Five-Star Business Finance Limited

Just as a gardener carefully nurtures plants for growth, Five-Star Business Finance is doing the same for the Indian economy by nurturing small businesses. With secured loans and tailored financial support, they help these businesses thrive, fostering long-term growth and contributing to a stronger, more vibrant economy[EasyDNNnews:PaidContentStart]

About the Company
Five-Star Business Finance Limited is a prominent financial services company based in Chennai, India, with a legacy of providing business finance solutions since its inception in 1984. The company primarily focuses on offering secured loans to small and medium-sized enterprises (SMEs) across various sectors. Known for its customer-centric approach, Five-Star has developed a strong presence in the Indian non-Banking financial company (NBFC) space.

The company’s offerings include a range of financial products designed to meet the working capital and expansion needs of businesses. Their loan portfolio is diversified, serving a wide array of industries, with a key emphasis on providing financial support to businesses in the retail, manufacturing, and service sectors. Over the years, Five-Star has established a reputation for delivering tailored financial solutions that help businesses grow and thrive.

With a robust management team and strategic growth initiatives, the company continues to expand its footprint across India. As of the latest financial year, Five-Star is actively focusing on increasing its borrowings and issuing nonconvertible debentures (NCDs) to fuel its expansion plans. The company is committed to maintaining a strong track record of corporate governance and financial discipline, positioning itself as a leader in the business finance sector in India.

Industrial Outlook
The Indian financial sector for FY 2024-25 shows cautious optimism despite facing several macroeconomic hurdles. The Reserve Bank of India (RBI) projects a 6.5 per cent real GDP growth, maintaining India’s position as the fastest-growing major economy globally. Continued public consumption and strong investment are driving the economy, supported by a stable financial system. Both the banking and non-banking financial company (NBFC) sectors are maintaining healthy balance sheets, which are key for the financial ecosystem’s resilience. In particular, the banking sector has improved significantly, with the gross non-performing assets (GNPA) ratio of scheduled commercial banks falling to a multi-year low of 2.6 per cent, signalling better asset quality.

However, the sector faces several challenges. Geopolitical risks and financial market volatility are contributing to uncertainty, which could dampen growth in the short to medium term. Despite these hurdles, the sector has structural drivers that support growth. Government fiscal policies, such as Tax exemptions for incomes up to INR 12 lakhs, are expected to stimulate consumption and investment. Additionally, the growing digital financial services and financial inclusion initiatives provide long-term growth prospects, especially in underserved regions.

Recent steps by the Reserve Bank of India (RBI) under Governor Sanjay Malhotra reflect a gradual easing and rationalization of regulations for non-banking financial companies (NBFCs). The RBI has begun unwinding certain curbs on compliant NBFCs, consolidating outdated rules, and reviewing frameworks for low-risk entities to reduce compliance burden. These measures aim to balance regulatory oversight with growth support, helping improve operational flexibility and reduce long-term compliance costs.

Business Model
Company operates as a Non-Banking Financial Company (NBFC) specializing in providing secured loans to microentrepreneurs and self-employed individuals in underserved regions of India. The company focuses on offering loans between ₹1 lakh and ₹15 lakh, with an average ticket size ranging from ₹3 to ₹5 lakh. These loans are primarily utilized for business expansion, home renovation, and other personal needs. Five-Star uses a proprietary underwriting model that evaluates the borrower's intent and ability to repay, ensuring sound credit decisions. The company operates 748 branches across 10 states and one union territory, targeting Tier 3 and Tier 6 cities where access to formal financial services is limited. With over 11,900 employees, Five-Star emphasizes financial inclusion and aims to help underserved populations transition into the formal credit ecosystem. Their strategy is centered around customer satisfaction, stakeholder returns, and maintaining a robust risk management framework to ensure sustainable growth.

Target Customers
Company focuses on a diverse customer base spread across urban, semi-urban, and rural markets. The primary target is individuals earning between ₹25,000 and ₹40,000 per month, primarily from self-employed or small business activities in sectors such as retail, agriculture, and services. These individuals often require financial assistance to expand their businesses or improve their livelihoods. The company extends loans to customers who can provide collateral, typically in the form of land or property valued at around ₹1 million. Family members are often required to act as co-applicants, enhancing the support system and increasing the likelihood of repayment. By targeting these micro-entrepreneurs and self-employed individuals, Five-Star is able to serve underserved markets and mitigate lending risks, promoting financial inclusion and helping these customers access much-needed capital.

