Large growth canvas, geographical expansion to drive growth: Five-Star operates
in a business that, has large growth potential: secured lending to
small businesses primarily in Tier 3 to Tier 6 towns (85% of branches) with a
granular portfolio (average loan outstanding of INR 0.25mn) with EMI-based
products. Over the last 2 decades it has developed a strong model of customer
acquisition, collateral-based lending, and collections in this segment. As Five-Star
expands to newer geographies away from southern India (94% of AUM
currently), we see AUM growth at 33% CAGR over FY23-25E. Its strong branchled acquisition model has delivered 55% CAGR in customer acquisition over the
past 5 years.
Enviable asset quality track record, collections model: Although it operates in the
informal income segment, Five-Star’s asset quality track record has been strong
through economic cycles. While early delinquencies are relatively higher because
of its presence in this segment (0-30DPD at 5.99% and 30-90DPD at 9.15%),
Five-Star’s focus on self-occupied residential property (SORP) as collateral ensures
that eventual loss rates are minimal. This has helped it maintain strong asset
quality even during crises such as Covid-19 and demonetisation. A razor-sharp
focus on collections keeps credit cost low (we expect credit cost to average
c.1.0% over FY24-FY25E).
Strong return metrics; premium valuations to sustain: Five-Star has also
demonstrated its ability to reduce funding cost as it has achieved scale and
boasts of over 50 lenders with a long-term credit rating of ‘AA-‘. This bodes well
for the company’s spreads over the medium term. A high yield portfolio,
controlled opex and low credit cost should help sustain Five-Star’s strong return
metrics. While near-term RoE is suppressed due to high capital adequacy (67.2%
Tier 1), we expect RoE to expand to 17.9% by FY25E and forecast earnings
CAGR of 29% over FY23-25E. We value Five-Star at 3.3x FY25E P/BV and initiate
coverage with a BUY rating and TP of INR 680. Five-Star’s inability to execute
growth plans while maintaining asset quality in newer geographies and sharp
broad-based deceleration in economic activity are key risks .
Strong growth led by customer acquisition and branch expansion
Five-Star’s AUM has grown at a robust CAGR (compound annual growth rate) of c.47% from
FY18 to FY23. This growth has primarily been driven by the acquisition of new customers
while maintaining a steady average loan outstanding. The number of live accounts has also
grown at a CAGR of around 55% during this period, while average loan outstanding has
been relatively stable at INR 0.25mn-0.3mn. This highlights the strength of Five-Star’s
business model, which focuses on expanding through new customer acquisition rather than
relying on higher ticket lending to existing borrowers.
Increase in branch network and penetration:
Five-Star initially operated as a Chennai-based NBFC but has successfully expanded beyond its
local market. It expanded its branch network from six branches in Chennai to 39 branches
across Tamil Nadu between FY10 and FY15. From FY15 to FY18, it further expanded to 72
branches in the states of Andhra Pradesh, Telangana, and Karnataka. As of Mar’23, Five-Star
has expanded its presence to 213 branches in these three states. During this period, the
contribution to AUM from these states increased to 60%. Recently, Five-Star has expanded
into Madhya Pradesh, Chhattisgarh, Maharashtra, and Uttar Pradesh. The company adopts a
strategic approach of contiguous expansion in geographies with substantial demand and
maintains robust asset quality by leveraging neighbouring branches, local credit evaluations,
and hiring staff with strong local networks.
The management has guided for sustaining the branch addition run-rate at 50-60 branches
per year. Further, at least 80% of the new branches will be in south India and the balance
20% in non-South regions. The company has highlighted that while there is sufficient
opportunity to grow in south India, it has started to add some branches in non-South regions
as well with a view to establish presence and get an understanding of the geography – given
these regions are expected to be growth drivers 5-6 years down the line.
Increase in fleet on the street:
The second lever is increase in the number of officers per branch. When a branch is
successful, instead of putting up a new branch, Five-Star adds more people to the existing
branch. This is done with a view that given Five-Star is already familiar with the area and has
existing customers in the area, new business can be easily shored up in the existing branch.
Thus, the number of officers has constantly increasing from 5.3 business and collections
officer per branch in Mar’18 to 10.7 business and collections officers in Mar’23. The
management has indicated that over time the number of officers in a branch will continue to
rise steadily, leading to an increase in the potential business opportunity from the existing
branch.
Operating leverage to start playing out
While Five-Star will continue its branch expansion strategy in newer geographies, for existing
geographies where it already has a successful branch it has a policy of adding more
employees to the existing branch rather than opening a new branch. This practice helps
improve cost efficiencies at the organisation level.
Thus, even with the target opening of 60 new branches per year, we expect the productivity
of branches/employees to improve continuously. We expect the AUM per branch to go up
from the current c.INR 185mn to c.INR 250mn by FY25E on the back of increase in number
of employees per branch and also AUM per employee (though number of clients per
employee is expected to remain ~85-100, disbursement ticket size is expected to increase,
leading to increase in AUM per employee).
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