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Reaching the unreached; niche position in INR 22trn MSME lending

Five Star Business Finance’s FY23 annual report provides an insight on how it is progressing towards its vision of “reaching the unreached through suitable credit solution” and capturing the INR 22trn MSME lending opportunity. AUM growth reviving to 37% in FY23 vs 14% CAGR between FY20-22 (covid impact) is a testimony to its agility and business resiliency. In a high human touch model, adherence to standard-operating-process (SOPs) becomes a prerequisite, and negligible frauds / mishandling of cash in FY23 (and even in previous years) reflects its tight control on processes and staff quality. Notably, gross stage 3 increased marginally to 1.36% in FY23 vs 1.06% in FY22 despite the implementation of daily DPD recognition from Oct’22. Maintain BUY with an unchanged target price of INR 860, valuing the stock at 4.5x on Sep’24 BVPS.

Huge untapped opportunity of INR 22trn

CIRSIL Research estimates total self-occupied residential property backed small business lending market at INR 22trn. Five Star with more than 2 decades of lending experience in small business loans is uniquely positioned to capture the largest pie of this huge untapped market. Unique underwriting model based on 3Cs – character, cashflow and collateral – and its continued investment towards branch expansion could help Five Star become a formidable player in small business loan segment.

37% AUM growth in FY23 reflects its agility and business resiliency

While Five Star has been able to deliver ~100% AUM CAGR during FY15-20, taking gross AUM to >INR 40bn by FY20 from INR 1.3bn in FY15, covid onset derailed its growth trajectory as reflected in AUM growth decelerating to 14% during FY20-22. However, with subsiding covid impact, Five Star has reemerged into a strong growth phase as it reported strong 37% YoY AUM growth in FY23, showcasing its agility and business resiliency.

Set-up of separate collection team

With increasing balance sheet size and to sharpen its focus on collection as well as sustain growth momentum, Five Star has set up a separate collection vertical. While the primary responsibility of early collections still remains with the sourcing officer, accounts with certain vintage will now move to collections vertical, which will free up the time for business team to on-board new business.

Key Risks.

Deceleration in AUM growth, and stress unfolding higher than anticipated.

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