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Five-Star Business Finance Ltd.

Overview of the Company

Formed in the year 1982, Five Star is non-Banking Finance Company (NBFC) with the Reserve Bank of India (RBI), specialized in providing financial services to address the needs of unbanked, and unserved segment, funding the people who were perceived to be non-fundable. The customers include all the way from small shop owners, flower vendors, maids, masons to small and medium enterprises that form the backbone of India’s economy.

The focus area of the company is to strike its operations to more and more under-served self-employed and Small Business customers and help them access credit on reasonable terms by opening more number of branches in the semi-urban/rural areas.
The company has one wholly-owned subsidiary called Five-Star Housing Finance Private Limited which was incorporated on 28th September 2015, registered with the National Housing Bank (NHB) as a non-deposit taking Housing Finance Company (HFC).

Five Star provides Small business loans to meet borrower requirements for commencing new businesses, expansion of his/ her existing businesses and to settle any unorganized dues he/ she has taken to further their businesses. The loans are given based on the company’s evaluation of the borrower household cashflows coupled against the security of the borrower’s house collateral.

The typical loan ticket ranges between Rs 1 lakh to Rs 10 lakhs for a tenure between 24 and 84 months. The repayments are to be made on a monthly equated basis.

Financial Results – Financial Highlights

` in Lakhs

Impact of COVID 19 Pandemic
The full year impact of the COVID-19 pandemic was felt during the financial year FY 2020-21. The first 5 months of the financial year was almost exclusively dedicated towards collections. The Company had provided moratorium to all the standard borrowers on an opt-out basis. The Company also took it upon itself to educate the borrowers on the pros and cons of moratorium and counselling them to make payments if their cashflows allowed them the ability to do so. Almost the entire staff infrastructure was focused on calling the borrowers and providing the necessary inputs for them to make their decision.

Industry Overview
While every sector in our country was impacted by the lockdown, the cascading effect of the downturn in cashflows was likely to have had a more pronounced impact on the financial services industry. This industry would have seen a significant spurt in delinquencies and non-performing assets and the resultant provisions would have eroded the capital base of a large number of banks and financial institutions.

RBI proactively stepped in and provided flexibility to banks and financial institutions to extend the benefit of moratorium to their borrowers. While initially, the moratorium benefit was extended for dues falling between March 2020 and May 2020, the same was later extended to dues falling between June 2020 and August 2020, thereby providing the relief for a period of six months

What makes Five-Star business robust

A) Mortgage property to give loans:
The company follows a business model, where lending to potential borrowers is secured by the twin factors of strong business income and emotionally attached property. The income of the borrower secures the loan during good times while the property mortgaged secures the loan during difficult times. The right combination of income and property has helped and continues to help the company maintain its asset quality even during difficult times like demonetization, implementation of GST, recent liquidity challenges, etc.

B) Robust Capital Structure:
Five Star has manageable leverage, leading to a healthy D/E ratio. Despite regulatory guidelines allowing for a much higher cap, the company never crossed 3.5 – 4x of leverage, which gives a lot of comfort to lenders.

C) Asset-Liability Mismatch:
The company over the years has maintained a steady Asset-liability mismatch. Many times to increase the Net Interest Margin of the company, the management tries to get loans for a shorter duration- which means at a lower cost and lend for long-term. This creates a problem during difficult times, and the perfect example is DHFL, where due to the Asset-liability mismatch, the NBFC with more than 1 Lakh Crores of loan book got burst.

As can be seen from the table above, the company has always been on the positive side of ALM over the last 4 years. This did come at a cost in the form of the higher cost of funds; however, the company was fully cognizant that such short-term pains were necessary to create a longstanding institution.

Presence

During the year, the Company added 79 branches resulting in the branch network increasing to 252 from 173.

Shares Issued by Five Star Business
1. In 2014-15, Five-star Business had issued 12,00,000 equity shares of Rs.10 each at a premium of Rs. 120 per share on preferential basis to M/s Matrix Partners India Investment Holdings II, LLC.
2. In 2015-16, the company has issued ~ 5 Lakhs shares at Rs. 130 per share.
3. In 2016-17, the company has issued ~35 Lakhs shares at Rs. 322 per share.
4. In 2017-18, the company has issued ~49 Lakhs shares at Rs. 646 per share.
5. In 2018-19, the company has raised ~49 Lakhs shares for capital amounting to INR 619 Crores, which was led by TPG Capital, one of the largest private equity investors across the globe and from the existing investor’s Morgan Stanley, Norwest Venture Partners and Sequoia Capital. The deal has happened at approx. price of 1260 per share.
6. During the financial year 2019-20, the Company has:
a) issued and allotted 3,00,08,700 Secured, Listed, Rated, Redeemable, Taxable, Non-Convertible Debentures on
private placement basis on various dates, which were listed in BSE Limited.
b) allotted 1,78,450 fully paid-up Equity Shares of Rs.10/- each on various dates, pursuant to the Five-Star Associate Stock Option Scheme, 2015.
c) made a preferential issue of 13,32,262 fully paid-up Equity shares of Rs 10/- each which were allotted on 22nd July 2019 on a private placement basis.
d) made a preferential issue of 7,50,000 Partly Paid Equity shares of Rs 10/- each which were allotted on 25th
February 2020 on a private placement basis.
e) issued and allotted 9,67,597 Partly Paid Equity shares of Rs 10/- each on 21st March 2020 pursuant to a rights
issue.

Valuation of Five Star Business
1. In 2014-15, the company had total outstanding shares of 1.02 Crores, valuing the company at ~130 Crores.
2. In 2015-16, the company has total outstanding shares of 1.07 Crores, valuing the company at ~140 Crores.
3. In 2016-17, the company has total outstanding shares of 1.42651 Crores, valuing the company at ~450 Crores.
4. In 2017-18, the company has total outstanding shares of 1.91689 Crores, valuing the company at ~1200 Crores.
5. In 2018-19, the company has total outstanding shares of 2.38996 Crores, valuing the company at ~3000 Crores.
6. In 2019-20- American private equity firm TPG has made a follow-on investment worth $50 million in Five-Star Business Finance Ltd. Last year also, TPG has invested $100 million in the company. With this round, Five-Star said it is close to attaining a valuation of at least ~6600 Crores.

Book Value of Five Star Business

1. In 2014-15, the company has a Net-worth of 71.25 Crores and a number of shares are 1.02 Crores. So the book value was ~70.
2. In 2015-16, the company has a Net-worth of 91 Crores and a number of shares are 1.07 Crores. So the book value was ~85.
3. In 2016-17, the company has a Net-worth of 222 Crores and a number of shares are 1.42651 Crores. So the book value was ~155.
4. In 2017-18, the company has a Net-worth of 592 Crores and a number of shares are 1.91689 Crores. So book value was ~308
5. In 2018-19, the company has a Net-worth of 1365 Crores and a number of shares are 2.38996 Crores. So the book value was ~571.
6. In 2019-20, the company has a Net-Worth of 1943 CRores and a number of shares are 2.558 Crores. So the book value was ~760.