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Salient features of the IPO:

* Five-Star Business Finance Ltd. (FBFL) is an NBFC-ND-SI providing secured business loans to micro-entrepreneurs and self-employed individuals.

* As of Jun’22’, AUM stood at Rs5,297 cr which grew at a CAGR of ~48% from FY18.

* Total issue size stood at Rs1,960 cr which is purely offer for sale.

Key competitive strengths:

* Fastest gross term loans growth among its compared peers

* Ability to successfully expand to new underpenetrated geographies through a calibrated expansion strategy

* Strong on-ground collections infrastructure leading to ability to maintain a robust asset quality;

* 100% in-house sourcing, comprehensive credit assessment and robust risk management and collections framework, leading to good asset quality;

Valuation: At the higher price band of Rs474, the issue is valued at P/BV 3.6x (on post issue BVPS) which seems expensive.

Below are few key observations of the issue:

* Five Star Business Limited (FBFL) was incorporated on May 7, 1984. FBFL is an NBFC-ND-SI providing secured business loans to microentrepreneurs and self-employed individuals, each of whom is largely excluded by traditional financing institutions. Based in Chennai Tamil Nadu, the company has a strong presence in south India.

* With a CAGR of 65% (FY17 to FY21), FBFL has the fastest Gross Term Loans among large peers (with more than Rs3,000 cr in Gross Term Loans). Over 95% of the loan portfolio comprises loans from between 1 lakh to 10 lakh in principal amount, with an average ticket size (ATS) of 2.9 Lakh as of June 30, 2022.

* FBFL had an extensive network of 311 branches, as of June’ 2022, spread across approximately 150 districts, eight states and one union territory, with Tamil Nadu Andhra Pradesh, Telangana and Karnataka being key states. Such key states collectively accounted for approximately 85% of the branch network by number, as of June’ 2022. Approximately 95% of the branches were located in cities and towns with populations up to one million as of June’ 2022.

* FBFL primarily offers the customers small loans for business purposes which accounts for Rs3,290 cr (62.1% of Gross Term Loans) as of June, 2022. They also provide loans for asset creation such as home renovation or improvement, or for meeting expenses for significant economic events such as marriage, healthcare and education, which accounted for Rs 2,006 cr (37.9% of Gross Term loans) as of June 30, 2022.

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