Five Star Business Finance Limited IPO: What Fueled Its Growth Over the Years?

Five Star Business Finance Limited IPO will open for subscription on 9th November. The company is aiming to raise Rs 2,751.95 crore from the IPO, which will be a complete offer for sale (OFS). The IPO closes on 11th November.

Five Star Business Finance Limited IPO Details

• Five Star Business Finance IPO Date: 9 November - 11 November 2022
• Five Star Business Finance IPO Price band: Rs 450-474 per share
• Five Star Business Finance IPO Issue Size: Rs 2,751.95 crore (Only offer for sale)
• Reservation: QIB 50%, Retail - 35%, NII 15%
• Minimum Investment: Rs 14,694
• Bid lot: Minimum 1 Lot, and Maximum 13 Lots

Five Star Business Finance Limited IPO: Objects of the Issue

The company will not receive any proceeds from the IPO as it is a complete OFS. The primary objectives of the IPO are i) To complete the Offer for Sale for existing investors. ii) To draw benefits from listing in the stock exchanges.

Five Star Business Finance Limited IPO: About the Company

• Five Star Business Finance was incorporated in 1984 as an NBFC to provide secured loans to micro-entrepreneurs and self-employed individuals. The company’s aim is to present this cohort with financing opportunities that have been majorly neglected by traditional financing institutions.
• Five Star Business Finance is headquartered in Chennai, Tamil Nadu with a strong presence in the South Indian market. Overall, the company has 300 branches across India in 2022, more than double its figure of 173 branches in 2019.
• Five Star Business Finance is backed by marquee investors like KKR, Sequoia, TPG Capital, and Matrix Partners India. Notably, the OFS IPO of 2,751.95 crores will involve the selling of Rs.1,350 crore by TPG Asia.  
• Five Star Business has witnessed robust and steady growth in its loan portfolio for the last four years. The company has more than doubled the same from Rs 2,113 crores in FY 2019 to Rs 5,067 crores in FY 2022.
• Five Star Business Finance has lending relationships with leading banks like SBI, HDFC Bank, ICICI Bank, and IDFC First Bank among others. Among NBFC, the company has relationships with majors like Bajaj Finance, Aditya Birla Finance, and Tata Capital among others.

Five Star Business Finance Limited IPO: Products

About 95% of the company’s loan portfolio is composed of loans between Rs 1 lakh and Rs 10 lakhs with an average ticket size of Rs 2.7 lakhs, Rs 2.6 lakhs, Rs 3.1 lakhs, and Rs 3.4 lakhs in the six months ended September 30, 2021 and the Financial Years 2021, 2020 and 2019, respectively.

Notably, to improve its product offerings, the company has been strengthening its technological capabilities. To reduce its turnaround time, that is the time taken to process the loans and final disbursal, the company has adopted digitization of data. Notably, during FY 2022, the company hired a Chief Technology Officer and a Head of Engineering and Data Sciences to further enhance its technology.

Five Star Business Finance Limited IPO: Business Outlook

• Lending to small businesses has grown at a CAGR of 36% between FY 2017 and FY 2020. Notably, NBFCs like Five Star Business Finance enjoys a 20% market share in this growing market.
• Moreover, a CRISIL report cites that small business loans (between Rs 1 lakh to Rs 10 lakh) will grow at a CAGR of 22% between FY 2021 and FY2024, positioning companies like Five Star Business Finance on solid grounds to enhance their operations as a major portion of their business is in this segment.
•  Further, with an untapped market and proliferation of data among the rural masses, companies like Five Star Business Finance remains well poised to take advantage of this structural tailwind and grow their business.
• However, the presence of a solid branch network is critical for the rise in small business loans and companies like Five Star Business Finance have taken steps in that direction too. According to a report by CRISIL, there has been a branch network expansion of a CAGR of 7% between FY 2018 and FY 2021 among the top small business lenders like Five Star Business Finance, Sriram City Union, and Veritas.

