scorecardresearchFive-Star Business Finance: This recently listed stock is up over 45% since

Five-Star Business Finance: This recently listed stock is up over 45% since its debut; should you buy?

Updated: 21 Jun 2023, 09:12 AM IST
TL;DR.

On the back of the recent recovery in the stock, global brokerage house Nomura has initiated coverage on Five-Star Business Finance with a ‘buy’ call and a target price of 750, indicating an upside of 15 percent.

It has soared over 17 percent just in June after a 6 percent rise in May.

It has soared over 17 percent just in June after a 6 percent rise in May.

Shares of the recently listed Five-Star Business Finance have given robust returns since their debut. The stock has jumped over 45 percent from the low of 448.20, hit on its listing day, November 21, 2022.

It was listed at 449.95, a discount of 5 percent over its issue price of 474. Despite the weak listing, the stock quickly touched its record high of 687.25, hit on December 7, 2022, less than a month after its debut.

However, after hitting its record high, the stock started correcting and fell 28 percent to 496 in April 2023, but since then the stock has been on a recovery path.

It has soared over 17 percent just in June after a 6 percent rise in May. However, in April, it lost around 5 percent. Overall in 2023 YTD, the stock has gained 6 percent.

On the back of the recent recovery in the stock, global brokerage house Nomura has initiated coverage with a ‘buy’ call and a target price of 750, indicating an upside of 15 percent.

The brokerage believes that Five-Star is uniquely positioned with superior growth and best-in-class profitability among financial peers. It is highly profitable and among the fastest-growing NBFCs in a niche market, added Nomura.

The company provides secured business loans to micro-entrepreneurs and self-employed individuals (secured by self-occupied residential property) with a strong presence in South India.

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Five-Star Business Finance stock

Investment Rationale

Highly profitable: The brokerage noted that Five-Star clocked an AUM CAGR of 47 percent (largely volume-led) over FY18-23, with an average ticket size of 3 lakh. Its focus on a large underbanked market provides superior pricing power (yields >24 percent) and strong underwriting leading to robust profitability with average ROAs of 7.6 percent and PAT CAGR of 61 percent over FY18-23, added Nomura.

AUM growth: It estimates the company will deliver a 30 percent AUM CAGR during FY23-26F driven by: 1)significant untapped opportunity in MSME, specifically in niche small business loans; 2) contiguous expansion with 50-60 new branches expected in every year; 3) increase in the fleet on the street leading to higher customer addition and enhanced productivity; and 4) a gradual increase in ticket size back to pre-COVID levels.

Strong asset quality: As per the brokerage, Five-Star’s key strength is in its strong underwriting practices, which have led to superior asset quality performance through cycles. The company follows a multi-layered underwriting approach with all loans sourced in-house with a strong focus on maker checkers across all credit functions. Even for NPAs, the haircut has been negligible, said Nomura. All these have led to credit costs (as a % of net loans) of only 80 bps during FY15-23, and the brokerage expects it to be 90 bps during FY24-26F.

The brokerage estimates an EPS CAGR of 25 percent during FY23-26F with RoA/RoE of 7.7 percent/16.6 percent.

Key risks include the inability to scale up in new states, rising competition from lenders/fintechs and worse-than-expected asset quality deterioration, warned Nomura.

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First Published: 21 Jun 2023, 09:12 AM IST