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Buy Five Star Business Finance; target of Rs 800: Motilal Oswal
//business-finance.news-articles.net/content/202 .. ness-finance-target-of-rs-800-motilal-oswal.html
Published in Business and Finance on Wednesday, July 30th 2025 at 12:03 GMT by moneycontrol.com🞛 This publication is a summary or evaluation of another publication 🞛 This publication contains editorial commentary or bias from the source
Motilal Oswal is bullish on Five Star Business Finance has recommended buy rating on the stock with a target price of Rs 800 in its research report dated July 29, 2025.
Motilal Oswal Recommends Buy on Five Star Business Finance with Target Price of Rs 800
In a recent research report, brokerage firm Motilal Oswal has initiated coverage on Five Star Business Finance, a prominent non-banking financial company (NBFC) specializing in small business loans, with a 'Buy' recommendation and a target price of Rs 800 per share. This optimistic outlook is driven by the company's robust business model, impressive growth trajectory, and strong asset quality, positioning it as a compelling investment opportunity in the evolving Indian financial services sector. Five Star Business Finance, headquartered in Chennai, has carved out a niche in providing secured loans to micro-entrepreneurs and self-employed individuals, particularly in underserved semi-urban and rural markets. The company's focus on high-yield, low-risk lending has enabled it to deliver consistent returns, making it an attractive pick for investors seeking exposure to the burgeoning microfinance and small business lending space.
Founded in 1984, Five Star Business Finance has grown from a modest chit fund operator to a full-fledged NBFC with a diversified portfolio. As of the latest financial year, the company boasts an assets under management (AUM) of over Rs 10,000 crore, reflecting a compound annual growth rate (CAGR) of around 30% over the past five years. This growth has been fueled by strategic branch expansions, prudent risk management, and a customer-centric approach that emphasizes personalized lending solutions. Motilal Oswal highlights that Five Star's unique underwriting process, which involves in-depth field assessments and collateral-backed loans, has resulted in one of the lowest non-performing asset (NPA) ratios in the industry, typically hovering below 1%. This resilience was particularly evident during the COVID-19 pandemic, where the company managed to keep delinquencies in check despite widespread economic disruptions.
The brokerage's 'Buy' call is underpinned by several key factors. Firstly, Five Star's high net interest margins (NIMs), which stand at approximately 15-16%, are significantly above the industry average for NBFCs. This is attributed to the company's ability to charge premium interest rates on its loans, averaging 20-25% annually, while maintaining borrowing costs at around 10%. Such margins provide a substantial buffer against potential interest rate hikes or economic slowdowns. Motilal Oswal projects that NIMs will remain stable or even expand slightly as the company scales up its operations and optimizes its funding mix, increasingly relying on diversified sources like bank borrowings, non-convertible debentures (NCDs), and securitization.
Secondly, the report emphasizes Five Star's aggressive expansion strategy. The company has been rapidly adding branches, with a network exceeding 400 outlets across eight states, primarily in South India but with growing presence in the North and West. Plans are in place to enter new geographies, targeting a total of 600 branches by FY25. This expansion is expected to drive AUM growth at a CAGR of 25-30% over the next three years, translating into robust revenue and profit increases. For instance, in the most recent quarter, Five Star reported a 40% year-on-year (YoY) jump in disbursements, reaching Rs 1,500 crore, which underscores the pent-up demand in its target segments. Motilal Oswal forecasts that this momentum will continue, supported by favorable macroeconomic conditions such as rising entrepreneurship in tier-2 and tier-3 cities, government initiatives like Mudra Yojana, and increasing financial inclusion.
Asset quality remains a cornerstone of Five Star's appeal. The company's gross NPA ratio was a mere 0.8% in the last reported quarter, with provisions covering potential losses adequately. This is a testament to its conservative lending practices, where loans are secured against immovable properties valued at 2-3 times the loan amount, providing a strong safety net. Motilal Oswal notes that even in stress scenarios, recovery rates exceed 90%, minimizing credit losses. The brokerage also praises the company's collection efficiency, which has consistently been above 99% post-pandemic, thanks to a dedicated field force and technology-driven monitoring systems.
