FIVESTAR — earnings call

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Prepared remarks

Moderator · Conference Operator

MS MAHRUKH ADAJANIA – NUVAMA INSTITUTIONAL

EQUITY · Management

Five-Star Business Finance Limited November 30, 2022

Lakshmipathy D.: · Yes. Thank you for all the participants who participated in the first conference call of Five Star.

Thank you, Mahrukh.

Good morning, all.

First of all, a warm welcome, and thank you for joining the first conference call of Five Star Business Finance.

Before getting into the Q2 performance of Five Star, let me talk a bit about myself and my journey in Five Star.

As introduced, people call me as Pathy.

I joined Five Star in 2002.

This is a 38-year-old NBFC started in 1984 lending to two-wheelers and consumer durables.

When I joined Five Star, we wanted to move away from vehicle business to something new of its kind, niche of its kind.

So that is where we found out lending to nano or small businesses, single-shop owners and self-employed, today, we are truly, fully present with them for last 20 years, very successfully in the last 20 years.

These profile of customers were not been seen positively by other former lenders, whereas we saw them very positively, especially the service segment in which we cater to essential service shops.

So those are the predominant customers of Five Star.

For last 20 years, first 10 years, we learned them a lot.

How does we underwrite them, how does we set our collection model, which perfectly suits them.

So that was a learning curve for Five Star, and from 2015 onwards, our growth started.

So we were growing close to 90% CAGR before COVID has hit us in 2020.

During COVID, it was a conscious call to grow slower.

So we were growing at 15% in COVID-1 and COVID-2, but we put our collections in front, and we did one of the best collections, in one among the best collections among the lenders of this profile of customers.

Now the COVIDs all settled, we are back to the growth plan.

That takes us to the performance what we did in Q2 of this financial year.

I will read this as one of the best quarters ever we have seen after COVID.

Just to take you on the numbers, our AUM has grown from INR 4,639 crores in last September to INR 5,732 crores in this September.

And from June, it has grown 8% from INR 5,297 crores to INR 5,732 crores.

So we have grown 8% in the quarter and supporting the growth, the disbursement also has gone up from INR 568 crores in June quarter to INR 803 crores in this September with a growth of close to 40% and from INR 353 crores in last Five-Star Business Finance Limited November 30, 2022 September to INR 803 crores in this September.

One of the good disbursement that ever we have seen in this quarter.

Taking you directly to the asset quality, we have also moved our asset quality from 1.44% in September '21 to 1.15% in the September '22 with a sharp drop of close to 30%, 35%.

And comparing to last quarter, we were almost flat in the asset quality.

And finally, to the branches, which led the growth of disbursement and AUM, we have opened close to 80 branches in last one year.

And specifically within last three months, from June to September, we have opened close to 41 branches, which is one of the best addition of branches ever we have seen in Five Star.

Finally on the borrowing side, I think Five Star is sweetly positioned.

The cost of funds keep dropping for Five Star.

We were borrowing close to 9% last year.

Now we are borrowing at 8.6% all-in cost.

And the cost of funds from the book has dropped down to 10.7% last year to 10.5% this year.

So even going forward, we think our borrowing cost is going to be in the same range.

So there is no need of transferring any increase of lending cost to the borrowers for coming quarters.

So with these numbers, let me hand over to Srikant to run through in more details.

Srikanth G.

Thank you, sir.

Very good morning to all of you.

As Mr. Pathy said, I think this has been one of the very good quarters for us, especially coming after two years of pandemic.

I will take you through some of the numbers and then open out for questions.

So as of September 2022, our total active loans had grown to about INR 2.5 lakhs from about INR 1.9 lakhs in September 2021, representing a growth of about 32% on a year-on-year basis.

Branch count increased from 268 to 352, which is like we added almost 75 to 80 branches in the last one year, one of the most robust growth that we have seen in the branch additions, about 84 branches during the year.

In the first half of this year, we added 52 branches, which is again one of the highest for Five Star in the last many years.

Disbursements increased by about 127% year-on-year to INR 803 crores in the second quarter and about INR 1,371 crores in the first half of this year.

AUM grew by 24% year-on-year to INR 5,732 crores.

The ratios remained stable.

As of September, our average yield on the portfolio was about 24.19% for the quarter with a cost of funds of 10.48%, resulting in a spread of 13.71%.