Borrowing Mix (Q2FY26)
Term bank loan
■ Sept. 2025 (55 per cent) vs. Sept. 2024 (60 per cent): The share of borrowings from Bank Term Loans (loans provided by banks with a fixed term and interest rate) has decreased by 5 per cent from September 2024. This decrease reflects the company’s strategy to diversify its funding sources while still relying on banks as the largest component of its borrowing mix.

Term Loan from Indian DFIs/Others
■ Sept. 2025 (14 per cent) vs. Sept. 2024 (10 per cent): Borrowings from Indian Development Financial Institutions (DFIs) and other sources have increased by 4 per cent in September 2025 compared to the previous year. This shift suggests that the company is looking to diversify beyond banks and tap into other term loan options, possibly from Development Financial Institutions (DFIs) or non-bank financial institutions.

NCD (Non-Convertible Debentures)
■ Sept. 2025 (10 per cent) vs. Sept. 2024 (12 per cent): Non-Convertible Debentures (NCDs) have decreased by 2 per cent in September 2025, suggesting that the company is reducing its Reliance on debt markets or opting for lowercost borrowing options. This change could also reflect a strategy to balance the funding mix more effectively

Securitization
■ Sept. 2025 (20 per cent) vs. Sept. 2024 (18 per cent): Securitization (the process of pooling various financial assets like loans or receivables and selling them as securities to investors) has increased by 2 per cent in September 2025. This shows that the company is increasingly relying on asset-backed financing. This could indicate a strategic shift towards creating liquidity through the sale of securitized assets or reducing the need for more traditional debt.

ECB (External Commercial Borrowings)
■ Sept. 2025 (1 per cent) vs. Sept. 2024 (1 per cent): The proportion of External Commercial Borrowings (ECB) (loans or credit raised from foreign lenders, typically to finance business growth) remains unchanged at 1 per cent in September 2025, indicating that the company continues to have minimal reliance on international debt.

Financials
In FY25, the company reported a strong financial performance with revenue increasing by 30.46 per cent to ₹2847.84 crore, up from ₹2182.85 crore in FY24. EBITDA grew by 32.32 per cent to ₹2128.95 crore, compared to ₹1609 crore in FY24, highlighting improved financial performance. Net profit surged by 28.3 per cent to ₹1072.49 crore, compared to ₹835.92 crore in the previous fiscal year, reflecting strong profitability growth.

In Q1FY26, the company continued its growth momentum. On a YoY basis, revenue increased by 13.87 per cent to ₹799.44 crore, up from ₹702.05 crore in Q1FY25. On a QoQ basis, revenue grew by 1.62 per cent from ₹786.68 crore in Q4FY25. Financial profit grew by 6.3 per cent YoY to ₹384 crore, reflecting consistent growth in core business profitability. Net profit stood at ₹286.14 crore, marking a 6.79 per cent YoY increase, and 7.45 per cent sequential growth from the previous quarter.

The company’s robust performance in FY25 reflects strong revenue growth and margin improvements, with notable increases in financial profit and net profit, indicating effective cost management and improved financial performance. The steady growth in Q2FY26 shows that the company is maintaining its growth trajectory, with solid profit margins and sequential improvement in net profit, suggesting a positive outlook for the upcoming quarters.

Key Financial Metric Comparison
■ Gross NPA - As of March 2025, the NBFC sector's GNPA stands at 2.9 per cent, with a projected increase to 3.3 per cent by March 2026. In comparison, Five-Star Business Finance’s GNPA has steadily increased from 1.02 per cent in FY2021 to 1.79 per cent in FY2025. Although both Five-Star and the sector show an increasing trend in GNPA, Five-Star’s GNPA remains significantly lower than the sector's average of 2.9 per cent in FY2025, indicating that Five-Star has managed to keep its asset quality relatively better than the industry. However, the continued rise in Five-Star’s GNPA signals increasing strain on its loan portfolio, similar to broader industry trends.

