Five Star Business Finance shares plummet 13.5% as NBFC cuts AUM growth forecast

Despite reporting strong results for the September ending quarter (Q2FY25), shares of Five Star Business Finance fell 13.60% to ₹758 apiece in intraday trade on Wednesday, October 30. This decline followed the company’s decision to lower its assets under management (AUM) growth guidance for FY25 to 25% from the previously projected 30%.

In addition, starting November 2024, the non-banking finance company (NBFC) intends to lower its lending rates by 2 percentage points to 22.5%. However, as these loans are fixed-rate, the reduction in spreads will only impact new disbursements, domestic brokerage firm Motilal Oswal noted.

The brokerage anticipates that net interest margin (NIMs) will decline to 18.3% and 17.2% in FY26 and FY27, respectively, down from an estimated 19.4% in FY25. Consequently, it has revised its profit after tax (PAT) estimates for FY26 and FY27 down by 3% and 5%, respectively, to account for a moderation in loan growth and a more accelerated compression in NIMs.

Despite these adjustments, the brokerage noted that Five-Star has developed strengths and capabilities in its business model that are difficult for competitors to replicate. It expects the company to maintain its best-in-class profitability, projecting a CAGR of approximately 28% in AUM and 21% in PAT from FY24 to FY27.

Furthermore, Five-Star is expected to command premium valuations relative to its NBFC and housing finance company (HFC) peers. The brokerage believes that these premium valuations will remain intact due to the company’s niche market position, superior underwriting practices, resilient asset quality, and consistently high return metrics.

The brokerage has retained its ‘buy’ rating on the stock, with a target price of ₹1,015 per share.

Q2 earnings snapshot

In Q2 FY25, net total income grew by 30% to ₹542.7 crore, up from ₹416.5 crore in Q2 FY24. Disbursements during the quarter amounted to ₹1,250.7 crore, compared to ₹1,204.3 crore in Q2 FY24. 

Profit before provisions and operating profits (PPOP) for Q2 FY25 stood at ₹380 crore, reflecting a 37% increase compared to Q2 FY24. In comparison to Q2 FY24, profit before tax (PBT) and profit after tax (PAT) rose by 34% each, reaching ₹358.2 crore and ₹267.9 crore, respectively, for Q2 FY25.

The cost-to-income ratio was at 34.18%, down from 36.03% in Q2 FY24. Excluding credit costs, the cost-to-income ratio for Q2 FY25 was 30.17%, compared to 33.49% in Q2 FY24.

Return on average total assets was 8.36%, slightly down from 8.47% in Q2 FY24. Return on equity increased to 19.02% for Q2 FY25, compared to 17.08% for Q2 FY24. Capital adequacy remained robust at 48.73%.

As of September 30, 2024, Five-Star Business Finance’s AUM stood at ₹10,927 crore, reflecting a YoY growth of 32% and a QoQ increase of 6%, distributed across 0.43 million active loans.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.