Five Star Business Finance IPO Fundamental Analysis (May Apply)

Five Star Business Finance IPO

Five Star Business Finance is an NBFC-ND-SI that provides secured business loans to micro-entrepreneurs and self-employed individuals. The NBFC is headquartered in Chennai, Tamil Nadu with a strong presence in South India, and the loans are secured by the borrower’s property, predominantly SORP.
Over 95% of the loan portfolio comprises loans from between Rs 0.1 million to Rs 1.0 million in principal amount, with an average ticket size of Rs 0.29 million (Q1FY23) ?0.28 million (FY22), ?0.26 million (FY21) and ?0.31 million (FY20). Five Star had an active loan base of 230,175 and 217,745 as of June 30, 2022, and March 31, 2022, respectively.
Gross Term Loans rose to Rs 5296.54 crore as of Q1FY23 from Rs 1008.26 crore as of FY18 at a CAGR of 49.73% since the last four fiscal years.
As of June 30, 2022, the Issuer had an extensive network of 311 branches, spread across approximately 150 districts, eight states, and one union territory, with Tamil Nadu, Andhra Pradesh, Telangana, and Karnataka being the key states. Such key states collectively accounted for approximately 85% of the branch network by number.
The Issuer secures financing from diversified sources of capital, including term loans; proceeds from loans securitized, proceeds from the issuance of NCDs, and others to meet capital requirements.
Total Borrowings were Rs 2520.32 crore (Q1FY23) and Rs 2558.83 crore (FY22) respectively. The average cost of Borrowings was 12.07% as of March 31, 2020, 11.48% as of March 31, 2021, 10.51% as of March 31, 2022, 10.68% as of June 30, 2021, and 10.53% (Q1FY23).
Long-term ratings from ICRA and CARE are A+ and short-term borrowings are rated A1+ by CARE.
As of June 30, 2022, the Issuer had a total of 6,077 employees.
The net interest margin was 19.17% (Q1FY23), 17.68% (FY22), 16.00% (FY21), and 16.69% (FY20) respectively.

Financial Review

Five Star Business posted total revenue of Rs 339.06 crore for Q1FY23 with PAT of Rs 139.43crore in the same period. The Issuer’s interest income rose by 18% to Rs 1203.77 crore for FY22 as against Rs 1014.88 crore for FY21. PAT increased to Rs 1203 crore for FY22 from Rs 1014 crore in FY21. However, the Issuer has negative net cash from operations for all last three fiscals and for Q1FY23 as can be seen from the table.

Debt to equity ratio was 0.65x (Q1FY23), 0.69x (FY22), and 1.48x (FY22) respectively. Return on net worth has been3.62% (Q1FY23), 12.22% (FY22), and 15.49% (FY21).

Table 1 - Financials and Ratios (Amount in Rs Crore)
Particulars	Q1FY2023	Q1FY2022	FY2022	FY2021	FY2020
Total Revenue	339.06	300.76	1256.17	1051.26	787.35
Revenue from Operations	335.22	290.23	1203.77	1014.88	746.83
PAT	139.43	101.57	453.55	358.99	261.95
EBITDA	254.88	224.38	479.54	813.02	576.30
Total Assets	6471.55	6129.1	6343.07	5993.61	4353.15
Net cash flow from operating activities	-174.57	5.89	-277.16	-157.27	-1523.28

Valuation and Peer Comparison

The Issue is priced at 24.74x with annualized earnings of 19.16 for Q1FY23 calculated at the upper price band of Rs 474 per share. With FY22 earnings (16.09), IPO is priced at 29.46x. Compared with the listed Peers in the RHP, the P/E of the Issuer is lower than Aavas and Aptus but near to AU SFB. The valuation appears to be on the higher side when compared to AU which is 5-6 times larger than the Issuer. P/BV of the Issuer is 3.72x with NAV of 127.35 as on 31^st March 2022.

Table 2 - Listed Peer Comparison
Parameters	Aavas	Aptus	AU Small Finance	Five Star
Total Income for FY22 (Cr)	1305.65	840.22	6915.43	1256.17
NAV Per Share	355.53	58.68	119.31	127.35
Return on net worth	12.66%	12.69%	15.04%	12.22%
P/E (4th Nov FY22, TTM)	37.60	45.75	32.60	NA
Debt to equity ratio (in times)	2.84	0.85	NA	0.69
P/BV	6.23	6.11	5.43	NA
CMP	1895	324.25	616.35	NA

Issue Details

Five Star Business FinanceIPO (Rs 1960.01 crore) opens on 9th Nov- 11^th Nov 2022 with a price band of 450-474 per share. The retail quota is 35% and investors can apply with a minimum bid of 31 shares (Rs 14,694). The maximum lot size is 403 shares (Rs 1, 91,022). The Issue is wholly an offer for sale by the promoter group (Matrix Partners and SCI Investments) and by investor selling shareholders (TPG Asia, Norwest Venture Partners, and Matrix partners. The issue is expected to list on 21^st Nov 2022.

Conclusion and Investment Strategy

Five Star Business Finance is an NBFC focused in the south Indian states of Tamil Nadu, Andhra Pradesh, Karnataka, and Telangana, contributing significantly to its Gross Term Loans. As of June 30, 2022, the district-level penetration was 93%, 77%, and 94% in the states of Tamil Nadu, Andhra Pradesh, and Telangana, respectively, and 65%, 63%, 8%, 11%, and 1% in the states of Karnataka, Madhya Pradesh, Maharashtra, Chhattisgarh, and Uttar Pradesh, respectively.

The leverage ratio for the Issuer may fall on the higher side due to the nature of its business being an NBFC and negative cash flow is also a constraining factor. The overpriced Issue, full offer for sale with an exit of certain promoters and investors appear as negative factors. Also, some of its peers are available at a lower price in the secondary market. Hence only high-risk appetite investors May Apply.

Reviewer recommends May Apply to the issue.

Review By CA Priyanka Choudhary on 10th Oct 2022

Review Author

About CA Priyanka Choudhary

CA Priyanka Choudhary, a freelance chartered accountant

Priyanka Choudhary Jain is a Chartered Accountant and an experienced credit analyst. She has worked with CRISIL as Senior Credit Analyst on ratings assignments including business and financial analysis in Corporates as well as the Public Finance Sector.

Email: [email protected]

DISCLAIMER: No financial information whatsoever published anywhere here should be construed as an offer to buy or sell securities, or as advice to do so in any way whatsoever. All matter published here is purely for educational and information purposes only and under no circumstances should be used for making investment decisions. Readers must consult a qualified financial advisor prior to making any actual investment decisions, based on information published here. Any reader taking decisions based on any information published here does so entirely at own risk. Investors should bear in mind that any investment in stock markets are subject to unpredictable market related risks. Above information is based on RHP and other documents available as of date coupled with market perception. Author has no plans to invest in this offer.

Five Star Business Finance IPO Fundamental Analysis (May Apply)