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Five Star Business Finance Ltd AVOID

Incorporated in 1984, 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. The company primarily offer its customers small loans for business purposes as well as loans for asset creation such as home renovation or improvement, or for meeting expenses for significant economic events such as marriage, healthcare and education.

* The company has an extensive network of 311 branches, as of June 30, 2022, spread across eight states and one union territory and approximately 150 districts across India, with Tamil Nadu, Andhra Pradesh, Telangana and Karnataka being the key states.

* Company has developed a business model that is predicated on arriving at an appropriate risk framework, with the optimal instalment to income ratio to ensure that its customers have the necessary means to repay the loan after meeting their regular obligations and other event-based capital requirements.

* The company has provided loans to more than 185,000 customers in total. They had an active loan base of 230,175 and 217,745 as of June 30, 2022, and March 31, 2022, respectively.

* Company’s growth is primarily volume led through increasing the customer base while keeping the ATS stable, and they expect this to continue. The interest rates on their loans depend on the underlying tenor with approximately 95% of the loans sanctioned being between the interest rate range of 24% to 26% and between the tenure range of 5 to 7 years.

Outlook & Valuation:

In recent years, NBFCs have had one of the highest shares of disbursements for small business loans among other lenders; one such NBFC is Five Star Business Finance Limited, which provides secured business loans to microentrepreneurs and self-employed individuals. The company has its headquarters in Chennai, Tamil Nadu, with a strong presence in south India. It has the fastest gross term loan growth among the compared peers and a continuous track record of financial growth with increasing revenue and profit. The issue is reasonably priced at a P/B valuation of 3.6 when compared with its peers. However, high competition and rising interest rates are big threats to this. The company has a major presence in the South Indian region only; however, management is confident about maintaining its growth pattern. Finally, the issue is a complete offer for sale, and some of its peers are available at a better price in the secondary market; thus, we recommend an AVOID rating for this issue.

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