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Five Star Finance Ltd IPO: Listing gains likely

Five Star Business Finance Limited is tapping the capital markets with its offer for sale to raise Rs1,960 crore at the top end of the price band.

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Five Star Business Finance Limited is tapping the capital markets with its offer for sale to raise Rs1,960 crore at the top end of the price band. The issue opens today (Nov 9) and closes on November 11 (Friday). The price band is Rs450-474.

On Monday, the company announced its anchor allocation of 124.05 lakh shares at Rs474 to 18 anchor investors comprising 21 entities. Of these, 88.95 per cent was allocated to FPIs and 11.05 per cent was allocated to domestic mutual funds. The largest allocation was made to Smallcap World Fund who was allocated 28.87 per cent of the anchor portion followed by 12.31 per cent to Fidelity Funds and 11.16 per cent to Volrado Venture Partners. The issue is entirely an OFS and the selling shareholders are the PE investors of the company. The individual promoters are not selling one share in the OFS. The quality of the anchor book lends credence to the management and fundamentals of the company.

The company is a NBFC lending to micro-entrepreneurs. It began its operations in Tamil Nadu, roughly twenty years ago and derives a dominant share of business from the four Southern states of Tamil Nadu, Karnataka, Andhra Pradesh and Telangana. It charges an average interest rate of 24 per cent and does secured lending against collateral of land and property. Its ticket size is between Rs2-5 lakhs and the average ticket size currently is Rs2.57 lakhs. The loan tenure is for a period of 5-7 years. The business model is secured lending. Customers are 100 per cent sourced in-house and there is no concept of leads or third-party loans.

On the liability franchise, the company has a very strong relationship and currently the relationship is with 53 institutions which comprise of a mix of 20 private banks, 9 PSU banks, 13 NBFCs, 1 mutual fund and 10 others. The strong relationship has led to a gradual decline in cost of funding even in times of uncertainty. The rate has declined from 12.07 per cent to 10.51 per cent with the average tenor rising from the earlier 48.5 months to 50.2 months. This is in the face of a rake hike by RBI over the last six months. The incremental cost of borrowing has fallen from 11.37 per cent in FY20 to 8.51 per cent in FY22. The company has grown at a CAGR of 30 per cent over the period FY17-FY21. Its AUM at the end of March 22 was Rs5,070 crores.

The company has a simple way of assessing the customer's ability to repay. They call it the three 'C's, where they assess the character, cash flow and collateral. The key is to assess the cash flows where there is lack of documentary evidence as far as income proof is concerned. The best form of collateral is 'self-occupied residential property' as no one wants to lose the roof over one's head.

The company has very high collection efficiency and the same was at 97.89 per cent for FY22. On the delayed part of the loan book, the same was at 1.05 per cent, over 90 DPD (gross) for FY22. This leads to a loss of less than 1 per cent on the internal rate of return for the company for the full year. The company is present in 126 districts across 8 states and Union Territories, has 300 branches and 5,675 employees. The loans are given to people who have a cash flow of between Rs25,000-40,000 per month.

Its revenues for FY22 were Rs1,253 crores, while profit after tax was Rs453.54 crores. Its basic EPS was Rs16.09, while fully diluted EPS was Rs15.92. The PE band of the stock is 28.26-29.77 which compares very favourably with the companies the company has compared itself with. They are AU Bank, Aavas Finance and Aptus Housing. The company is into a niche segment and offers appreciation in the medium to long term. Looking at the niche business model, the excellent response from anchor investors, it makes imminent sense to apply for the IPO. Appreciation in the medium to the long term should be the objective, while listing gains would be the icing on the cake.

(The author is the founder of

Kejriwal Research and Investment Services, an advisory firm)

Arun Kejriwal
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