Five Star Business Finance gains momentum as delinquencies improve and disbursements accelerate

Investment View and Valuation

Motilal Oswal Financial Services retains its Buy recommendation on Five Star Business Finance after a broadly in-line 1QFY27 performance. The broker believes the company is rebuilding business momentum, supported by a sharp recovery in disbursements, stabilising asset quality and improving collection trends.

Motilal Oswal has revised its target price to Rs 670, based on 2x March 2028E book value.

1QFY27 Financial Performance

Five Star Business Finance reported 1QFY27 PAT of Rs 2,700 million, up 2 per cent year on year and in line with Motilal Oswal estimates. Net interest income rose about 10 per cent year on year to Rs 6,400 million, also in line with estimates. Other income increased 17 per cent year on year to Rs 311 million, around 8 per cent above estimates.

Annualised credit costs were about 1.84 per cent of AUM, compared with 1.85 per cent in 4QFY26 and 1.6 per cent a year earlier.

Disbursement Recovery and AUM Growth

Disbursements increased 16 per cent year on year and 23 per cent sequentially to a historical high of about Rs 15,000 million. AUM grew 10 per cent year on year and 4 per cent sequentially to about Rs 137,000 million.

Management is confident of achieving about 20 per cent AUM growth in FY27, supported by stronger disbursement momentum and better collection and asset-quality trends. Its FY27 disbursement target is Rs 65,000-68,000 million. Motilal Oswal models about 21 per cent AUM growth in FY27 and an AUM CAGR of about 23 per cent over FY26-FY28.

Active loan customers exceeded 500,000 as of June 2026. The company added 12 branches during the quarter, mainly in Maharashtra, while also expanding into newer states.

Asset Quality and Collections

Asset-quality signals improved in the early buckets despite the seasonally weak 1QFY27. The 1+ days-past-due ratio declined 60 basis points sequentially to 16.7 per cent, while 30+ days-past-due declined 30 basis points to 12.4 per cent. Overall collection efficiency was 99.2 per cent and unique-customer collection efficiency was 97.9 per cent. The slippage ratio was stable sequentially at 0.7 per cent.

However, gross Stage 3 and net Stage 3 ratios each increased about 10 basis points sequentially to 3.45 per cent and 2.1 per cent, respectively. Stage 3 provision coverage declined about 125 basis points to around 40 per cent, while Stage 2 provision coverage fell about 40 basis points to 3.05 per cent.

Management expects slippages and NPAs to decline as collections improve. However, FY27 write-offs are expected to remain elevated at about Rs 2,250-2,500 million because of the sizeable 61-90 days-past-due pool.

Yields, Funding Costs and Margins

Reported yields fell about 12 basis points sequentially to 22.5 per cent, while the cost of borrowings declined about 15 basis points to 8.8 per cent. Spreads consequently improved about 5 basis points to 13.7 per cent, although NIM as a share of AUM declined about 10 basis points to around 20 per cent.

Management expects yields to settle near 22.25 per cent, with possible further moderation of 10-15 basis points, and expects incremental cost of funds near 8.5 per cent. It expects the overall cost of funds to decline 10-15 basis points in FY27, assuming no adverse policy changes.

FY27-FY28 Outlook

Management guides for FY27 credit costs of 1.7-1.9 per cent of AUM, trending towards 1.7 per cent, and 1.6-1.7 per cent in FY28. It targets Stage 1 assets of about 91-92 per cent, Stage 2 assets of 6-7 per cent, Stage 3 assets below 3 per cent and steady-state gross NPA near 2.5 per cent.

Employee costs may remain elevated because of salary revisions, performance-linked incentives and competition, limiting meaningful operating leverage in FY27. Motilal Oswal forecasts FY26-FY28 AUM and PAT CAGRs of about 23 per cent and 14 per cent, respectively, with FY28E RoA of 6.7 per cent and RoE of 15.5 per cent.

Key Drivers and Risks

The key factors supporting the investment thesis are:

• Healthy underlying demand.
• Improving productivity.
• Recovering collections.

Key risks include elevated write-offs, asset-quality deterioration, margin pressure from lower yields and continued cost inflation.