Five-Star Business Finance Limited — Q1 FY26 earnings call

Call held 29 Jul 2025

Management summary

Five-Star Business Finance reported a muted Q1 FY26 characterized by asset quality stress stemming from borrower overleverage in the microfinance and personal loan segments. While AUM and PAT showed YoY growth, credit costs nearly doubled, prompting a strategic shift toward higher ticket-size loans (₹5L-₹10L) and a slowdown in the <₹3L segment. Despite the unexpected leadership transition and regional headwinds in Karnataka and Andhra Pradesh, management maintained its 25% growth guidance for the full year, banking on a recovery in the second half.

Highlights

  • AUM reached approximately ₹12,500 crores, representing 20% YoY growth and 5% QoQ growth.

  • Profit After Tax (PAT) stood at ₹266 crores, up 6% YoY but down 5% QoQ due to higher credit costs.

  • Credit cost spiked to 1.3% for the quarter, up from 0.7% in the previous period, leading to a guidance revision to 1.20%-1.25% for the full year.

  • Return on Assets (ROA) remained robust at 7.24%, while Return on Equity (ROE) was 16.57%.

  • Incremental cost of funds dropped significantly by 70 bps QoQ to 8.59%, aided by the RBI repo rate cut.

  • Collection efficiency for the quarter was 96.3%, with management noting early signs of improvement in July.

  • CEO Rangarajan Krishnan announced his resignation effective August 14, 2025, to pursue entrepreneurship; CMD Lakshmipathy Deenadayalan will take over full operations.

Concerns

  • Borrower Overleverage

Key financials

  1. AUM ₹12,500 Cr +20%YoY
  2. PAT ₹266 Cr +6%YoY
  3. ROA 7.2%
  4. ROE 16.6%
  5. Credit Cost 1.3%
  6. Gross Yield 23.5%

What they filed

Q1 FY27: revenue up 5.3%, net profit up 1.9% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue702 727 752 787 799 +14%815 +12%817 +9%829 +5%
Net profit268 274 279 266 286 +7%277 +1%269 −4%271 +2%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Guidance & targets

Revenue

  • AUM Growth Revenue · FY26 · High confidence 25%
    Hence, we are not revising our growth and profit guidance of 25% growth and 12% to 15% profit for the financial year 2026

    — Lakshmipathy Deenadayalan, CMD

Profitability

  • Profit Growth Profitability · FY26 · Medium confidence 12% to 15%
    Hence, we are not revising our growth and profit guidance of 25% growth and 12% to 15% profit for the financial year 2026

    — Lakshmipathy Deenadayalan, CMD

Margin

  • Credit Cost Margin · FY26 · Medium confidence 1.20% to 1.25%

    Previously 0.80% to 1.00% → 1.20% to 1.25%

    The credit cost guidance for the full year will be in the range of 1.20% to 1.25%.

    — Lakshmipathy Deenadayalan, CMD

  • Cost-to-Income Ratio Margin · FY26 · Medium confidence 35% to 37%
    So our belief is the cost to income should stay somewhere around 35% to 37% at least for this year.

    — Srikanth Gopalakrishnan, CFO

Debt

  • Incremental Cost of Funds Debt · FY26 · Medium confidence 8.75%
    So 8.60% may read more like an 8.75% levels for the full year.

    — Srikanth Gopalakrishnan, CFO

Risks & concerns

  • Borrower Overleverage

    high

    Small ticket borrowers (<₹3L) are highly indebted due to aggressive lending by MFIs and personal loan fintechs over the last 18-24 months.

    Both acknowledged

  • Geographical Concentration Stress

    medium

    Karnataka (ordinance issues) and Andhra Pradesh (riskier localities) are seeing higher NPA formation.

    Management

  • Leadership Transition

    medium

    The exit of CEO Rangarajan Krishnan, who was instrumental in the company's growth to a unicorn/listed entity, creates execution risk.

    Analyst downplayed

  • Yield Compression

    low

    Shift to higher ticket sizes (₹5L-₹10L) and risk-based pricing could compress yields by 60-75 bps annually.

    Analyst acknowledged

Areas of evasion (1)

  • Specific quantitative figures for August collection efficiency were withheld as the month was not yet over.

Q&A highlights

3 direct
Macro Stress and Collection Efficiency Direct
The bigger problems is not on the cash flows. The bigger problems is the overleverage in the EMI capability of that family... now the time has come for him to differentiate between the unsecured and secured lenders.

Clarifies that the stress is due to over-indebtedness from unsecured lenders (MFIs/Fintechs) rather than a drop in borrower income.

Asked by Mahrukh, Nuvama

CEO Exit and Management Stability Direct
I can assure you there is no further exit of management team or employees will happen because of Ranga's exit... I'm always an operational guy in the last 22 years of my work in Five-Star.

Addresses investor concerns regarding leadership vacuum and potential attrition following the CEO's departure.

Asked by Nischint Chawathe, Kotak

Asset Quality Surprise in Q1 Direct
So you're right that this came in a bit surprise. Otherwise, I would have guided in March quarter itself that this is coming up... Only in this quarter, you see the NPAs shooting up.

Management admits they were caught off-guard by the rapid deterioration in asset quality during the quarter.

Asked by Divyansh Gupta, Latent PMS

2 min read 5 chapters

Detailed narrative

Asset Quality Headwinds and July Recovery

Q1 FY26 saw a significant spike in credit costs to 1.3%, driven by overleverage in the small-ticket borrower segment (<₹3L). Management attributed this to aggressive unsecured lending by MFIs and fintechs over the past two years, which has strained borrower repayment capacity. However, July data shows green shoots, with collection efficiency and D1C1 metrics improving compared to April. Management expects the pain to stabilize by the end of September, with a stronger recovery in growth and asset quality in H2 FY26.

Strategic Pivot to Higher Ticket Sizes

To mitigate overleverage risks, Five-Star is consciously slowing down exposure to loans below ₹3L and shifting focus toward the ₹5L to ₹10L segment. While the 'sweet spot' remains ₹3L to ₹5L, the company aims to increase the ₹5L-₹10L portfolio from 15% to approximately 20-25% by year-end. This shift targets more financially literate customers who are less prone to frivolous over-borrowing, even if it leads to a gradual compression in yields.

Leadership Transition and Operational Continuity

The resignation of CEO Rangarajan Krishnan (Ranga) was a major announcement. Ranga, who spent 10 years with the firm, is leaving to pursue entrepreneurship. CMD Lakshmipathy Deenadayalan (Pathy) will assume full operational control, supported by a strong second-line management team including the COO, CBO, and Head of Business. Pathy emphasized his 22 years of operational experience to reassure investors that the transition would not disrupt the company's 25% growth trajectory.

Optimizing Cost of Funds

A bright spot in the quarter was the reduction in the cost of funds. Incremental debt was raised at 8.59%, a 70 bps drop from the previous quarter, largely due to the RBI repo rate cut and successful negotiations with lenders. While the CFO expects the full-year incremental cost to settle slightly higher at 8.75% as they diversify funding sources beyond banks, the current liquidity position remains strong with a net worth exceeding ₹6,500 crores.

Strengthening Collection Infrastructure

In response to rising stress, the company has significantly bolstered its collection team, adding nearly 200 officers in the last quarter alone to reach a total of 2,000. They have also restructured the team to separate origination from collection; the business team now handles current accounts, while a specialized collection team focuses exclusively on DPD (Days Past Due) buckets. This move is intended to arrest slippages and improve recovery from the ₹70-80 crore NPA pool targeted for this financial year.

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