Five Star shares up 50% since listing; more steam left in this counter?

Shares of Five-Star Business Finance (Five Star) have been on the radar of investors amid as the stock has risen more than 50 per cent from its issue price after making its Dalal Street debut in November 2022. Interestingly, the issue of non-banking financial companies (NBFC) barely managed to sail through.

However, the tables have turned now as the company has been in demand among the investors amid the rising interest rates, superior margins, better asset quality, niche untapped market segment and robust operational performance. A host of brokerage firms have initiated coverage on the stock with a positive view and see more upside.

Nomura believes Five-Star is uniquely positioned with superior growth and best-in-class profitability among financial peers. It cited highly profitable and among fastest-growing NBFCs in a niche market, large untapped opportunity with limited competition to drive 30 per cent AUM growth and multilayered underwriting driving superior asset quality as the key triggers for it.

"We estimate EPS CAGR of 25 per cent during FY23-26F with RoA and RoE of 7.7 per cent and 16.6 per cent., respectively. We value the company using residual income method with a target price of Rs 750, implying 3.6 times FY25F BVPS and 24 times FY25F EPS," Nomura added in its maiden report on the stock.

However, the brokerage has cited inability to scale up in new states, rising competition from lenders and fintechs and worse-than-expected asset quality deterioration as the key risk for the private player.

Five Star Business Finance was listed on November 21, 2022, when the company raised about Rs 1,593 crore from its primary stake sale by selling its shares at Rs 474 apiece. However, its issue was subscribed only 70 per cent and the stock dropped over 5 per cent to Rs 448.20 on its maiden trading session.

Five-Star is a direct play on the increasing formalization of credit, especially in the small-ticket business loan segment. Barring SCUF and Repco, key players in similar ticket-size SME loans reported over 30 per cent AUM CAGR during FY18-FY23 while Five-Star delivered an industry-leading 47 per cent during the same period, said ICICI Securities' initiating coverage report.

"We expect 25 per cent AUM CAGR for Five-Star over FY23- FY25E on the back of one of the most extensive branch networks of 370 as of March 2023; deep understanding of the customer segment it serves; and focus on deepening presence in existing geographies, it added while initiating with 'buy' and a target price of Rs765," it said.

Five Star Business Finance posted a 43 per cent growth in its fourth quarter net profit at Rs 169 crore, boosted by strong growth in loan disbursals and collections. The Chennai-based NBFC posted a net profit of Rs 118 crore for the corresponding quarter previous year.

The company’s interest income grew by 35 per cent on a yearly basis to Rs 423.4 crore in Q4FY23, compared to Rs 313.6 crore in the last quarter of FY22. The lender’s disbursements for the March 2023 quarter stood at Rs 1,110 crore, 72 per cent higher than the disbursals in Q4FY22.

Five Star has a strong track record of growth and profitability in the highly underpenetrated small business lending segment with a potential market opportunity of Rs 22 lakh crore, as per a CRISIL report, said HDFC Securities. Over the last five years, Its NIM and AUM growth and earnings growth have been among the highest in the sector while its NPLs have been amongst the lowest, it said.

"Five Star’s IRR loss on closed NPLs has been less than 2 per cent since April 1, 2018, though it lends to a highly vulnerable segment. We feel that investors can buy the stock between Rs 594-606 and add more on dips to Rs 530-540 band. We expect the Base case fair value of Rs 658 and the bull case fair value of Rs 709 over the next 2-3 quarters," HDFC Securities added.

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