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Growth momentum continues

Five-star business finance (Five-Star) continues its strong performance with sustained AUM growth momentum (+8.1% QoQ, +43.1% YoY) and healthy profitability metrics (RoA at 8.42%, RoE at 17.89%). Despite floods in Tamil Nadu and the coastal areas of Andhra Pradesh, disbursements remained resilient at INR 12bn (+0.4% QoQ, +32.8% YoY) and collection efficiency at 99.1% (vs 100.3% in 2QFY24) saw only a minor dip. While yields inched up to 24.3% (+10bps QoQ), CoB continues to see a consistent decline to 9.6% (- 10bps QoQ). Despite the risk-weight circular, incremental CoB remained stable at 9.57% (vs 9.5% in 2QFY24). The company has decided to diversify its source of borrowings, which could result in ~25bps increase in CoBs in next couple of quarters. Given the uncertainty after the RBI circular in November, management took a prudent approach and maintained higher liquidity at ~20% of AUM (against aim of ~15% of AUM). This resulted in higher leverage, thereby leading to NIMs at 16.8% (-88bps QoQ). On the risk weight front, management said that only 25-30% of their portfolio saw a higher risk-weight which resulted in a 3.5-4% impact in its capital adequacy. But given its high CAR at 53.26%, the company remains adequately capitalized. Given Five-Star’s established track record and unique positioning we expect continued delivery on growth, profitability and asset quality with ROEs expected to expand to 21.3% by FY26E. We maintain a BUY with a target price of INR 1010 (valuing company at 4x FY26E BVPS).

Sustained growth momentum: Despite floods in Tamil Nadu and coastal areas of Andhra Pradesh, Five-Star’s AUM continues to grow at a robust pace (+8.1% QoQ, +43.1% YoY) on the back of healthy disbursements (+0.4% QoQ, +32.8% YoY). Customer acquisition continues to be strong with more branch additions (24 in 3QFY24) bringing the total branch additions to 111 in 9MFY24 (aligns with guided 120+ branches in FY24). On the risk weight front, management said that only 25-30% of their portfolio saw a higher riskweight which resulted in a 3.5-4% impact in its capital adequacy. But given its high CAR at 53.26%, the company remains adequately capitalized. Management continues to remain confident of achieving 35%+ AUM growth in this fiscal. Further, for the next fiscal year, as market opportunities continue to broaden, the company expects growth to remain in similar range, while also remaining conscious of how the regulatory regime shapes up.

Spreads remain stable; Strong operational performance continues: Operating profit increased to INR 3bn (+8.1% QoQ, +45.5% YoY, inline JMFe) driven by a) healthy growth in NII (+5.7% QoQ, +31.6% YoY) and, b) lower growth in operating expenses (+1.6% QoQ, +18.3% YoY). Though spreads remained stable, NIMs were at 16.8% (-88bps QoQ) which was attributed to increasing leverage and higher liquidity during the quarter. Yields inched up to 24.3% (+10bps QoQ), while CoBs continues to decline to 9.6% (-10bps QoQ). Despite the risk-weight circular, incremental CoB for the company remained at 9.57% (vs 9.5% in 2QFY24). Further, management indicated that the company has decided to diversify its borrowing sources, which could result in a ~25bps increase in CoBs over the next couple of quarters.

Robust asset quality metrics: Five-Star‘s current book (currently 86.7% vs 86.5% in 2QFY24) continues to inch up towards their target of ~90%, with its 30+ dpd book at 8.35% (vs 8.59% in 2QFY24). Despite the challenging weather conditions in Tamil Nadu and Andhra Pradesh, collection efficiency remained stable at 97.5% (vs 98% in 2QFY24). GS3/NS3 remained steady at 1.40%/0.65% (+5bps QoQ/-3bps QoQ) with a healthy PCR of 54.26%. Management indicated that it shall continue to maintain provisions north of 50%, given the regulator’s comfort with the same. We build in an average credit cost of 0.6% over FY24E/26E.

Valuation and view: Driven by a) high yield portfolio, b) onset of operational efficiencies, and c) moderating credit cost, we expect Five-Star to continue to deliver robust return metrics with ROE expanding to 21.3% by FY26E. We maintain BUY with a target price of INR 1010 (valuing at 4x FY26E BVPS).

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