Five Star Business: Niche business, large untapped opportunity and highly profitable secured lending model

6 Mar 2024 , 11:16 AM

Five Star is a fast growing, secured and highly profitable MSME lender with spreads/ROAs of 11%/7% (FY26). Entry barriers are high, given the operational rigour required to grow and maintain low credit costs in this segment. It has less volatile spread/credit costs vs its AHFC/MFI peers and higher growth runway vs Gold NBFCs. Analysts of IIFL Capital Services expect Five Star to scale its AUM 2.5x to ~Rs230bn by FY27, led by geographical expansion, maturing branch vintage, ATS increase and productivity improvement. Expect NII/ EPS Cagr of 26%/23%, as NIMs compress 230bps and credit costs increase to ~1% (book seasoning). Initiate with BUY and TP of Rs900; implying 3.5x P/B for 7%/18% ROAs/ROEs by FY26. 

Secured MSME lender ready to scale 2.5x by FY27: 

Five Star is a fast growing South-based (~95% AUM), small-ticket secured MSME lender with Rs89bn AUM. It has built a rigorous business model with 100% in-house sourcing, underwriting and collections with a multi-layer and independent underwriting process to assess informal family income (50% FOIR) and house values (50% LTV). Five Star is set to grow its AUM at 33% Cagr (FY24- 27), led by 1.5x branch expansion, branch vintage maturity, ATS increase and productivity improvement. 

Low market share in $275bn TAM; collection focus necessary to arrest high early delinquencies: 

SBL (<Rs1mn) is a large untapped opportunity ($275bn ATM), with only 11% penetration that should grow with 95% of land records in India now digitised. Five Star’s 3.6% market share (10% in four southern states) in the $30bn SBL loans o/s leaves adequate room for growth. Early delinquencies in this business are high (Five Star’s 30+ DPD of 8.4%), but NPAs are controlled as the field team arrests forward flows with support from supervisory and legal teams and secured nature of the collateral. Its 1.4% GNPA (2.6% 2Y lagged) is better than the sector (5% for SBL <Rs1mn). 

BUY with TP of Rs900:

Expect Five Star to deliver NII/EPS Cagr of 26%/23% over FY24-27, as NIMs compress 230bps (leverage increase, ~100bps rate cut) and credit costs avg. ~1% (vs 0.6% now). Initiate with BUY and TP of Rs900.