Five-Star Business Finance Limited IPO

About the company:

It is a Non-Banking Financial Company with its headquarters in Chennai and is a Systemically Important Non-Deposit Taking Company (NBFC-ND-SI). It is a lender for small business financing. For commercial goals, asset creation, and other personal needs, it offers secured loans to microentrepreneurs and self-employed people.

At a CAGR of 49.73% between March 31, 2018 and March 31, 2022, the Company's Gross Term Loans increased from $10,082.58 million as of March 31, 2018 to 52,965.35 million as of June 30, 2022 (and to 50,670.78 million as of March 31, 2022).

The interest rates on loans falls between the interest range of 24% - 26% and between the tenure range of five to seven years (approximately 95% of the loans sanctioned). Further, all of loans are fully secured with more than an estimated 95% of the collateral being SORP (Self occupied residential property) at the time the loan application is approved.

Below are highlights of their different products and exposure to products.

Over 95% of the loan portfolio comprises loans from between ₹0.1 million to ₹1.0 million in value, with an average size of ₹0.29 million in the three months ended June 30, 2022.

The average loan-to-value (at sanction) for 230,175 active loan accounts was 36.62% as of June 30, 2022. Almost all of the collateral across the loan portfolio are standalone independent homes and the company does not resort to taking vacant land, agricultural land, or flats in residential complexes as collateral. The company takes an exclusive charge on the collateral against the loan, that is, the company does not share the collateral charge with any other lender either at the time of sanction and disbursal or at any time during the tenor of the loan.

The company has generally averaged a collection efficiency of approximately 98%, except for during the beginning of the COVID-19 pandemic in 2020.

Industry growth:

NBFCs have grown at a faster pace compared to PSBs and private banks in small business loans with less than ₹ 10 lakhs ticket size.

Distribution network of Five Star Business Finance Limited:

As of June 30, 2022, the company’s network is 311 branches, spread across eight states and one union territory, and approximately 150 districts across India, with Tamil Nadu, Andhra Pradesh, Telangana, and Karnataka being their key states. Such key states collectively account for approximately 85% of their branch network.

Key parameters of the Company:

The company’s CRAR stands at 69.93% as of June 2022.

For the company, the average effective cost of borrowings has been consistently about 10.50% and therefore enjoys a long-term credit rating of “A+” by CARE and “AAA” by ICRA as of Sep 2022.

The below table helps to understand the diverse liability franchise of the company.

Below table helps to understand key financial parameters for the company.

The company’s gross NPA stands in the range of 1.1% and net NPA in the range of 0.9% average in the last 3 years and It has a 35% (bucket to bucket matching) provision coverage ratio. The company has one of the lowest restructured books in fiscal 2022 in the industry.

Financials

For the three months ended June 30, 2022 NIM was 19.17%.

Key risks

1. Increase in the level of NPAs or provisions may adversely affect business, financial condition, results of operations and cash flows;

2. Company may face various risks associated with large number of branches and widespread network of operations;

3. Company has huge exposure to few states and lack of diversification could be risky for business.

4. Large portion of collections and disbursements from customers are in cash, exposing to certain operational risks.

Comparison and Basis for issue price

Considering the upper price band of 474 per share, it translates into PE of 30x and PB ratio of 3.6x (based on June 2022 book value of 132 INR). It appears reasonable valuation considering both the parameters.

IPO details and subscription

The IPO starts on 9^th Nov 2022 and will end on 11^th Nov 2022 with an issue size of Rs. 1,960.01 Cr (fully offer for sale). The lot size will be 31 shares and a retail investor can apply for a maximum of 13 lots. The price band offered by the company is Rs. 450 - 474 per share. As of 10^th November 2022, in the grey market, it is trading at a discount of 8/share. As of the releasing the blog, the issue has been subscribed to 0.08 times.