Five Star Business IPO: All You Need To Know

Small business lender Five Star Business Finance Ltd. launched its initial public offering on Wednesday to raise up to Rs 1,960 crore. The issue is a complete offer for sale, with a handful of the company's early shareholders looking to sell their holdings.

IPO Details

• IPO open: Nov. 9

• IPO close: Nov. 11

• Price band: Rs 450-474 per share.

• Fresh Issue: Not applicable

• Offer for sale: Rs 1,960 crore

• Selling shareholders:  SCI Investments (Rs 166 crore), Matrix Partners (Rs 840 crore), Norwest Ventures (Rs 361.4 crore), TPG Asia (Rs 700 crore)

• Book running lead managers: ICICI Securities, Edelweiss Financial, Kotak Mahindra Capital, Nomura Financial Advisory

The Chennai-headquartered lender deals in secured business loans to micro-entrepreneurs and self-employed individuals, each of whom are largely excluded by traditional financing institutions. As of June 30, loans to small business owners and self-employed borrowers accounted for 70.15% of gross term loans.

Borrowers earning more than Rs 25,000 per month accounted for just 0.58% of the total loans at the end of the first quarter, according to data available in the red herring prospectus.

Profitability

The non-bank finance lender reported a net profit of Rs 139.4 crore for the quarter ended June 30. Among the compared peers, Five Star Business has the highest net interest margins of 14.9% in FY22, which can be attributed to the strong yields it has been able to charge on the target micro, small and medium enterprise segment.

Five Star Business also has the fourth highest yield on advances at 24.7% at end of FY22, among its peers. Among the compared peers, the lender has the second highest growth in net profit at 71% over fiscals 2018-22.

Asset Quality

Five Star Business has the second best asset quality and best asset quality amongst comparable peers and amongst MSME focused lenders, respectively. Gross non-performing asset ratio of the lender stood at 1.05% in FY22 with all the other MSME focused players reporting Gross NPA of more than 2%.

The company said its four layer credit verification process aids in reducing asset quality issues.

"We also conduct an in-depth analysis of the potential customer by considering 'the three Cs', being their character, their existing cash-flow to assess their repayment abilities, and their collateral to ensure that there is adequate ability and a high motivation on the part of the customer to repay us," the company said in its prospectus.

Key Risks

In its past inspection reports, the Reserve Bank of India has identified certain deficiencies in the company's operations, made certain observations in relation to its operations during its periodic inspections, and sought certain clarifications on these operations.

These observations included inadequate institutional risk management structure in light of significant business growth during FY19. Despite inherent risks, no risk profile had been prepared considering the business and external environment, the company said.

The RBI observed that nearly 55.58% of the gross loans were recently originated, as of FY19, with a run period of less than one year. The RBI noted that such an unseasoned loan book would carry higher risks, requiring the enhanced attention of risk management, which was not found adequate in the risk processes.

Stage 3 gross term loans to total advances were only 0.88% as of March 31, 2019. However, there were higher delinquencies in 30-day, 60-day, and 90-day default categories representing inherent stress in the credit portfolio. The RBI noted that the aggregate stressed accounts in the time categories of up to 90-day default category aggregated to 19.56%, which was significantly on the higher side.

The regulator noted an increase in net NPAs from 0.84% as of March 31, 2021 to 7.75% as of Dec. 31, 2021, exceeding the requisite thresholds that may trigger the imposition of restrictions set out in the prompt corrective action framework, and was a case of supervisory concern for the RBI.