■ Net NPA - The NBFC sector’s NNPA is not published in detail but is implied to be in the low single digits due to robust provisioning. Five-Star's NNPA has remained low, increasing marginally from 0.84 per cent in FY2021 to 0.88 per cent in FY2025, suggesting that its provisioning strategy has been effective in managing its non-performing assets. Despite a slight rise, the company’s NNPA is still considerably lower than the broader sector, reinforcing that it has maintained solid risk management and recovery mechanisms compared to its peers.

■ Net Interest Margin - The NBFC sector’s NIM is highly variable, with micro-loan NBFCs expected to report NIMs in the low-to-mid teens in FY2025. Five-Star's NIM has been higher, starting at 19.17 per cent in FY2021 but declining to 16.75 per cent by FY2025. The decline was partly due to a drop in yields coupled with an increase in leverage, leading to a reduction in NIM to 16.84 per cent compared to 17.19 per cent earlier. While still above the sector average, this downward trend reflects margin pressure amid rising competition and potentially higher funding costs. The overall decline in NIM across both Five-Star and the broader sector underscores the challenges in sustaining profitability in a tightening and evolving market environment.

Valuation Comparison
Five-Star trades at the lowest valuation with a P/E of 17x and P/B of 2.74x, reflecting a more attractive entry point based on its strong return metrics. SBFC Finance, despite having a high P/E of 31.2x and P/B of 3.58x, has weaker returns, with an ROA of 4.41 per cent and an ROE of 11.6 per cent, which makes its premium valuation harder to justify. Capri Global’s valuation of 26.7x P/E and 3.81x P/B places it between Five-Star and SBFC, but its weaker ROA of 2.66 per cent and ROE of 11.8 per cent indicate lower efficiency in generating profits.

Return Metrics Comparison
Five-Star leads in profitability with a high ROA and ROE, showing better asset utilization and equity returns. SBFC and Capri Global, though solid in their sector, lag in profitability, with SBFC showing the weakest ROA and Capri Global having a relatively low ROE. Five-Star stands out for offering the best balance of strong returns and attractive valuation.

Outlook
Company as of Q2FY26, is navigating through a challenging economic environment with a clear focus on expansion and operational enhancements. The company has maintained strong asset quality, with a notable 18 per cent year-on-year growth in its Assets Under Management (AUM), reaching ₹128,471 million. With 800 branches spread across 11 states in India and a workforce of over 13,000 employees, Five-Star is continuing its efforts to provide small, secured loans primarily to micro-entrepreneurs and self-employed individuals. These loans are typically backed by self-occupied residential properties, which provides additional security to the lender. Although there was a slight dip in disbursements for Q2FY26, mainly due to stricter customer onboarding controls, the company remains optimistic about future growth. The company expects a positive impact from its strategy of opening new branches and expanding its team of business officers. Additionally, Five-Star is diversifying its offerings by exploring new loan products, including housing loans, which could unlock new growth avenues in the future.

Financially, Five-Star has continued to show strong performance, with a Profit After Tax (PAT) of ₹286 crore, reflecting a 7 per cent increase from the previous quarter. The company also maintains a solid net interest margin (NIM) of 16.41 per cent, underlining its ability to generate substantial returns from its core lending operations. Moreover, Five-Star has preserved a strong liquidity buffer, with ₹2,360 crore in unencumbered cash and equivalents as of September 2025, ensuring it remains well-capitalized to weather any macroeconomic challenges.

Looking ahead, the company is focusing on tapping into the significant untapped market for small-ticket secured loans. By expanding its branch network and increasing the average ticket size of loans, Five-Star aims to accelerate its growth trajectory. The company’s focus on credit underwriting and collections, alongside its robust risk management strategies, positions it well for sustained growth in the coming quarters. As financial inclusion continues to drive demand for accessible credit, Five-Star is expected to benefit from its strategic initiatives, strong market presence, and commitment to improving operational efficiencies. The outlook for the medium to long term remains positive, with promising opportunities for growth and expansion across India’s underserved markets. Given Five-Star Business Finance's strong performance, robust growth strategy, and commitment to expanding its market presence, we recommend BUYING the stock for long-term growth potential.

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