All You Need To Know About Five Star Business Finance Ltd. IPO
Published by Sharekhan Education | November 9, 2022
Five Star Business Finance Ltd. IPO
Amit Pathak | Sharekhan Education
Issue size: ₹ 1960 Cr
Price Band: ₹ 450-474
Minimum Application: 31 Shares and in multiples thereon
The issue opens on: Wednesday, 9th Nov’2022
The issue closes on: Friday, 11th Nov’2022
Company Overview:
Five Star Business Finance provides secured business loans to micro-entrepreneurs and self-employed individuals. The company targets customers who typically derive income from “everyday” cash and carry businesses with a focus on services; with household net cash-flows of Rs. 25,000 to Rs. 40,000 per month. Over 95% of their loan portfolio comprises loans from Rs 1 lakh to Rs 10 lakhs in principal amount. Tamil Nadu, Andhra Pradesh, Telangana, and Karnataka collectively account for approximately 85% of the branch network. The company is backed by marquee institutional investors such as TPG Capital, Sequoia Capital, Matrix Partners, KKR, and TVS Capital Funds Ltd.
Industry Overview:
As per Crisil Report, the total market size of MSME lending was approximately 21 lakh crore as of FY22. Less than 15% of 70 million MSMEs in India have access to formal credit. Historically, there is a perception of high risk and the prohibitive cost of delivering services physically, which have constrained traditional lenders’ ability to provide credit to MSMEs. There is a huge demand-supply gap in this segment. Over the last few years, expansion in branch networks, more data availability and government initiatives like GST, UDYAM, and increasing thrust towards the adoption of digital payments have led to an increasing focus of lenders, especially NBFCs in this space. The MSME loan market is estimated to grow at 16-18% CAGR over FY 22-25.
Key Concerns:
The company’s operations are primarily concentrated in southern states. Any significant social, political or economic disruption or changes in the policies of the state governments of these regions could disrupt business operations. Around 30.4% of the company’s customers are first-time borrowers. Such customers generally have a higher risk of non-payment or default. It is exposed to interest rate volatility risk. Any change in interest rates would affect Net Interest Income and Net Interest Margins.
Financials:
The company has reported a total AUM of Rs 5296.5 crore as of June 30, 2022, with strong growth of 49.7% CAGR over FY18-22. The average cost of borrowings on average total borrowings was 10.53%. The Gross NPA ratio was at 1.12% while the net NPA was at 0.68%. The company has reported an average RoE of 15.1% over the last three fiscal years. The post-issue P/B works out to be 3.7x FY22 BVPS (at the upper end of the price band)
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