Buy Five Star Business Finance ltd Target Rs.950 - Nirmal Bang
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* Five Star provides secured business loans to unbanked micro-entrepreneurs & self-employed individuals excluded by most Banks/NBFCs with ATS (avg loan ticket size) of Rs. 2.4 Lac and total AUM of Rs. 6.9k Cr.
* All its loans are secured by borrowers’ property, predominantly self-occupied residential property.
* ATS of < Rs. 5 Lacs is the toughest segment to crack owing to complex operational challenges such as (i) requirement of deep knowledge of local area and customer behaviour, (ii) tricky collateral evaluation (iii) difficulty in assessing volatile informal customer cash flows (iv) ensuring timely collections. Thus, building expertise takes time. With 2 decades of experience & consumer data, Five Star has cracked this model.
* Serving mainly in tier 3-6 small towns, invoking legal action entails high cost, as a result, the only other listed co. (SFB). present in this segment is shifting its focus away from < Rs. 5 Lac ticket size.
* Five-Star’s strong return metrics (RoA/RoE of 8%/18% in FY25E) and high earnings growth of 30% CAGR over FY23-25E shall be driven by strong AUM CAGR of 35%; stable NIM and cost/income; and subdued credit cost in the 0.6-0.8% range. We recommend ‘BUY’ with a target of Rs. 950 based on 27x FY25E EPS at 1x PE/G (assuming FY23-30E earnings CAGR of 27%)
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