Five Star Business Finance Limited: Listed Peers

Among Five Star Business Finance’s listed peers, there are some notable and established names like Aavas Financiers, Aptus Value Housing Finance, and AU Small Finance Bank. A brief comparison with the listed peers is below:

• In comparison with its listed peers, the company’s revenues are lesser than both AU Small Finance Bank and Aavas Financiers, although it is much closer to the latter. However, it is significantly more than that of Aptus.
• Similarly, in terms of EPS, Five Star Business Finance has reported a figure of Rs 15.92 which is higher than Aptus but below Aavas and AU Small Finance Bank.
• Notably, the company’s return on Net Worth of 16.85% is above all its listed peers.

Five Star Business Finance Limited: Financials

(Source Five Star Business Finance DRHP)

• Five Star Business Finance has reported revenues of Rs 787 crores, Rs 1,051 crores, and Rs 1,256 crores, in FY 2020, FY 2021, and FY 2022, respectively. The revenue has witnessed a CAGR of 16.86% over the past three years.
• Similarly, the company reported net profits of Rs 262 crores, Rs 359 crores, and Rs 454 crores, respectively.
• Meanwhile, the operating profit margins of the company also have shown continued improvement standing at 44.4%, 45.4%, and 48.2% for FY 2020, FY 2021, and FY 2022, respectively.
• Notably, the company’s net debt-to-equity ratio has improved from 0.93 in FY 2021 to 0.52 in FY 2022.

Five Star Business Finance Limited: Growth Potential

• Growing MSME Sector: Five Star Business Finance caters mainly to the small business sector which is expected to grow with increased awareness and data transparency. With the overall MSME sector starved of credit, Five Star Business Finance with its established operational strengths remains well poised to fill this gap.
• Strong Branch Network: In FY 2022, the company added 38 branches resulting in the branch network increasing to 300 from 262 in FY 2021. With a strong presence in the South Indian market, Five Star Business Finance is looking to further expand its presence in the lucrative western market with four branches already present in Maharashtra.
• Rising Technological Capabilities: Five Star Business Finance has been ramping up its strength in the tech front with the increasing use of APIs for enhancing data accuracy. Further, the company has been making good use of UPI to make its payment system more efficient.

Five Star Business Finance Limited IPO: Risks

• Concentration in one Region: Five Star Business Finance’s operations are primarily centered in the South Indian market. Hence, it remains prone to any adverse region-specific developments which can hinder its growth.
• High Inflation Levels: The persistently high inflation levels have hurt business sentiments. Consequently, this can hurt the borrowers’ repaying capability as their businesses have been hurt which in turn can result in an NPA problem for this niche lender.
• High-Interest Rates: A monetary tightening scenario is not a favourable situation for borrowers as interest rates are elevated during this time. As a result, the cost of borrowing rises for the borrowers. This can especially hurt Five Star Business Finance’s clients, particularly as they are mainly small business establishments whose operations remain prone to such adverse situations.
• High Competition: With established players in a fragmented market, Five Star Business Finance may find it difficult to make its presence felt in the rapidly growing NBFC sector, especially in markets like North and Western India where its presence is minuscule.

Five Star Business Finance IPO: Detailed Review and Recommendation

Unique lending strategy: It is very rare to find non-banking finance companies that have a very focused target segment, however, Five Star Business Finance has uniquely placed itself by lending primarily to small and medium enterprises, that too, particularly in South India. This is even more intriguing given the fact that various fintech and shadow banks (what non-banking companies are otherwise referred to as) have started to focus on building multi-product digital-first businesses.

Strong growth in revenues: A look at the financials table provided above would show you that the CAGR (compounded annual growth rate) of Five Star Business Finance’s revenue from operations over the last 3 financial years is 26.3% which is laudable. 

Healthy Rise in Profits: Over the last 3 financial years (FY20-22), Five Star Business Finance’s net profits have grown at a CAGR of 31.6%. 

