Five Star Business Finance IPO kicks off: Should you subscribe?

The 1,960 crore initial public offering (IPO) of Five-Star Business Finance opened for subscription on Wednesday, November 9 and will close on Friday, November 11. With a price band fixed in the range of Rs 450-474 per share, the Chennai-based NBFC’s public issue is a complete offer for sale (OFS). 
 

According to IPO watch, shares of Five-Star Business Finance traded at Rs 484 apiece on the upper price band in the grey market, higher by 2 per cent. Later, they are likely to debut bourses on November 21 and join listed peers like AU Small Finance Bank, Shriram City Union Finance, Home First Finance, and Aptus Value Housing.
 

Ahead of its IPO, the company raised Rs 588 crore from 16 anchor investors, which included Capital Research, Fidelity Investments, ADIA, Norges Bank, White Oak, Edelweiss MF, SBI Life, Bay Capital, among many others.
 

That apart, the company provides secured business loans to micro-entrepreneurs and self-employed individuals. It has a strong presence in the Southern India and majority of its loans are secured by borrowers’ property, predominantly being SORP (self-occupied residential property). As of June 30, 2022, the company had an extensive network of 311 branches, with Tamil Nadu, Andhra Pradesh, Telangana, Karnataka, being their key states.
 

According to Manan Doshi, co-founder, unlistedarena.com, the Five-Star Business Finance IPO is exemplary from all view-points – from valuations to business performance. 
 

“Five Star provides secured business loans and 95 per cent of their loan disbursements range between Rs 1 to 10 lakhs. For FY22, NIMS were 17.68 per cent, while GNPA and NNPA remained under control. On the valuation front, the issue looks attractively priced based on the upper price band as P/BV is 3.58x (based on June, 22 book value). Besides, shares of the NBFC player has traded as high as Rs 725 per share in the unlisted market,” he added.
 

Meanwhile, here are the top things you should know before subscribing to this IPO:
 

Subscription date and price: The 3-day IPO of Five-Star Business Finance shall remain open from November 9 to November 11. The price band is fixed in the range of Rs 450-Rs 474 per share.
 

Issue break-up: Since the IPO is 100 per cent OFS, majority of the issue is reserved for qualified institutional buyers, which consists of 50 per cent. Non-institutional buyers and retail investors, meanwhile, comprise of 15 per cent and 35 per cent of the issue, respectively.
 

Minimum bid lot: Retail investors have to bid for a minimum of 31 shares and multiples thereof, which amounts to Rs 14,694. High net worth investors (HNIs), meanwhile, have to invest for 434 shares minimum, which amounts to Rs 2.05 lakh.
 

Allotment and listing date: The allotment process of IPO shares will begin on November 16. Thereafter, shares will debut both NSE and BSE on November 21.
 

Book running managers: ICICI Securities, Edelweiss Financial, Kotak Mahindra Capital, and Nomura Financial are the leading book running managers for the public issue.
 

Financial overview: As of June 30, 2022 (Q1FY23), the NBFC company reported 4.5 per cent growth quarter-on-quarter (QoQ) in gross term loans to Rs 5,296.5 crore from Rs 5,067.08 crore. Total borrowings, however, declined 1.5 per cent QoQ to Rs 2,520.3 crore in Q1FY23 from Rs 2,558.8 crore in Q4FY22. The company’s revenue from operations, meanwhile, grew 12 per cent year-on-year (YoY) to Rs 337.9 crore in Q1FY23 from Rs 300.5 crore in Q1FY22, but declined 73 per cent QoQ from Rs 1,254 crore in Q4FY22.
 

Competitive strengths: According to a report by Axis Capital, analysts said that the company has seen fastest loan growth among NBFC peers present in India, which amounts to more than Rs 3,000 crore gross term loans, with strong return and growth metrics. The strong on-ground collections infrastructure, too, ensures that the company maintains high asset quality. The 100 per cent in-house sourcing and collections framework allows the company to identify, monitor, and manage risks inherent from their operations.
 

Key risks: The company’s primary operations is restricted to Southern India like Tamil Nadu, Andhra Pradesh, Telangana and Karnataka. The company has had negative net cash flows in the past and may continue to have negative cash flows in the future. Besides, the promoter, Lakshmipathy Deenadayalan, has provided personal guarantees for loan facilities obtained by the company, and any failure or default to repay such loans could trigger repayment obligations on the promoter.