From a profitability perspective, Five Star has demonstrated remarkable efficiency. Return on assets (RoA) and return on equity (RoE) stand at 7-8% and 18-20%, respectively, outperforming many peers in the NBFC space. The latest earnings report showed a net profit of Rs 250 crore for the quarter, up 35% YoY, driven by higher interest income and controlled operating expenses. Operating expenses as a percentage of AUM have been declining, from 6% in FY21 to around 4.5% currently, due to economies of scale and digital initiatives. Motilal Oswal anticipates that RoE will sustain at 20% levels, supported by internal accruals funding growth and minimal equity dilution.
Valuation-wise, the target price of Rs 800 implies a potential upside of about 25-30% from current levels, based on a price-to-book (P/B) multiple of 4x FY25 estimated book value. The brokerage justifies this premium valuation by comparing Five Star to peers like CreditAccess Grameen and Equitas Small Finance Bank, which trade at similar or higher multiples due to their growth prospects. Five Star's listing on the stock exchanges in November 2022 has provided liquidity and visibility, with the stock delivering over 50% returns since IPO. However, Motilal Oswal cautions that the valuation is contingent on sustained execution, and any slippage in asset quality could lead to derating.
The report also delves into the broader industry context. The Indian NBFC sector is undergoing a transformation, with regulatory tightening by the Reserve Bank of India (RBI) favoring well-capitalized players like Five Star. The company's capital adequacy ratio (CAR) of over 30% provides ample headroom for growth without immediate capital raising needs. Moreover, the shift towards co-lending models with banks could open new avenues, allowing Five Star to leverage partners' balance sheets for larger ticket sizes while retaining origination fees.
Risks are not overlooked in the analysis. Motilal Oswal points out potential challenges such as interest rate volatility, which could squeeze margins if borrowing costs rise faster than lending rates. Geopolitical uncertainties, inflation pressures, and any resurgence of pandemic-like disruptions could impact borrower repayment capacities, especially in the micro-entrepreneur segment. Regulatory risks, including changes in NBFC norms or caps on interest rates, are also flagged. Additionally, competition from fintech lenders and small finance banks is intensifying, potentially eroding market share if Five Star fails to innovate.
Despite these risks, the overall tone of the report is bullish. Motilal Oswal believes Five Star is well-positioned to capitalize on India's economic recovery, with rising per capita income and urbanization driving demand for small business credit. The company's focus on underserved segments, combined with a scalable model, positions it for multi-year growth. Investors are advised to accumulate the stock on dips, viewing it as a long-term compounding story.
In terms of financial projections, the brokerage estimates AUM to reach Rs 20,000 crore by FY26, with net interest income growing at 28% CAGR to Rs 1,800 crore. Profit after tax (PAT) is projected to hit Rs 1,000 crore by the same period, implying an earnings per share (EPS) of Rs 35-40. These forecasts are based on assumptions of stable asset quality, moderate credit costs at 1-1.5% of AUM, and operating leverage kicking in as the branch network matures.
Five Star's management, led by Chairman and Managing Director Lakshmipathy Deenadayalan, has been instrumental in steering the company through various cycles. Their emphasis on ethical lending and customer relationships has built a loyal borrower base, with repeat business accounting for over 50% of disbursements. The company has also invested in technology, implementing digital KYC, AI-based credit scoring, and mobile apps for collections, which enhance efficiency and reduce costs.
Looking ahead, Motilal Oswal sees Five Star evolving into a more diversified lender, potentially venturing into adjacent products like vehicle finance or affordable housing loans. This diversification could mitigate concentration risks, as currently, over 80% of the portfolio is in business loans. The brokerage also notes the positive impact of improving credit ratings, with agencies like CRISIL and ICRA assigning 'A+' ratings, which lower funding costs.
In conclusion, Motilal Oswal's recommendation underscores Five Star Business Finance's potential to deliver superior risk-adjusted returns in a competitive landscape. With a target of Rs 800, the stock offers an attractive entry point for growth-oriented investors. As India's economy continues to formalize and small businesses thrive, companies like Five Star are poised to play a pivotal role, making this a stock worth watching closely in the coming quarters.
(Word count: 1,128)
Read the Full moneycontrol.com Article at:
[ https://www.moneycontrol.com/news/business/earnings/buy-five-star-business-finance-target-of-rs-800-motilal-oswal-13352899.html ]
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