Five-Star Business Finance Limited — Q4 FY25 earnings call

Call held 30 Apr 2025

Management summary

Five-Star delivered a resilient performance in FY25 despite regulatory and regional headwinds in Karnataka. The company prioritized asset quality over aggressive growth, proactively cutting yields to attract better-profile customers while maintaining industry-leading ROA of 8.04%. Management is navigating a transition toward slightly higher ticket sizes (₹4-5 lakhs) and diversifying its borrowing base away from banks to 63% of total debt.

Highlights

  • Achieved 4-digit annual profit for the first time with FY25 PAT at ₹1,073 crores, up 28% YoY.

  • AUM grew 23.2% YoY to ₹11,877 crores, slightly missing the 25% guidance due to Karnataka disruptions.

  • Gross Stage 3 assets inched up to 1.79% from 1.62% QoQ, primarily driven by the Karnataka ordinance impact.

  • Incremental cost of funds dropped 27bps to 9.29%, while the overall book cost remained stable at 9.63%.

  • Net Interest Margin (NIM) compressed to 16.84% from 17.19% QoQ following a proactive 200bps lending rate cut.

  • Board recommended a maiden dividend of ₹2 per share (200% of face value), representing a 5.5% payout ratio.

  • Disbursements showed strong recovery, growing 55% QoQ to approximately ₹1,300 crores in Q4.

Concerns

  • Regional Regulatory Disruptions

Key financials

  1. AUM ₹11,877 Cr +23.2%YoY
  2. PAT (Full Year) ₹1,073 Cr +28%YoY
  3. Gross Stage 3 Assets 1.8% +10.5%QoQ
  4. NIM 16.8% -2%QoQ
  5. ROA 8%
  6. Cost to Income Ratio 36.6%

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 · Medium confidence 25%

    From 25% today

    So this year also, I think we are giving a guidance of 25% what we gave last year after October till things get settled.

    — Lakshmipathy D., CMD

Profitability

  • Earnings Growth Profitability · FY26 · Medium confidence 12-15%
    I think we should look at an earnings growth anywhere between 12% to 15% for FY '26.

    — Srikanth Gopalakrishnan, JMD & CFO

  • ROA Profitability · FY26 · High confidence 7.5-8.0%
    ROAs, I think if the leverage is not going to go up significantly, ROAs will continue to be around 7.5% to 8%.

    — Srikanth Gopalakrishnan, JMD & CFO

Margin

  • Credit Cost Margin · Medium Term · High confidence 75-100 bps
    Our guidance stays at 75 to 100 basis points.

    — Rangarajan Krishnan, JMD & CEO

Debt

  • Incremental Cost of Funds Benefit Debt · FY26 · Medium confidence 25-30 bps
    So our belief is that on an incremental basis, we should at least see 25 to 30 basis points of benefit coming through to us.

    — Srikanth Gopalakrishnan, JMD & CFO

Dividend

  • Dividend Payout Ratio Dividend · Foreseeable Future · Medium confidence 5-8%
    But our payouts will probably range anywhere between 5% to 8% for the foreseeable future.

    — Srikanth Gopalakrishnan, JMD & CFO

Risks & concerns

  • Regional Regulatory Disruptions

    high

    Karnataka ordinance impacted collections; management is monitoring a new Tamil Nadu ordinance, though they believe regulated NBFCs are exempt.

    Both acknowledged

  • Yield Compression and NIM Pressure

    medium

    Proactive 200bps rate cut to attract better customers is compressing NIMs and will mute FY26 earnings growth.

    Analyst acknowledged

  • Overleverage in Small Ticket Segments

    medium

    Management noted stress in the sub-₹3 lakh ticket size segment due to over-lending by MFIs and fintechs, prompting a shift toward ₹5-10 lakh loans.

    Management acknowledged

Areas of evasion (1)

  • Specific collection efficiency numbers excluding Karnataka were deferred to an offline discussion.

Q&A highlights

3 direct
Impact of Karnataka and Tamil Nadu Ordinances Direct
The impact of Karnataka ordinance was completely unexpected... But this is a state of bigger banks and bigger NBFCs. I think state government will be very clear... regulated entities like banks and NBFCs are completely excluded from this ordinance.

Clarifies that the asset quality deterioration was due to external regional factors rather than internal credit underwriting failures.

Asked by Mahrukh Adajania, Nuvama Wealth

Muted Earnings Growth Guidance for FY26 Direct
For FY '26, you're right, the earnings growth will be slightly muted... given that we have dropped our yields from November and you will see a full year impact.

Management admits that the proactive yield cut to improve customer profile will lead to a temporary slowdown in profit growth (12-15%) compared to AUM growth (25%).

Asked by Sarthak Nautiyal, Eraya Capital

Lagged NPA Trajectory Direct
The normal NPA numbers for this business model is sub 2%, which means if you're looking at a 2-year lag... it should at least be 3% to 3.25%. So even in the current quarter, we are not way off on a 2-year lagged NPA number.

Provides a realistic benchmark for asset quality in a high-growth environment, suggesting that current reported NPAs are within acceptable historical ranges when adjusted for seasoning.

Asked by Divyansh Gupta, Latent Advisors

2 min read 5 chapters

Detailed narrative

Navigating Regional Regulatory Headwinds

The quarter was significantly impacted by a 'completely unexpected' ordinance in Karnataka, which disrupted collection efficiency and pushed Gross Stage 3 assets to 1.79%. Management noted that while Karnataka represents only 6-7% of the portfolio, it contributed to 2/3 of the recent stress. They expressed confidence that a similar ordinance in Tamil Nadu (their home state with 30% exposure) would have a lesser impact as regulated NBFCs are explicitly excluded from the draft bill's purview.

Strategic Shift in Ticket Sizes

Five-Star is consciously moving its 'sweet spot' from sub-₹3 lakh loans toward the ₹5-10 lakh range. This shift is driven by observed overleverage in the microfinance and small-ticket fintech segments. Average ticket sizes are trending toward ₹4.5-5 lakhs, which management believes attracts a 'savvier' customer with more stable income and better credit behavior, even if it requires lower lending rates.

Yield Compression and FY26 Outlook

The company proactively reduced lending rates by 200bps starting in November to improve customer profile and address regulatory discomfort with high NBFC rates. This resulted in a yield drop to 23.7% in Q4 and a NIM compression to 16.84%. Consequently, management guided for a 'muted' earnings growth of 12-15% in FY26, as the full-year impact of lower yields flows through the books, despite a robust 25% AUM growth target.

Borrowing Diversification and Cost of Funds

Five-Star has successfully reduced its reliance on bank borrowings from 80% to 63% as of March 2025, diversifying into other funding sources. Incremental cost of funds dropped to 9.29% in Q4, and management expects a further 25-30bps benefit in FY26 as interest rates cycle downward. They intend to maintain a bank borrowing proportion of 65-70% to optimize costs while ensuring liquidity buffers of ~₹2,300 crores.

Operational Efficiency and Branch Strategy

The company added 228 branches in FY25, bringing the total to 748, largely through a 'split branch' strategy where branches with over 1,500 customers are divided to improve risk management. For FY26, branch expansion will moderate to 75-100 new locations. Productivity remains healthy at 2.6 loans per officer per month, with a target to reach 3 loans per month and an AUM per employee of ₹1.25 crores by mid-FY26.

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