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Five-Star Business Finance (Five-Star) delivered yet another strong quarter with sustained growth momentum (+9% QoQ, +44.2% YoY AUM growth), healthy profitability metrics (RoA at 8.55%, RoE at 17.22%) and continued improvement in asset quality with GS3/NS3 at 1.35%/0.67% (-6bps QoQ, -11bps QoQ). Further, Five-Star’s early bucket delinquencies continues to improve with 30+ DPD at 8.59% (-1.09% QoQ) and current book at 86.5% (vs 84.8% in 1QFY24). Management is confident of the sustained improvement in the early delinquencies and expects further improvement of the 0DPD portfolio to 90% in the next few quarters. Disbursements saw robust growth (+6.4% QoQ, +50% YoY) on the back of healthy customer acquisition driven by branch expansion (added 70 in 2QFY24) and deeper penetration. Average ticket size has now reached pre-covid levels to INR 0.34mn, up from INR 0.25mn during the pandemic. Cost of borrowings remained steady at 9.7% (-1bps QoQ) with yields at 24.2% (-20bps QoQ). Therefore, NIMs remained stable at 17.68% (-6bps QoQ).

On competitive intensity, management indicated that players continue to enter in either INR 1mn (lucrative for the bigger players given the effort and time spent) but not in Five Star’s preferred ticket size of INR 0.3-0.5mn. While competition may increase over a period of time, ability to ensure underwriting and collection are factors which will differentiate Five Star over newer entrants. In our view Five Star, remains uniquely positioned to operate in this segment given its single product focus, long-standing track record, strong collections focus. We forecast Five-Star to deliver 32% CAGR in earnings over FY23-25 with RoEs likely to hit 18.6% in FY25E. Given continued delivery on asset quality, growth and profitability, we maintain our target price at INR 840 (valuing the company at 4.0x FY25e P/BV). Maintain BUY.

* Sustained growth momentum: Five-Star’s AUM saw robust growth (+9% QoQ, +44.2% YoY) on the back of a) strong growth in disbursements (+6.4% QoQ, +50% YoY) and b) healthy customer acquisition driven by branch expansion (added 70 in 2QFY24) and deeper penetration. Further, the management revised its branch expansion target to 120+ in FY24E given the strong demand momentum. With 83 branches added in just in H1FY24, the management is more confident than ever and maintains its growth guidance of 35% over next couple of years.

* Spreads sustaining; operating efficiencies playing out: Operating profit increased to INR 2.8bn (+6.3% QoQ, +38% YoY) driven by healthy growth in NII (+8.3% QoQ, +34.3% YoY) and stable operating expenses (+10% QoQ, +39% YoY). Reported NIMs remained stable at 17.68% (-6bps QoQ) with cost of borrowings at 9.7% (-10bps QoQ) and yields at 24.2% (-20bps QoQ). On the opex front. Five-star continues to expand its branches (70 branches in 2QFY24) with management revising its branch target for FY24E to 120+. Overall, cost to income at 33.4% continues to be within guided levels.

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CIN Number : L67120MH1986PLC038784