Comparing this number against the quarter of September 2021, we were at about 13.5% spread.

So despite a significant increase in the rates by RBI, our spreads have increased, and this has come purely on the back of lower funding costs.

NIMs very healthy at 18.2% for the quarter, and at about 17.6% for the first half of the year as compared to 15.94% for the half year ended September 2021.

We have also been increasing our efficiencies.

Our cost to income for the first half of this year was at 34.11% as compared to 35.34% for the half year ended September 2021.

This has resulted in a healthy return on assets.

And whenever we are talking any of these ratios, I would just like to remind you that this is on the basis of average total assets and not on the portfolio.

So we had a healthy return on assets of 8.68% for the first half of this year with a return on equity of about 14.66%.

Five-Star Business Finance Limited November 30, 2022 Coming to the borrowing side, we have a well-diversified borrowing profile with 51 lenders having lent to us.

About 60% of our borrowings on the book today is fixed rate, so which is not going to have any impact in an interest rate rising scenario.

Bank lending contribute about 50% of our debt.

We pretty much have all the public sector and private sector banks on our debt table.

We have also diversified our borrowings not just in term loans, but into nonconvertible debentures, market-linked debentures.

We have done securitization transactions.

We have also done an external commercial borrowing.

So it's a well-diversified borrowing profile, both from a lender perspective as well as from a structure perspective.

The on-balance sheet liquidity is sufficient at INR 795 crores as of September 2022 without assuming any of the incremental sanctions, which will help us to meet our growth targets for the next two quarters.

As of now, we enjoy a rating upgrade of A+ from both ICRA and CARE, and we'll be taking up with the rating agencies for the possible rating upgrade to come.

Over the last five quarters, the collection efficiencies have been showing consistent improvement.

For the quarter of September '22, we clocked a collection efficiency of 100.1%.

In fact, three out of five quarters from September 2022, we have been clocking over 100% collection efficiency.

The other two quarters have seen north of 98%.

So the pandemic clouds have receded, and we are back to our normalcy in terms of both growth and collections.

While there was an increase in the 30-plus number consequent to the second wave of COVID, but we have been able to bring that down significantly to 13.62% as of September 2022.

This will drop a little more gradually as we go forward.

The gross Stage 3 assets, 90-plus stood at 1.15% in September ‘22 as compared to 1.44% in September ‘21.

And we maintained a very robust provision coverage, both on the Stage 3 assets and on an overall AUM.

On Stage 3 assets, our provision coverage stood at a little over 44%.

On our overall AUM, it was at 1.77%.

Our restructured book as on September 22, we overall restructured a book of 1.83%.

But as of September, ’22, it stood only at 1.18%.

And even on this portfolio, we maintain a provision coverage of over 50%.

So, the restructured assets have seen post restructuring payment behaviour of more than 1 year and north of 91% of the restructured book remains in the standard category.

For the first half of the year, we clocked a PAT of INR 284 crores, representing a growth of 30% year-on-year.

For the quarter ended September 22, our PAT was at INR 144 crores, representing a growth of 22% year-on-year.

We had a net worth of over INR 4,000 crores as of 30th September.

So, we have delivered robust growth, profitability, and quality for the quarter and the first half of the year and are confident of this trajectory to continue for the remaining 2 quarters as well.

With these brief remarks, we open the floor out to questions.

Thank you.

Moderator · Conference Operator

We have the first question from the line of Shailesh Kanani from Centrum Broking.

Shailesh Kanani

Good morning, sir, and thanks for the opportunity.

Also, congratulations on a good set of numbers.

Sir, first question on our 30-plus DPD book.

It seems to be a little on the higher side.

Can you shed some light on that?

And also, what can be the long-term average for 30% for us.

Five-Star Business Finance Limited November 30, 2022

Moderator · Conference Operator

We have the next question from the line of Pranav Gupta from ASK Investment Managers.

Pranav Gupta

Hi sir.

Good morning.

Just a couple of questions, probably a continuation from the previous one.

So you said that most of your customers you are taking files from the unorganized lenders and these customers are not rate sensitive and our tenures are typically five to seven years.

So just wanted to understand that the natural progression for the customer taking a loan from Five Star eventually is to move on to NBFC or larger ticket size or a bank.

What is a repeat rate once the customer repays and what is the natural progression for our customer?

That is the first question.

Moderator · Conference Operator

We have the next question from the line of Umang Shah from Kotak Mutual Fund.

