Buy Five Star Business Finance for the Target Rs 670 by Motilal Oswal Financial Services Ltd
Rebuilding momentum; on track for asset quality stabilization Early delinquencies improved with moderation in 1+ dpd and 30+dpd
* Five Star Business Finance’s (FIVESTAR) 1QFY27 PAT grew 2% YoY to INR2.7b (in line). NII grew ~10% YoY to INR6.4b (in line). Other income rose 17% YoY to INR311m (~8% beat).
* Opex grew 21% YoY to INR2.4b (~5% higher than est.). PPoP rose ~5% YoY to INR4.2b (in line). Credit costs stood at INR618m (in line). Annualized credit costs (as a % of AUM) stood at ~1.84% (PQ: ~1.85% and PY: ~1.6%).
* Disbursements rose ~16% YoY/~23% QoQ to ~INR15b and AUM grew 10% YoY/4% QoQ to ~INR137b. Management exuded confidence in achieving ~20% AUM growth in FY27, supported by a pickup in disbursement momentum and improvement in asset quality and collection trends. We model AUM growth of ~21% in FY27 and AUM CAGR of ~23% over FY26-28. ? FIVESTAR shared that slippages during the quarter remained stable despite weak seasonality. However, it expects slippages and NPA levels to decline in subsequent quarters. Collection trends have also been steadily improving and moving closer to pre-stress levels, indicating a gradual improvement in the operating environment. Management has guided for credit costs of 1.7-1.9% in FY27 and ~1.6-1.7% in FY28. We model credit costs of ~1.8% in FY27E.
* FIVESTAR continues to focus on promoting responsible credit behavior, which should strengthen portfolio resilience over the medium term. The ~60bp QoQ improvement in 1+ dpd indicates stabilization in early-bucket delinquencies and, if sustained, should provide management with greater confidence to accelerate business momentum in the coming quarters.
* We estimate FIVESTAR to deliver a CAGR of ~23%/~14% in AUM/PAT over FY26-28, with FY28E RoA/RoE of 6.7%/15.5%. Reiterate BUY with a revised TP of INR670 (based on 2x Mar’28E BV).
NIM contracts ~10bp QoQ; incremental CoB declines ~20bp QoQ
* Reported yields declined ~12bp QoQ to 22.5%, while CoB declined ~15bp QoQ to 8.8%, resulting in spreads rising ~5bp QoQ to 13.7%. Reported NIM (as a % of AUM) contracted ~10bp QoQ to ~20%.
* Management expects yields to settle at ~22.25%, with a further 10-15bp moderation possible over the next couple of quarters. Incremental CoF declined ~20bp QoQ to ~8.35%. With incremental CoF remaining below the average cost of liabilities, the company expects a 10-15bp reduction in overall CoF in FY27, assuming no adverse policy changes.
* 1QFY27 RoAUM/RoE stood at 8.1%/14.5%, respectively. Capital adequacy stood at ~51% as of Jun’26.
Valuation and view
* FIVESTAR appears on track to regain its mojo with a healthy pick-up in disbursement volumes and AUM growth. Early-stage delinquencies improved meaningfully, driven by a decline in 1+ dpd and 30+ dpd, while slippages and credit costs remained broadly stable sequentially. With the business now on a stronger footing, the company is well-positioned to build from here, supported by healthy underlying demand, strong asset quality, and improving productivity.
* The stock currently trades at 1.9x FY27E P/BV. We estimate FIVESTAR to post a CAGR of ~23%/~14% in AUM/PAT over FY26-28, with an RoA/RoE of 6.7/15.5% in FY28. Reiterate BUY with a revised TP of INR670 (based on 2x Mar’28E BV).
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