Five-Star Business Finance Limited — Q3 FY25 earnings call

Call held 1 Feb 2025

Management summary

Five-Star Business Finance delivered a resilient Q3 FY25, characterized by a 'collection-first' approach amidst a challenging macro environment of overleverage and regulatory scrutiny. Management consciously slowed disbursement growth to 25% to prioritize asset quality and collection efficiency, which remained high at 98%. Despite a slight uptick in slippages, the company maintains industry-leading profitability metrics (8.1% ROA) and a strong liquidity position.

Highlights

  • AUM reached ₹11,178 crores, growing 25.4% YoY, in line with revised guidance.

  • Profit After Tax (PAT) stood at ₹274 crores, a 26% YoY increase.

  • Disbursements were intentionally moderated to ₹940 crores, down 25% YoY, to focus on collections.

  • Asset quality remained robust with Gross NPA at 1.62% (up 15bps QoQ) and Stage-3 PCR over 50%.

  • Return on Assets (ROA) was a healthy 8.10% with Return on Equity (ROE) at 18.49%.

  • Net Interest Margin (NIM) compressed slightly to 16.56% from 16.8% YoY due to proactive yield cuts.

  • Cost-to-Income ratio remained stable at 34.87% despite environmental challenges.

  • Liquidity buffer stood at ₹2,145 crores with fresh sanctions of ₹1,400 crores received in Q3.

Concerns

  • Systemic Overleverage

Key financials

  1. AUM ₹11,178 Cr +25.4%YoY
  2. PAT ₹274 Cr +26%YoY
  3. GNPA 1.6%
  4. ROA 8.1%
  5. NIM 16.6%
  6. Cost-to-Income 34.9%

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

Market Share

  • AUM Growth Market Share · FY25 · High confidence 25%

    Previously 30%+ → 25%

    we have given a guidance in last earning call on bringing down our growth to 25%... we took a sharper hit in Q3 and Q4 will be business as usual.

    — Lakshmipathy Deenadayalan, CMD

Profitability

  • Credit Cost Profitability · Medium Term · High confidence 0.75% to 1.00%
    our guidance to you on the credit cost is typically that the business model of Five Star can take a credit cost or will have to operate at a credit cost of around 75 to 100 basis points

    — Srikanth Gopalakrishnan, JMD & CFO

  • Static Pool Peak NPA Profitability · 33 to 36 months · Medium confidence 2.5%
    we have said that typically the NPAs peak around 33 to 36 months and in today's scenario it is anywhere around 2.5% or thereabouts.

    — Srikanth Gopalakrishnan, JMD & CFO

Margin

  • Cost-to-Income Ratio Margin · Ongoing · High confidence 35% to 36%
    we are maintaining our numbers and we will continue to operate at around the 35% to 36% kind of cost-to-income.

    — Srikanth Gopalakrishnan, JMD & CFO

Other

  • Branch Expansion Other · Full Year · High confidence 70-80
    the guidance remains the same, we will be opening close to 70, 80 branches in a full year.

    — Lakshmipathy Deenadayalan, CMD

Risks & concerns

  • Systemic Overleverage

    high

    Management noted a trend of overleverage in unsecured personal loans impacting borrower repayment capacity across the industry.

    Both acknowledged

  • Asset Quality Deterioration (30+ DPD)

    medium

    30+ DPD increased by 70bps QoQ; management expects stabilization in Q4 due to seasonal factors and collection focus.

    Analyst acknowledged

  • Regulatory Environment

    medium

    Cited as one of the three primary challenges currently facing the NBFC sector.

    Management acknowledged

Areas of evasion (1)

  • Specific details on on-us vs off-us default analysis were deferred to a later point.

Q&A highlights

3 direct
ECL Provisioning vs. Rising Slippages Direct
our LGD continues to be fairly low... about 10% to 12%... against which we are maintaining more than 50% provisions. So, that's the kind of coverage that we are doing.

Analysts were concerned that provisions weren't rising despite bucket movements; management clarified that their LGD is so low that current PCR is actually very conservative.

Asked by Aayush Sharma, Alder Capital

Impact of Overleverage and 30+ DPD Spike Direct
We would like to blame it more on overleverage, which cannot be restricted only to MFI... it's more a trend of overleverage than MFI is what I would like to put it as.

Management identified that the 70bps spike in 30+ DPD is due to general overleverage (unsecured/PL) in the system, but noted their secured nature provides better protection.

Asked by Renish, ICICI

RBI Interaction and Yield Reduction Direct
First of all, let me categorically clarify, there have been no problems highlighted by RBI... the dropping the yields was anyway on the cards for a long time.

Management debunked rumors of regulatory pressure on yields, stating the 200bps reduction was a proactive strategic move to align with the environment.

Asked by MM Bansal, Master Capital

1 min read 5 chapters

Detailed narrative

Strategic Moderation in Disbursements

Management executed a conscious slowdown in disbursements, which fell 25% YoY to ₹940 crores. This was a tactical move to align with the revised 25% AUM growth guidance and to pivot the field force toward collections during a period of systemic overleverage. The company expects Q4 to return to 'business as usual' as the system stabilizes.

Asset Quality Resilience and Provisioning Philosophy

Despite a 15bps rise in GNPA to 1.62% and a 70bps increase in 30+ DPD, management remains confident due to their secured lending model. They highlighted a low Loss Given Default (LGD) of 10-12%, making their 50%+ Stage-3 provision coverage highly conservative. Total write-offs for the nine-month period were ₹36 crores, which, if added back, would still keep GNPA below 2%.

Proactive Yield and Regulatory Management

Five-Star proactively reduced yields on incremental loans by 15-20 basis points this quarter, part of a larger 200bps reduction strategy. Management clarified that this was not due to specific RBI penalties but was a strategic decision to improve borrower sustainability and align with regulatory expectations for the NBFC sector.

Liquidity and Diversified Borrowing

The company successfully onboarded new high-profile lenders like HDFC Mutual Fund and HSBC Mutual Fund. Bank reliance has decreased from 70% to 65%, with 35% of borrowings now coming from capital markets and developmental institutions. Incremental borrowing costs remained flat at 9.56%, demonstrating strong lender confidence despite tight systemic liquidity.

Branch Splitting Strategy for Risk Mitigation

Of the 69 branches opened in Q3, 41 were 'split branches.' This strategy involves breaking down large branches into smaller units within the same vicinity to de-risk the portfolio and improve collection focus. This approach has contributed to the rising proportion of Tier-6 branch exposure, which now stands at approximately 43% of the mix.

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