumb rule that they have is that if an officer is doing business and collection on an average, he can handle about 100 accounts. So the moment it crosses the per officer level of 100 accounts, they will start adding more and more officers as per the need in the branch. So they have branches which have more than 12-13 officers at this point of time. 
  24. Attrition at officer level in a branch is about 28-29% overall, largely in line with the industry.
  25. The management stated that they are in talks with SIDBI to get a fresh line. On the international side, they have had monies that they have raised from institutions like Responsibility in the past. The ECB that they are currently carrying on book is given by the Swedish development, sovereign fund, Swedfund.
  26. The management stated that what they see as a salary , both fixed and variable for a field officer is about INR 20,000, INR 25,000. So that’s like 1 lakh to 1.25 lakh. The branch manager will be getting anywhere around INR 40,000 to INR 50,000. So that’s 1.75 lakh. Each of the other people on a broad basis, the credit operations support and cashier, the average salary will be about INR 20,000. 
  27. The management informed that about 7% of our portfolio comes from non-south,  93% of the portfolio is within the south. 
  28. The management stated that a bulk of the collateral that they take is a self-occupied residential property and are backed by document.

Analyst’s ViewFive Star Business Finance offers loans and other financial services to small and medium-sized enterprises (SMEs) in India, which could be a promising area for growth given the country’s large and growing SME sector. The underwriting model of the company recognises those customers with the ability and willingness to repay the loans by studying their character, cash-flow and collateral. Considering that the business targets those from low-middle income groups, lack of documentation can severely hinder the company’s efficiency. The company aims to continue to build slowly and steadily about 50 to 60 branches per year which would add to the growth. A lot of this market opportunity is also concentrated in states like South India like Tamil Nadu, Andhra, Telangana, Rajasthan, Madhya Pradesh, Maharashtra and all that. So it is a very huge market out there in terms of opportunity for Five Star Business Finance. The company has been constantly developing on the technological front by implementing APIs which enhance data accuracy.