Five Star Business Finance Limited is a systemically important non-deposit taking non-banking financial company (NBFC-ND-SI) which provides secured business loans to micro-entrepreneurs and self-employed individuals. It was incorporated as Five-Star Business Credits Private Limited in 1956, the firm is headquartered in Chennai with a strong presence in South India. The loans have an average ticket size of ₹2,90,000 which is secured by self occupied residential properties. Small loans for business purposes accounted for 62% of the AUM and the rest 38% are loans for home renovation or improvement, marriage, healthcare and education as on 30th June 2022.

ABOUT THE COMPANY – FIVE STAR BUSINESS FINANCE LIMITED

As on 30th June 2022 , the Gross AUM of the company was ₹ 5,296.54 crore and it had an active loan base of 2,30,175 with average loan to value ratio of 36.62%. The company disbursed 6,363 crore loans in FY22.
It is a South-based player with the top 4 southern states i.e., Tamil Nadu, Andhra Pradesh, Telangana and Karnataka, cumulatively accounting for 93% of AUM in FY22.
The target audience is households with net monthly cash-flows of ~₹25,000 to ₹40,000 and those who have co-applicants on the loan with collateral of ~₹10 lakhs in value.
The lending interest rate lies between 24% -26% and a tenure of 5-7 years.
The company has 311 branches in 150 districts of 8 states and 1 union territory.
As of 30th June 2022, the total borrowings are ₹2,520.3 crore with an average cost of borrowings being 10.5%.
Among the compared peers, Five Star Business has the highest Net Interest Margins of 16.6% in FY22, which can be attributed to the
strong yields it has been able to charge because of specific focus on the target segment.
Five Star Business average ticket sizes, at around ₹2,90,000 as on 30th June 2022, is the lowest compared to other players considered in the peer set.
They target customers located in urban, semi-urban locations and rural markets of India.

INDUSTRY OUTLOOK – FIVE STAR BUSINESS FINANCE LIMITED

The small ticket size secured (SORP – Self Occupied Residential Property) MSME lending market potential is estimated at ₹ 22 lakh crores. Players such as Five Star Business Finance, Vistaar Financial, Veritas Finance and AU SFB currently operate in this market. The top 5 states including UP, West Bengal, Bihar, Maharashtra and Tamil Nadu together account for almost half the addressable market

Compared to different loan secured small business loans is one of the most attractive asset classes offering higher yields over a medium tenure with good collateral quality and lower default risk as the loans are secured predominantly with SORP.

In absolute terms, the aggregate size of lending in the small business loans segment is estimated to be around ₹1.95 trillion as of June 2022. There are various kind of players serving this segment including Banks, NBFCs, Small Finance Banks, and Microfinance Institutions that offer loans to self-employed individuals, micro-entrepreneurs as well as MSMEs.

COMPETITIVE LANDSCAPE – FIVE STAR BUSINESS FINANCE LIMITED

PROMOTER BACKGROUND AND SHAREHOLDING – FIVE STAR BUSINESS FINANCE LIMITED

The entities forming part of the Promoter Group are as follows:

SCI Investments V (8.79%)
Matrix Partners India Investment Holdings II, LLC (12.46%)
Lakshmipathy Deenadayalan (10.49%)
Hema Lakshmipathy (7.17%)

The company has been backed by marquee institutional investors such as TPG Capital, Sequoia Capital, Matrix Partners, Norwest VenturePartners, KKR and TVS Capital Funds Limited.

RISK FACTORS

The company’s operations are primarily focused on the states of Tamil Nadu, Andhra Pradesh, Telangana and Karnataka which collectively account for ~93% of AUM as on 30th June 2022, thus has concentration risk.
The small business finance industry in India is highly competitive and competes with unorganized money lenders, friends & family members, certain larger NBFCs and HFCs, NBFCs that also offer loans for business purposes that are backed by property.
The customers do not have credit histories supported by sufficient documentary evidence such as tax returns, that would enable the company to accurately assess their creditworthiness. They depend on the accuracy and completeness of the information provided by the customers and reliance on any misleading information may affect the judgment of their credit worthiness, as well as the value and title of the collateral.
As of 30th June 2022, 30.42% of the customers are first time borrowers which increases risks of non-payment or default.

STATEMENT OF PROFIT AND LOSS – FIVE STAR BUSINESS FINANCE LIMITED

STATEMENT OF ASSET AND LIABILITIES – FIVE STAR BUSINESS FINANCE LIMITED

STATEMENT OF CASH FLOW – FIVE STAR BUSINESS FINANCE LIMITED

KEY METRICS – FIVE STAR BUSINESS FINANCE LIMITED

KEY TAKEAWAYS – FIVE STAR BUSINESS FINANCE LIMITED

The company has been backed by marquee institutional investors such as TPG Capital, Sequoia Capital, Matrix Partners, Norwest Venture Partners, KKR and TVS Capital Funds Limited who have not only provided capital but also have assisted in strengthening the corporate governance framework that has been critical to our growth.
The underwriting model evaluates the cash-flows of small business owners and self-employed individuals in the absence of traditional documentary proofs of income.
Potential market for residential property-backed small business lending is estimated at ₹22 trillion.
The company has enough capital and thus they did not need fresh issue of shares.
The company does not intend to do unsecured lending.
Five Star Business recorded the fourth fastest AUM growth of 50% CAGR over FY18-22, among the compared peers. Digikredit Finance has the highest AUM growth of CAGR 128% over FY18-22, followed by Lendingkart at 63% and Veritas Finance at 60% in the same time frame, albeit a lower base.

SWOT ANALYSIS – FIVE STAR BUSINESS FINANCE LIMITED

The company provides secured business and personal loans. The average loan to value ratio stands at ~37% with capital adequacy ratio of 75.2% as on 30th June 2022.
~93% of the AUM comes from south India and thus bears concentration risk.
They target customers located in urban, semi-urban locations and rural markets of India.

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FIVE STAR BUSINESS FINANCE LIMITED – IPO