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Five-Star Business Finance Ltd

| Q3 FY26 Earnings Conference Call

NEUTRAL SENTIMENT

Report Source

⬤3rd Feb 26

Summary : Five-Star Business Finance is stabilizing collections and asset quality amidst small-ticket loan stress, preparing for accelerated growth post-Q4 while maintaining prudent provisioning and a long-term credit culture.

Management Perspective positive : Management expressed confidence in their actions, stating they are 'very confident' the company will get 'back stronger performance' and are in the 'last leg of fixing the problems' before 'accelerating growth'. They believe efforts are 'bearing fruit' and things are 'looking up'.

Concall Report Analysis & Insights

Business Overview

  1. Company follows a 3-step approach: understand, fix problems, then accelerate growth.
  2. Actions in underwriting and collections led to stable softer bucket collections in Q3.
  3. Portfolio current proportion marginally rose from 81.67% to 81.77% in Q3.
  4. Overall and unique customer collection efficiency remained stable at 96.6% and 95.1%.
  5. Disbursements moderated to INR 976 crores, 18% lower, due to focus on collections.

Future Growth Prospects

  1. Confident of stronger performance in the next 1-2 quarters after collection strategy is fully in place.
  2. Expects to accelerate growth and improve asset quality post Q4 results.
  3. Investing in people and physical infrastructure, adding 35 branches and 678 officers in Q3.
  4. Building a full-fledged collection vertical to positively impact collections and asset quality.
  5. Affordable housing book is being built, with encouraging feedback from 100 sanctioned files.

Management Insights

  1. Management is in the last leg of fixing problems, focusing on long-term perspective over short-term.
  2. Confident in rolling back or settling NPA loans without principal loss through concerted efforts.
  3. Does not subscribe to large technical write-offs, believing it harms credit culture and borrower behavior.
  4. Prudent level of technical write-offs is maintained while spurring recovery efforts.
  5. Cost of funds on the book dropped over 50 bps year-on-year, protecting spreads despite lower yields.

Signs of Skepticism

  1. Analysts questioned the prolonged stress in Stage-2 and NPA assets compared to industry trends.
  2. Concern raised about credit cost not having bottomed out and potentially increasing in future quarters.
  3. Queries about the slow growth in disbursements despite industry growth and implemented strategies.
  4. Analyst asked if the company would prefer higher buffers/provisions to clean up books faster.
  5. Questions on the long duration of legal recourse for NPA accounts (3-4 years).

Risk Factors

  1. Slippages in Stage-3 or NPA remain slightly elevated, indicating persistent stress.
  2. Small-ticket loans are facing tough times, with a shift from over-leverage to behavioral crisis.
  3. Marginal increase in Opex due to lower disbursements and growth, compressing NIMs.
  4. Competition and attrition may necessitate higher Opex to retain employees.
  5. Credit cost marginally increased from 1.34% in Q2 to 1.44% in Q3.

Good To Know

  1. Recoveries from NPA or technical write-offs amounted to INR 23 crores in Q3.
  2. Robust liquidity of INR 2,276 crores and unavailed sanction lines of nearly INR 1,500 crores.
  3. Signed a $100 million loan agreement with Asian Development Bank, to be availed over next quarters.
  4. Net worth crossed INR 7,000 crores for the first time, reaching INR 7,083 crores.
  5. Overall provision coverage dropped marginally by 6 basis points, but remains healthy at 1.8%.

Key Drivers

  1. Improved collection efficiency.
  2. Lower cost of funds.
  3. Resolution of behavioral crisis.
  4. Accelerated disbursement growth.

Key Analyst Discussions

Competitive Environment

  1. MFI overlap with Five-Star customers is expected to continue, as MFIs expand customer segments.
  2. MFIs are not direct competition but reach similar small business customers for higher loans.
  3. Five-Star focuses on longer tenure, secured loans for business setup, unlike MFI gold loans.
  4. Competition is not the problem, but customer overlap will always be there.

Market Trends & Consumer Behavior

  1. Small-ticket loans are facing tough times, with a crisis shifting from over-leverage to behavioral issues.
  2. Behavioral crisis means customers psychologically affected by other lenders' write-offs.
  3. Company is fighting back to instill good credit culture among customers.
  4. January collections held up well despite numerous holidays.
  5. Slippages are more muted in January compared to October, auguring well for Stage-3.

Financial Highlights

  1. Current collection efficiency improved to 99.01% for current book, 97.26% excluding NPA.
  2. PAT for Q3FY26 was INR 277 crores, 3% lower sequentially but 1% higher year-on-year.
  3. ROA and ROE remain healthy at 7% and 15.8% respectively.
  4. Cost of incremental debt was 8.19%, lower than previous quarter.
  5. Lowest addition to Stage-2 assets in 4-5 quarters, at INR 70-80 crores in Q3.

Product Composition

  1. Affordable housing book has been put in place from last quarter, with 100 files sanctioned.
  2. No hurry to accelerate growth in new products like affordable housing.
  3. May consider a separate team for housing book growth in the future.
  4. LAP book acceleration will coincide with housing book acceleration.

Strategic Considerations

  1. Underwriting steps and collection vertical setup are key actions to fix problems.
  2. Rejection rates for new customers are stable at 38-40%, up from 30% previously.
  3. No specific growth guidance provided, pending full confidence in collection stabilization.
  4. Legal recovery team focuses on full or partial settlements, not collecting single EMIs from NPA accounts.
  5. Write-off period reduced to 15 months from NPA, with some state-specific aggression.
Five-Star Business Finance Ltd (FIVESTAR) Concall Report Analysis & Insights | Dhanarthi