Five Star Business Finance primarily lends to small and medium enterprises, doesn’t that imply a huge risk? Given that these businesses might not have sufficient resources to weather an economic downturn?

A peek into how Five Star Business Finance typically lends:

The company follows a simple rule: Offer small and medium enterprises loans anywhere between Rs 1 lakh to Rs 10 lakhs at a tenure within the range of 24 months to 84 months. But here comes the nice part, the firm does not provide any loan solely on the basis of cash flows to SMEs. A large part of its loan portfolio is secured by property. Again, it is unique even on the underwriting (the process of determining whether or not to provide loans to an individual or a firm) front.

Growth compared to peers (FY18-22)

(Source Five Star Business Finance DRHP)

What fueled Five Star Business Finance’s robust growth over the years?

In 2018, the IL&FS Group’s fiasco led to a severe crisis in the NBFC sector. A large number of shadow banks moved away from lending to micro and small businesses as they preferred businesses with an appetite for bigger loans. This gave way to firms like Five Star Business Finance a gap to fill.

Since the NBFC crisis, the Reserve Bank of India has ensured the availability of sufficient liquidity in the financial sector and hence had fueled several banks that had excess liquidity to invest in corporate bonds. Five Star Business Finance issues bonds with interest rates anywhere between 8% and 13% while raising loans from banks at interest rates between 9% to 12%. (according to a report published by The Morning Context, dated 13th January 2022)

Over the last few years, the RBI had maintained low-interest rates (until it started hiking rates in order to curb high inflation), which has further helped Five Star Business Finance to earn strong margins. A large part of the company’s loans to borrowers are priced between 24% and 26%. That explains the high net interest margins. (See below)

(Source: Five Star Business Financial DRHP)

The yield on advance is got by interest earned/ advances. It is a parameter used to gauge if the bank or an NBFC is able to generate good returns from loans given.
The net interest margin (NIM) is the difference between interest earned by way of loans and advances and interest paid on deposits. The higher the NIM, the better for the bank or the NBFC.

Key areas to take look out for in the future

The RBI has hiked interest rates several times in the last couple of months as growing inflation remains an Achilles heel to the purchasing power of consumers and businesses alike. Hence, the company might find it difficult to maintain its healthy margins as its cost of funds (interest rates paid on bank loans and bonds) could increase.

Moreso, Five Star Business Finance has an “A+” credit rating in the long term (according to Care Ratings, as of June 20, 2022). The high-interest rate regime might force investors in the bond market to prefer entities with “AAA” and “AA” credit ratings.

Valuation: The IPO shall open with a price band of Rs 450-474 per share. This makes the issue valued with a price-to-earnings ratio (P/E ratio) at 25 times its annualized FY23 earnings. The price to earnings of its listed competitors: AU Small Finance Bank, Aavas Financiers Ltd. and Aptus Value Housing Finance Ltd. are 31.36, 37.48 and 38.63 (as of November 4th, 2022 prior to the close of the market)

Recommendation: According to external analysts, although there are several firms that are into financing small and medium enterprises, the strong financial performance showcased by Five Star Business Finance over the years along with the confidence exhibited by the management team with regard to its growth can make it a good choice over the long term.

How to apply for Five Star Business Finance IPO?  

You can apply for Five Star Business Finance IPO through INDmoney in just a few simple steps. Click here.

Want to know about other IPOs?

Bikaji Foods IPO Opens: Should You Subscribe?

Global Health (Medanta) IPO: Should You Subscribe?

Fusion Microfinance IPO

This is not an investment advisory. The blog is for information purposes only. Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Past performance is not indicative of future returns. Please consider your specific investment requirements, risk tolerance, goal, time frame, risk and reward balance, and the cost associated with the investment before choosing a fund, or designing a portfolio that suits your needs. The performance and returns of any investment portfolio can neither be predicted nor guaranteed.