FIVESTAR - Five-Star Business Finance Ltd. Share Price

The management of Five-Star Business Finance Limited provided an optimistic outlook during the earnings conference call for Q3 FY26. The Chairman and Managing Director, Lakshmipathy Deenadayalan, emphasized that the company was nearing the end of a challenging phase, stating they have understood the crisis well and are in the process of fixing the underlying issues while aiming to accelerate growth.

Key forward-looking points include:

• The current proportion of the loan portfolio remained stable, increasing marginally from 81.67% in September to 81.77% in December, signaling potential improvement in asset quality.
• Collection efficiencies were stable, with unique customer collection efficiency at 95.1% and overall collection efficiency at 96.6%. Unique customer collection on the current book increased from 98.5% in Q2 to 99.01% in Q3.
• The company reported recoveries from NPA of approximately INR 23 crores in Q3. Despite increased slippages, credit costs only rose marginally from 1.34% in Q2 to 1.44% in Q3.
• Disbursements in the quarter were INR 976 crores, down 18% from the previous quarter, as the company prioritizes stabilizing collections before resuming growth.
• Management aims for a healthier recovery trend, with plans for future business acceleration once collections stabilize further.
• The company secured INR 460 crores in incremental debt at a cost of 8.19%, lower than prior quarters, and has a robust liquidity position with INR 2,276 crores on the balance sheet.
• The net profit after tax (PAT) for the quarter was INR 277 crores, a 3% decline compared to the previous quarter but up 1% year-on-year.

Overall, management is focused on establishing strong collection strategies before accelerating growth, with confidence in improved performance in upcoming quarters.

Question 1: "If you can say give the numbers on the unique collection efficiency on the current customers, right, and also without the NPA customers for the last 3 quarters?"

Answer: The current collection efficiency has increased from 98.5% in Q2 to 99.01% in Q3. Meanwhile, the unique customer collection efficiency, excluding NPA customers, rose from 96.5% to 97.26% during the same period. I will look for the Q1 numbers and provide them later.

Question 2: "Next year if I look at the disbursement growth, if I bake in say a 20%, given how sharp the rundown has been on the disbursement front since the last 1.5 years, right, it's fair to expect mathematically that at least next year the AUM growth will be more like 20%?"

Answer: At this stage, I can't provide specific guidance on growth or disbursement numbers until we finalize our collections strategy post-Q4 results. We need to ensure our collections are stable before focusing on accelerating growth.

Question 3: "What actually led to this crisis? Was it just customer over-leveraging and spillover of MFI stress, which is the crux of this problem?"

Answer: This crisis was initially rooted in over-leverage but has evolved into a behavioral crisis due to lenders' aggressive write-offs impacting borrower psychology. It's crucial for us to reinforce good credit culture and ensure borrowers understand their obligations.

Question 4: "What is the extent of improvement that we can anticipate from an infrastructure standpoint once we see a turnaround?"

Answer: We've added 35 branches and 678 employees recently, which shows our commitment to long-term growth. Once asset quality is under control, we anticipate a significant acceleration in growth due to our strengthened infrastructure.

Question 5: "What is the incremental room for you to reduce the cost of funds?"

Answer: I expect another 10 to 15 basis points reduction in cost of funds in the next 3 to 6 months due to the recent repo rate cuts affecting a portion of our loan book. We're already borrowing at lower rates, which is favorable for our spread.

Question 6: "Could you share the fully loaded cost we have signed the agreement with ADB?"

Answer: The fully loaded cost for our loan agreement with ADB will likely be around 8.75% to 8.80%. This is slightly higher than our usual borrowing costs, reflecting the specifics of the agreement.

Question 7: "What steps are we taking on the fixing front, except for setting up a full-fledged collection vertical?"

Answer: We are tightening our underwriting processes and implementing enhanced collection strategies to address both immediate and long-term portfolio health. We also engage with borrowers frequently to reinforce responsible borrowing behavior.

Question 8: "What methods currently are we employing to ensure improving customer behavior?"

Answer: We are focusing on educating customers about managing their debts responsibly and the importance of credit scores. Regular follow-ups and meetings with customers help reinforce our commitment, which aids in regaining their trust.

Question 9: "What are the challenges in growing the affordable housing book amid ongoing asset quality issues?"

Answer: We have started building our affordable housing book but are cautious about accelerating growth until we stabilize our asset quality. We are currently assessing potential expansions carefully based on market conditions and internal capabilities.

Question 10: "What are the write-offs taken this quarter?"

Answer: We took write-offs totaling approximately INR 63 crores this quarter. This is part of our commitment to maintain appropriate provision levels while ensuring loan quality is upheld throughout our portfolio.