IPO Analysis: Five Star Business Finance Limited

IPO Rating: Invest

About the issue:

Five Star Business Finance Limited is an NBFC-ND-SI (Non-Banking Finance Company) providing secured business loans to micro-entrepreneurs and self-employed individuals is coming out with its initial public offering (IPO) of equity shares of the face value of Rs 1 per equity share. The price band of the issue has been fixed at Rs 450 to Rs 474 per equity share. The issue size is Rs 1960.01 crore at a higher price band.

The IPO opening date is November 9, 2022, and it will be closing on November 11, 2022. The issue is likely to be listed on the exchange on November 21, 2022. The IPO market lot size is 31 shares and in multiple thereof. A retail-individual investor can apply up to a maximum of 13 lots (403 shares or Rs 191,022) at the upper price band.

Objects of the Issue

The company will not receive any proceeds from the offer and all such proceeds will go to the selling shareholders.

Promoter holding 

The pre issue shareholding is 40.07 per cent, post the IPO the promoter stake will be 33.65 per cent.

About the company:

Five Star Business Finance Limited is an NBFC-ND-SI (Non-Banking Finance Company) providing secured business loans to micro-entrepreneurs and self-employed individuals. The company has an extensive network of 311 branches, as of June 30, 2022, spread across eight states and one union territory and approximately 150 districts across India, with Tamil Nadu, Andhra Pradesh, Telangana and Karnataka being the key states.

Five Star Business Finance Limited has created a business model based on identifying an appropriate risk framework and the ideal instalment-to-income ratio to make sure that customers have the resources to repay the loan after meeting their regular obligations and other event-based capital requirements.

The company is headquartered in Chennai, Tamil Nadu with a strong presence in south India. As of September 30, 2021, we had a total of 4,306 employees.

The company has provided loans to more than 185,000 customers in total. They had an active loan base of 230,175 and 217,745 as of June 30, 2022, and March 31, 2022, respectively.

With more than Rs 30,000 million in AUM, the company has the fasted AUM growth among the compared peers. As of June 30, 2022, and March 31, 2022, the total borrowings were Rs 25,203.19 million and Rs 25,588.31 million, respectively.

According to the CRISIL Report, among its compared peers (being NBFCs in India) - within a subset of large peers (with more than Rs 3000 crore in Gross Term Loans), FBFL has the fastest Gross Term Loans growth, with a compound annual growth rate ("CAGR") of 65.0 per cent (Financial Year 2017 to 2021), FBFL has on Gross Term Loans of 7.5 per cent, across the period covering Financial Years 2022, 2021 and 2020; and the company is among the three best for gross non-performing assets (being Stage 3 Gross Term Loans which are 90+ Days-Past-Due ("DPD")) as a percentage of Gross Term Loans as of March 31, 2022, while it has the best asset quality among lenders identified by CRISIL as engaged in extending MSME business loans, with other lenders reporting 90+ DPD more than 2 per cent.

Financial 

On the financial performance front, for the last three fiscals, FBFL has posted a total income/net profit of Rs 787.35 crore/ Rs 261.95 crore (FY20), Rs 1051.26 crore/ Rs 358.99 crore (FY21), Rs 1256.17 crore/Rs 453.55 crore (FY22). For the Q1 of FY23 ended on June 30, 2022, it earned a net profit of Rs 139.43 crore on a total income of Rs 339.06 crore. 

For the last three fiscals, FBFL has reported an average EPS of Rs 14.18 and an average return on a net worth of 15.11 per cent. 

Valuation and Outlook

The company's topline is increasing at a three-year 46 per cent. The rising trend in the topline represents the growth phase of its life cycle. Companies' reserves are steadily growing. The company's reserves for FY22 are Rs 3681 crore.

If we annualize FY23 earnings and attribute them to post-IPO fully diluted equity capital, the PE is 24.76 times. As a result, based on its most recent financial statistics, the issue looks to be fully priced. According to the offer paperwork, FBFL's identified peers include Aavas Financiers, Aptus Value Housing, and AU SFB. They are now trading at P/E ratios of 37.37x, 46.21x, and 32.62x, respectively (as of November 04, 2022). They are not, however, truly comparable on an apple-to-apple basis.

This market for small customer borrowing is becoming increasingly crowded and competitive. However, given the previous financial performance and management's confidence in preserving the development pattern, well-informed investors may contemplate parking funds with a long-term outlook. As a result, we recommend that investors may apply for this IPO for the long term.