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Motilal Oswal Sets INR700 Target Price for Five Star Business Finance

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  Published in Business and Finance on Wednesday, December 31st 2025 at 20:18 GMT by moneycontrol.com

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Motilal Oswal Bullish on Five Star Business Finance, Sets ₹700 Target Price

Motilal Oswal Financial Services (MOFS) has issued a positive recommendation for Five Star Business Finance (FStar), projecting a significant upside potential and setting a target price of ₹700 per share. This optimistic outlook is based on the company's robust performance, improving asset quality, and favorable industry dynamics within the Micro, Small & Medium Enterprises (MSME) lending sector. The report highlights Five Star’s strategic focus and ability to navigate challenging economic conditions while maintaining a strong growth trajectory.

Understanding Five Star Business Finance:

Five Star Business Finance is a non-banking financial company (NBFC) specializing in providing secured business loans to small and medium enterprises (SMEs) across India. They primarily cater to businesses involved in wholesale trade, distribution, and light manufacturing. The company differentiates itself through its deep understanding of the SME landscape, localized presence, and strong relationship management capabilities. Unlike many other lenders, Five Star focuses on relatively smaller loan sizes, typically ranging from ₹10 lakh to ₹10 crore, allowing them to serve a wider segment of businesses often underserved by traditional banks. (Refer to FStar's website for more details: [ https://www.fstarbf.com/ ])

Motilal Oswal’s Rationale – Key Positives Driving the Recommendation:

MOFS’s bullish stance is underpinned by several key factors. The most significant, according to their analysis, are:

• Strong Asset Quality Improvement: This is arguably the cornerstone of the positive recommendation. The report notes a marked improvement in Five Star’s asset quality metrics, including Gross Non-Performing Assets (GNPA) and Net Non-Performing Assets (NNPA). The reduction in NPAs reflects better risk management practices, improved collection efficiencies, and a more conservative lending approach adopted over the past few years. This is particularly crucial given concerns about potential stress within the SME sector due to factors like rising interest rates and inflation.
• Robust Disbursements & AUM Growth: Five Star has consistently demonstrated strong disbursement growth, indicating healthy demand for its loan products. Assets Under Management (AUM) have also seen significant expansion, reflecting both organic growth and potentially strategic acquisitions. MOFS believes this trend will continue, driven by the company’s expanding geographical reach and deepening relationships with existing clients.
• Effective Cost Management: The report praises Five Star's ability to manage its operating expenses effectively. This disciplined approach has helped improve profitability margins even in a challenging interest rate environment. Cost-to-income ratio improvements are seen as sustainable, contributing positively to the company’s overall financial performance.
• Strategic Focus on Tier 2 & 3 Cities: Five Star's expansion strategy focuses heavily on Tier 2 and Tier 3 cities, which offer significant growth potential due to lower competition and a growing SME base. This geographic diversification reduces concentration risk and allows the company to tap into underserved markets. The report suggests that this strategic focus will be a key differentiator in the long run.
• Technological Advancements & Digital Transformation: Five Star has been investing in technology to streamline its operations, enhance customer experience, and improve credit assessment processes. This digital transformation is expected to further boost efficiency and reduce operational costs.

Financial Projections & Target Price Justification:

MOFS projects that Five Star’s AUM will continue to grow at a healthy Compound Annual Growth Rate (CAGR) over the next few years. They anticipate improvements in profitability margins driven by cost efficiencies and potentially better pricing power. The target price of ₹700 is based on a sum-of-parts valuation methodology, considering various factors like future earnings potential, asset quality improvement, and market conditions. This implies a significant upside from the current trading levels. The report emphasizes that this target price could be even higher if certain key assumptions play out favorably, such as faster disbursement growth or further improvements in asset quality.

Potential Risks & Challenges:

While MOFS maintains a positive outlook, they also acknowledge potential risks and challenges:

• Interest Rate Volatility: Rising interest rates can negatively impact demand for loans and potentially increase the risk of defaults. While Five Star has demonstrated resilience so far, continued rate hikes could pose a challenge.
• Economic Slowdown: A broader economic slowdown could significantly affect the SME sector, leading to increased stress on borrowers and higher NPA levels.
• Competition: The NBFC landscape is becoming increasingly competitive, with both traditional banks and other fintech players vying for market share. Five Star needs to continue differentiating itself to maintain its position.
• Regulatory Changes: Changes in regulations governing NBFCs could impact the company's operations and profitability.

Conclusion:

Motilal Oswal’s recommendation suggests a strong belief in Five Star Business Finance’s ability to navigate the current economic landscape and capitalize on growth opportunities within the SME lending sector. The positive outlook is largely driven by improvements in asset quality, robust disbursements, effective cost management, and a strategic focus on Tier 2 & 3 cities. While acknowledging potential risks, MOFS remains optimistic about Five Star's long-term prospects and believes that the company’s stock has significant upside potential, justifying their target price of ₹700. Investors considering an investment in Five Star should carefully review the full report from Motilal Oswal and conduct their own due diligence to assess the risks and rewards involved. The success of this recommendation will depend on Five Star's continued execution of its strategic plan and ability to adapt to evolving market conditions.