Motilal Oswal initiates coverage on Five Star Business Finance; stock rises

Five Star Business Finance shares gained over 2 per cent in Tuesday's (May 14) trade after Motilal Oswal initiated coverage on the stock. The domestic brokerage gave a 'buy' call with a target price of Rs 950 apiece. With this target price, Motilal Oswal sees an upside of 31.6 per cent from the previous day's close of Rs 722 apiece. 

In its initiation report, Motilal Oswal said Five Star Business Finance has huge untapped potential in small-ticket secured business loans. Further, it believes that the company can gain market share over the medium term.

"The addressed market size is Rs 372 billion as of September 2023, which suggests that NBFC has a market share of 20 per cent and can continue to gain market share over the medium term through deeper penetration, branch expansions, and productivity improvement," the report read. 

Motilal Oswal also reckons that Five Star Business has a meticulous customer selection and deep understanding of customer behaviour, coupled with an emphasis on high customer equity. This has helped it maintain robust asset quality through cycles, with average credit costs of 90 basis points (bps) over FY20-FY24. 

Moreover, as per the report, the company stands strong among its peers as it has developed strengths and capabilities in its business model. 

"We anticipate that the company will maintain its best-in-class growth and profitability, with an estimated AUM/PAT CAGR of 31 per cent/ 23 per cent over FY24-26. Five-Star Business Finance is expected to command premium valuations relative to its NBFC/HFC peers due to its ability to deliver strong RoA/RoE of 7.2 per cent/18.5 per cent by FY26E," the report read. 

However, on the downside, as per Motilal Oswal following are the key risks: 

>>Concentration in southern India.

>>Rising competitive intensity resulting in loss of pricing power.

>> Seasoning of the portfolio leading to asset quality deterioration and higher credit costs. 

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