The ₹1,960 crore initial public offer (IPO) of non-banking finance company (NBFC) Five Star Business Finance's opened for subscription on Wednesday (November 9). The firm has decided a price band of ₹450-474 for the issue, which will conclude on November 11, Friday.
The issue is entirely an offer for sale (OFS) by the promoters and existing shareholders of the company, aggregating to ₹1,960 crore. The South-India-based shadow lender has trimmed its issue size from ₹2,752 crore earlier.
The individual promoter is not selling any shares as part of the OFS. SCI Investments, Matrix Partners India Investment Holdings and Norwest Venture Partners are the key shareholders participating in the OFS of the company.
The company will not receive any proceeds from the issue and all such proceeds will go to the selling shareholders, who will get a partial or complete exit after this IPO.
Ahead of its issue, the Chennai-based NBFC raised ₹588 crore from 16 anchor investors. The Chennai-based NBFC said it had allocated 12.4 million shares at 474 apiece to anchor investors. They included Capital Research, Fidelity Investments, ADIA, Norges Bank, Carmignac Gestion, White Oak, Malabar Investments, Bay Capital and Segantii, Enam, SBI Life, HDFC MF, Baroda BNP, Edelweiss MF, Mirae, and Gee Cee Ventures among others.
About the firm
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’ properties. Incorporated in 1984, the company provides secured business loans to micro-entrepreneurs and self-employed individuals, operating with 311 branches in 8 states and one union territory as of June 2022.
The NBFC posted a 19.49 percent growth in total income at ₹1256.16 crore in FY22 from ₹1051.25 crore in FY21, while its net profit stood at ₹453.54 crore in FY22 from ₹358.99 crore in FY21. Total income increased by 12.74 percent to 339.05 crore for the June quarter, from ₹300.75 crore in the year-ago period, primarily due to an increase in revenue from operations. Profit after tax increased by 37.28 percent to ₹139.43 crore in Q1FY23, from ₹101.57 crore in Q1FY22.
Shriram City Union Finance, Veritas Financial AU Small Finance Bank, Aavas Financiers Limited, Home First Finance Company India and Aptus Value Housing Finance India are some of its peers.
Brokerages are mostly mixed on the issue. Some are bullish on the back of its presence in an underpenetrated and fast-growing segment while the high competition, expensive valuation and the complete OFS nature of the issue have been flagged as key concerns.
Let's see what brokerages have to say:
"The company has created a niche for itself and is able to generate an impressive ROA of 7-8 percent. Despite generating a high ROA and NIMs, the company’s GNPA has been below 1.5 percent, 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 operates in a segment that is highly underpenetrated and has sufficient legroom to grow. This is evident from the fact that the company has been growing its book at a very good pace, added the brokerage.
"At the higher price band of ₹474, the issue is valued at P/BV 3.6x which seems expensive. It has the fastest gross term loan growth among its compared peers, said the brokerage. Considering the business profile of the company, intense competition and mounting risk around the microfinance sector, it has assigned a ‘Subscribe with Caution’ rating to the issue.
As per the brokerage, the NBFC has a strong NII and PAT growth CAGR of 31 percent and 32 percent, respectively, coupled with healthy advance growth CAGR of 15 percent over two years along with ROE and ROA metrics. The post-issue P/B works out to be 3.7 times.
"Strong tailwinds in the banking sector, uptick in credit cycle and strong Q1FY23 results of the company are the near-term positives that are factored in the valuations and the issue is reasonably price," said the brokerage recommending a 'neutral' rating.
"High competition and rising interest rates are big threats. The company has a presence in the South Indian region only. However, management is confident about maintaining its growth pattern. Finally, the issue is a complete offer for sale, and some of its peers are available at a better price in the secondary market," it said with an Avoid rating.