Company Update : Five Star Business Finance by Motilal Oswal Financial Services Ltd
Sharp deterioration in asset quality and elevated credit costs
Earnings in line; disbursements weak, and AUM growth moderates to 20% YoY
* FIVESTAR’s 1QFY26 PAT grew 6% YoY to INR2.7b (in line). NII grew ~20% YoY to INR5.8b (in line), while PPoP rose ~14% YoY to INR4b (in line). Other income declined 6% YoY to INR265m (vs. MOFSLe of INR161m), primarily because of a decline in investment income.
* Opex grew 29% YoY to INR2b (in line). Credit costs stood at INR478m (~60% higher than MOFSLe). Annualized credit costs rose sharply to ~1.3% (PY: ~74bp and PQ: ~73bp).
Reported spreads dip due to moderation in yields
* Reported yields declined ~20bp QoQ to 23.5%. CoB also dipped ~10bp QoQ at 9.55%. Reported spreads declined ~10bp QoQ to 14%. Reported NIM declined ~40bp QoQ to ~16.4%.
* Incremental CoF declined ~70bp QoQ to ~8.6%.
Sharp deterioration in asset quality; cash collections decline
* GS3/NS3 rose ~70bp/40bp QoQ to ~2.45% and 1.25%, respectively. PCR declined ~125bp QoQ to ~50%.
* The current portfolio declined to 82.4% (PQ: 84.3%). Stage 2 rose ~1pp QoQ to ~8.9%. 30+ dpd rose ~165bp QoQ to 11.3%, and 1+dpd increased ~185bp QoQ to 17.6%. Cash proportion in collections declined to ~19% (PQ: ~20% and PY: ~35%) due to strong efforts made by the company to reduce cash collections.
* Overall Collection Efficiency (CE) stood at 96.3% (PQ: 97.7%). Unique loan collections (due one, collect one) stood at 95.1% (PQ: 96.2%).
Disbursements decline ~2% YoY; AUM growth moderates to 20%
* Disbursements declined ~2% YoY and ~12% QoQ to ~INR12.9b; AUM grew 20% YoY/5% QoQ to ~INR125b.
* FIVESTAR’s 1QFY26 RoA/RoE stood at 7.2%/16.6%, and capital adequacy was ~49.2% as of Jun’25.
Valuation and View
* FIVESTAR reported a weak operational performance during the quarter, marked by muted disbursements and subdued AUM growth. Asset quality deteriorated sharply, as reflected in a significant rise in 30+ dpd, resulting in elevated credit costs of ~1.3%. Additionally, spreads and margins contracted further, primarily due to a decline in yields.
* The stock currently trades at 2.3x FY27E P/BV. Even though the company is navigating a relatively tough phase, we believe that FIVESTAR has a niche market position, strong growth potential, and superior underwriting practices, which will allow it to bounce back quickly (and strongly) from the current headwinds in asset quality and AUM growth. We will review our estimates after the earnings call on 29th Jul’25.
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