Five-Star Business Finance Limited — Q2 FY26 earnings call

Call held 29 Oct 2025

Management summary

Five-Star Business Finance characterized Q2 FY26 as a 'quarter of stabilization' following a difficult Q1. Management successfully arrested the downtrend in asset quality and improved return ratios despite a deliberate slowdown in disbursements caused by significantly tighter credit filters. The company remains committed to its 25% AUM growth guidance for FY26, banking on a much stronger performance in the second half of the year.

Highlights

  • PAT reached ₹286 crores, representing a 7% growth both sequentially and year-on-year

  • Disbursements stood at ₹1,196 crores, a slight decline from ₹1,290 crores in Q1 due to tighter credit controls

  • Return on Assets (RoA) improved to 7.49% from 7.24% in the previous quarter

  • Cost of funds dropped by 27 bps to 9.27%, with incremental debt availed at 8.56%

  • Credit rejection ratio spiked to 41% in Q2 from 25% in Q1, reflecting significant underwriting tightening

  • Overall collection efficiency improved to 96.7% from 96.3% in Q1, though unique customer collection remained flat at 95.1%

  • Credit cost was maintained at 1.34%, within the revised guidance range of 1.25% to 1.35%

  • Launched a new affordable housing loan product in October 2025, targeting ticket sizes of ₹6-8 lakhs

Concerns

  • Overleverage in sub-3 lakh ticket size segment

Key financials

  1. PAT ₹286 Cr +7%YoY
  2. RoA 7.5% +3.5%QoQ
  3. RoE 16.9% +2.1%QoQ
  4. Disbursements ₹1,196 Cr -7.3%QoQ
  5. Yield on Assets 23.2% 0%QoQ
  6. Cost of Funds 9.3% -2.8%QoQ

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%
    We expect to deliver on the guidance for this financial year that we have given you and look forward to the much better and stronger second half of this financial year.

    — Lakshmipathy Deenadayalan, CMD

  • Housing Loan AUM Revenue · FY26 · Medium confidence ₹100-150 crores
    Maybe in this financial year, we may build up close to 100 crores-150 crores of pure housing loan portfolio.

    — Lakshmipathy Deenadayalan, CMD

Profitability

  • Credit Cost Profitability · next 18-24 months · High confidence 1.25% to 1.35%

    Previously 0.75% → 1.25% to 1.35%

    This will hold on for at least next 18 months-24 months.

    — Lakshmipathy Deenadayalan, CMD

  • OPEX to Average Assets Profitability · short to medium term · Medium confidence 5% to 5.5%
    I think you should build in about 5%-5.5% of OPEX for the short to medium term.

    — Srikanth Gopalakrishnan, JMD & CFO

  • Combined RoA (with Housing) Profitability · Long term · Medium confidence 6% to 6.5%
    Put together, we should be able to deliver you a 6%-6.5% ROA.

    — Srikanth Gopalakrishnan, JMD & CFO

Margin

  • Steady State Spreads Margin · FY26-27 · Medium confidence 13% to 13.5%
    Spread will be about 13%-13.5% on a steady state.

    — Srikanth Gopalakrishnan, JMD & CFO

Risks & concerns

  • Overleverage in sub-3 lakh ticket size segment

    high

    This segment is seeing the highest delinquencies and NPAs, leading to a strategic shift away from very small ticket loans.

    Both acknowledged

  • Geographic stress in Karnataka

    medium

    Numbers in Karnataka are 'a little higher' due to local ordinances, though the state is only 5-6% of AUM.

    Management acknowledged

  • Contagion from MFI sector write-offs

    medium

    Borrowers who saw MFI loans written off initially hoped for similar treatment from secured lenders, impacting early-stage collections.

    Both acknowledged

Areas of evasion (2)

  • Specific breakdown of the 30+ DPD pool beyond the 12% figure mentioned by the analyst.
  • Refusal to provide specific write-off guidance for the second half, preferring to take it 'offline'.

Q&A highlights

3 direct
Early bucket (30+ DPD) pool reaching post-COVID highs Direct
If you see unique customers at 95.1%, that means there will be some slippages from current to arrears... We are trying to arrest that in this quarter.

Confirms that while overall efficiency is up, the underlying pool of delinquent customers is still elevated, requiring focus on containment.

Asked by Renish, ICICI

Overlap with Microfinance (MFI) and borrower behavior Direct
When they saw that microfinance had written off their loans, the collection efforts had reduced. And there was a hope that secured lenders also will follow that path. But when they see secured lenders... following up more frequently... the behavior definitely changes.

Explains the behavioral contagion from the MFI sector stress and why management believes their secured model will eventually recover these dues.

Asked by Abhijit Tibrewal, Motilal Oswal

Discrepancy in Stage-1/2 trends compared to historical cycles Direct
This is the first time we see a overleverage crisis from a small ticket borrower segment... the over-leverage has been made a big dent in the repaying capability of the sub 3 lakh segment.

Management admits the current stress is structural (overleverage) rather than environmental (COVID/Demon), justifying the permanent shift in credit cost guidance.

Asked by Sanjay Ladha, Bastion Research

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Detailed narrative

Stabilization and the Road to Q4 Recovery

Management repeatedly labeled Q2 as a 'quarter of stabilization,' noting that the downtrend witnessed in Q1 has been arrested. They expect 'green shoots' in Q3 and a significantly stronger performance in Q4. This optimism is backed by an improvement in overall collection efficiency from 96.3% to 96.7% and a stable PAT of ₹286 crores.

Tighter Credit Filters Impacting Disbursements

Disbursements fell to ₹1,196 crores in Q2 from ₹1,290 crores in Q1, a drop attributed to the implementation of additional controls. The rejection ratio for login files spiked from 25% in Q1 to 41% in Q2. Management believes this 'underwriting tightness' is necessary to ensure the onboarding of the right customers in a stressed environment.

Managing the Overleverage Crisis in Small Tickets

The company identified an 'overleverage crisis' specifically within the sub-₹3 lakh ticket size segment. This has led to a permanent revision of credit cost guidance from 0.75% to a range of 1.25%-1.35%. Management noted that unlike previous crises (COVID/Demonetization), this one is driven by excessive lending by other players, particularly in the MFI space.

Strategic Pivot to Higher Ticket Sizes

In response to small-ticket stress, Five-Star is shifting its focus toward the ₹3-5 lakh and ₹5-10 lakh segments. This move is expected to increase the average ticket size and improve asset quality, as these borrowers are perceived to be more resilient. This shift is a key component of their strategy to maintain a 25% AUM growth rate.

Launch of Affordable Housing Finance

The company officially launched its housing loan product in October 2025 across 175-200 of its strongest branches. Targeting an average ticket size of ₹6-8 lakhs and yields of 16-18%, management expects to build an AUM of ₹100-150 crores by the end of FY26. While RoA for this product will be lower (6-6.5%), it is expected to provide a kicker to RoE through higher leverage.

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