Founded in 1984, Five Star is an NBFC with AUM of Rs45bn catering to a
business community of 177k customers with an average outstanding ticket size
of Rs250k.
It has created a niche in lending to ‘underserved’ business owners and
self-employed segment in tiers 3-6 cities, thereby commanding IRRs of ~24% and spreads of ~12%. The execution excellence helps it manage opex/AUM at 6-7%.
It contain credit cost, thereby generating RoAUM of 8-9% and RoE of 16-18%.
The scale-up all through past couple of decades was led purely by customer addition (not increased average ticket size).
What has Five Star done differently from other NBFCs?
1). Fully backed by hard collateral with right sizing of loan amount:
100% of FiveStar’s lending portfolio is backed by hard collateral, of which ~95% is self-occupied residential property (SORP).
Loans are right sized within its internal parameters of LTV and IIR of about 50%.
the loans are structured with relatively longer tenures (maximum seven years and minimum two years) to reduce the EMI burden (average behavioral tenure is of about 5 years).
2). Carving out niche in lending to small businesses:
Five Star Business Finance has created its nichein lending to small business owners and self-employed individuals.
Businesses to whom lending is targeted are usually businesses with cyclical experience, running successfully for few years and profitable too, but are outside the credit map
Also, the loan is given in the name of several members of the family to
ensure family’s collective loan decisioning.
The family cashflows generally range between Rs25k-40k per month and typical collateral value is Rs1mn (no vacant land or commercial property).
The end use of the loans provided (of ticket size of Rs0.1mn-1.0mn) is primarily for business purposes, but there might be some asset creation as well (home renovation / improvement and other mortgage purposes).
3). Investing into technology for efficiency:
Five Star has made considerable investments in technology and operates on a core banking, ERP platform and facilitates paperless loan journey.
Further, it believes, digitization will act as a business enabler to improve efficiency and productivity.
Company is building digital capabilities through senior hires.
4). Marquee investor backing and professional management team:
Five Star has raised over Rs19bn (US$260mn) in equity till date and is backed by marquee private equities including TPG, Matrix, Norwest, Sequoia, KKR and TVS Capital.
Also, it is run by a professional team (15 department heads with banking background) and stands up to high governance standards.
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