Company Update : Five Star Business Finance Ltd By Motilal Oswal Financial Services Ltd
AUM growth moderates to ~25% YoY; deterioration in asset quality
Earnings in line; Reported NIMs declined ~35bp QoQ
* 3QFY25 PAT grew 26% YoY to INR2.74b (in line). NII grew ~28% YoY to INR5.4b (in line), while PPoP rose ~29% YoY to INR3.9b (inline). Other income declined 3% YoY to INR198m, primarily because of lower treasury income. Opex grew 21% YoY to INR1.7b (in line).
* Credit cost stood at INR233m (~13% lower than est.). Annualized credit cost was stable QoQ at ~70bp (PY: ~50bp).
Reported NIMs contract due to decline in yields
* Reported yield declined ~20bp QoQ to 24%, while CoB was stable QoQ at 9.6%. Reported spreads declined ~20bp QoQ to 14.35%. Reported NIM declined ~35bp QoQ to ~16.55%.
* Incremental CoF was stable QoQ at ~9.6%.
Asset quality deteriorates; cash component in collections declines
* GS3/NS3 rose ~15bp/10bp QoQ to ~1.6%/0.8%. PCR declined ~160bp QoQ to ~50.2%.
* The current portfolio declined to 84.9% (PQ: 86%). Stage 2 rose ~55bp QoQ to ~7.5%. 30+ dpd rose ~70bp QoQ to 9.15% and 1+dpd increased ~110bp QoQ to 15.1% Cash collections declined to ~24% (PQ: ~28% and PY: ~52%) because of strong efforts made by the company to reduce cash collections.
* Overall collection efficiency (CE) stood at 98% (PQ: 98.4%). Unique loan collections (Due one, collect one) stood at 96.7% (PQ: 97%).
Sharp decline in disbursements; AUM growth moderates
* Disbursements declined ~22% YoY and ~25% QoQ to ~INR9.4b; AUM grew 25% YoY/2% QoQ to ~INR112b.
* 3QFY25 RoA/RoE stood at 8.1%/18.5%. Capital adequacy stood at ~51.2% as of Dec’24.
Valuation and view
* FIVESTAR reported weak business momentum in 3QFY25. The company reported AUM growth of ~25% YoY, in line with its guidance to moderate its growth momentum in the current weak macro environment and stress in the MFI sector. Interestingly, while the asset quality deteriorated with GS3 rising ~15bp QoQ because a minor sequential decline in collection efficiency, credit costs were broadly stable QoQ.
* The stock currently trades at 2.6x FY27E P/BV. We believe that Five Star’s premium valuations will remain intact, given its niche market position, strong growth potential, superior underwriting practices, resilient asset quality, and high return metrics. We will review our estimates after the earnings call on 1st Feb’25.
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