Five Star Business Finance IPO: Should you subscribe or give it a miss?

Five Star Business Finance's Rs 1,960 crore initial public offer (IPO) opened for subscription on Wednesday. Ahead of its issue, the Chennai-based NBFC raised Rs 588 crore from 16 anchor investors.  The issue is purely an offer for sale (OFS) by existing institutional investors. The individual promoter is not selling any shares as part of the OFS.

The IPO is being sold in the Rs 450-474 price band and investors can bid for a minimum of 31 shares and in multiples of 31 shares thereafter. The issue would conclude on November 11, Friday.

Five Star Business Finance provides secured business loans to micro-entrepreneurs and self-employed individuals, each of whom are largely excluded by traditional financing institutions. The NBFC has a strong presence in South India and all of its loans are secured by borrowers’ property.

Analysts are largely mixed on the issue. While a presence in underpenetrated and fast growing segment is a positive, geographic concentration, high competitive intensity in small business finance industry and substantial portion of customers being first time borrowers are seen as key risks.

Samco Securities said Five Star Business operates in a segment that is highly underpenetrated and has sufficient legroom to grow. This, it said, is evident from the fact that the company has been growing its book at a very good pace.

"The company has created a niche for itself and is able to generate an impressive ROA of 7-8 per cent. Despite generating a high ROA and NIMs, the company’s GNPA has been below 1.5 per cent, which makes this business model value-generating and unique. Considering the improving macro environment, systemic credit growth of the country, strong underwriting of the company, and the ability to generate high return ratios, we recommend our investors to subscribe to the IPO," it said.

Five Star Business has listed peers such as AU Small Finance, AAVAS Financiers and Aptus Value Housing.

ICICIdirect said the NBFC has showed healthy fundamental performance and robust growth in fast growing small business finance market. At the upper end  of the price band, the IPO is valued at 3.7 times FY22 BV (post issue). This brokerage has not rated the IPO.

"The small business finance industry in India is highly competitive. It faces competition from other NBFCs as well as scheduled commercial banks. Moreover, the issue is fully OFS and the amount raised will not go to the company," SMC said while assigning 1.5 stars to the issue in the scale of zero to five. 

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