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Company Description

Five star business finance limited is an NBFC-ND-SI providing secured business loans to micro-entrepreneurs and self-employed individuals, each of whom are largely excluded by traditional financing institutions. They are headquartered in Chennai, Tamil Nadu with a strong presence in south India. Over 95% of its loan portfolio comprises loans from between ?0.1 million to ?1.0 million in principal amount, with an average ticket size of ?0.29 million, ?0.27 million, ?0.28 million, ?0.26 million and ?0.31 million in the three months ended June 30, 2022 and June 30, 2021, and the Financial Years 2022, 2021 and 2020, respectively. They have developed a business model that is predicated on arriving at an appropriate risk framework, with the optimal instalment to income ratio to ensure that their customers have the necessary means to repay the loan after meeting their regular obligations and other event-based capital requirements. They target customer:

* in urban and semi-urban locations, as well as in the rural markets of India;

* who typically derive income from “everyday” cash and carry businesses with a focus on services;

* with household net cash-flows of approximately ?25,000 to ?40,000 per month;

* who can provide collateral (typically land and building of approximately ?1 million in value;

* whose family will act as co-applicants on the loan.

Their growth is primarily volume led through increasing their customer base while keeping the ATS (Average ticket size) stable, and they expect this to continue. The interest rates on their loans depend on the underlying tenor (which ranges from two to seven years), with approximately 95% of the loans sanctioned being between the interest rate range of 24% to 26% and between the tenure range of five to seven years. 100% of their leads for customers are sourced in-house without any use of direct selling agents to source leads for them; further, all of their loans are fully secured with more than 95% of the collateral being SORP at the time the loan application is approved. They had an active loan base of 230,175 and 217,745 as of June 30, 2022 and March 31, 2022, respectively. Gross Term Loans has grown to ?52,965.35 million as of June 30, 2022 (?50,670.78 million as of March 31, 2022), from ?10,082.58 million as of March 31, 2018, at a CAGR of 49.73% between March 31, 2018 and March 31, 2022. Profit for the period / year for the three months ended June 30, 2022 and June 30, 2021, and for the Financial Years 2022, 2021 and 2020 was ?1,394.33 million, ?1,015.71 million, ?4,535.45 million, ?3,589.94 million and ?2,619.51 million, respectively, and their Total Equity as of the end of the same period/years was ?38,569.75 million, ?29,444.13 million, ?37,103.51 million, ?23,181.72 million and ?19,445.80 million, respectively.

Valuation

Five star business finance limited has a fastest gross term loan among peers with a strong on-ground collections infrastructure leading to their ability to maintain a robust asset quality and access to diversified and cost effective long term financing with an experienced, cycle tested leadership supported by marquee investors.

Five star business finance limited is available at the upper price of the band at 3.7x P/BV with market cap of ?1,38,107.34 million post issue of shares and return on net worth of 13.86% and ROA is 7.5%.

Five star business finance limited is fairly priced and we recommend a “Subscribe- Long term” rating to the IPO.

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