Umang Shah

Yes good morning, thanks for taking my question and congratulations to the team for quarter, just a couple of them that I have, one is on restructured loans.

I just wanted to confirm the current outstanding book is at about 1.2%.

And in the opening remarks, Srikanth mention, it has improved from 1.8% of that was in the previous quarter, is it, or?

Five-Star Business Finance Limited November 30, 2022

Lakshmipathy D.: · Yes. Thank you for all the participants who participated in the first conference call of Five Star.

See, I think, as I said in opening remarks, we were growing at 15% in COVID-1 and COVID-2, pre-COVID very healthy growth was been demonstrated from 2015 to 2020.

We are very strong feeling is the growth will be in a very healthy portion from now onwards.

You will be seeing in quarter-on-quarter performance, if you see June versus September, we grew our AUM by 8% and disbursement close to 40%.

So that's a clear indication that growth for this financial year and next two financial year will be very healthy.

It will be very strong growth comparing to what we did in COVID periods.

Umang Shah

Just one data point, if you can provide.

Post IPO, what would be your net worth if that number is what you can help me with?

Moderator · Conference Operator

We have the next question from the line of Shweta Daptardar from Elara Capital.

Five-Star Business Finance Limited November 30, 2022

Shweta Daptardar

Congratulations for a good set of earnings.

So I have a couple of questions.

The first one being, I'm just taking cue from the previous question.

So while you mentioned the growth should remain healthy, but now that we have crossed the INR 6,000-odd crores are close to INR 6,000- odd crores AUMs.

So now is the time where we'll see a lot of vintage and seasoning of portfolio happening, what challenges do you perceive going forward?

That's my first question.

Srikanth G.

So Shweta, the last two years, we have seen a lot of challenges.

So it's not that the book is only growing.

There was quite a bit of seeing with a smaller set of growth numbers for the last two years in to COVID.

Incrementally, we don't see any further challenges, which is envisaged in the foreseeable future.

We are adequately investing both in people and some in terms of branch network.

You will see that from our performance that for the first half of this year, we've already opened 52 branches.

Generally, we tend to open up about 50 to 60 branches in a year.

This year, we have opened already 52 branches in the first half of the year because we wanted to upfront opening of the branches in the first half.

So does these branches start contributing towards the second half of the year.

So you will not see the same set of branch opening in the second half, but at least for the first half, if you are opening, we are able to spread out these assets by the time we are moving towards the year-end.

So there is a lot of optimism on the ground.

We are seeing green shoots.

We are seeing demand clearly picking up over the period this year.

This quarter, more than 600 people have joined Five Star.

So with these kind of investments, I think we are confident of seeing a healthy rate of growth that Mr. Pathy mentioned.

We are not currently looking at any significant impact that we are going to see from the market.

And just to add one point, for last 12 months, our collection efficiency is around 100%.

So that clearly demonstrates the underwriting what Five Star has done is clearly stacking up very well even during COVID-1and COVID-2.

So we don't see any risk from us for next few quarters and next few years.

The growth will be healthy, stronger growth we'll be demonstrating the stronger growth with the kind of profitability what we do and the kind of quality what we deliver.

Shweta Daptardar

Sir, my follow-up question to that is, so if I look at our headcount number, around 6,700 stands one of the highest.

So also if I compare that with the AUM books closer to INR 6,000-odd crores, this number looks pretty much on the higher side.

So would you like to comment on productivity ratio?

And also you could give a breakup of this headcount in terms of sales field force and underwriting?

Moderator · Conference Operator

We have the next question from the line of Nidhesh Jain from Investec.

Nidhesh Jain

Firstly, data keeping question on the gross NPA as per the revised RBI announced, what would be the gross NPA for us as of September 22?

Lakshmipathy D.: · Yes. Thank you for all the participants who participated in the first conference call of Five Star.

Yes.

Nidhesh, this is a very important question.

See, as Srikanth said, we got a time of nine months when we represented RBI, RBI took it in a positive way and gave all NBFCs nine months deferring the circular.

See, from Five Star perspective, as I said, we take the customer from informal segment.

There is no due date concept from informal segment.

There is no due date when a guy is taking a loan from money lender.

So when you move from money lender to Five Star, his mind still says it's a due month rather than due date.

And we were also comfortable in the earlier regime that if a customer pays within the month, we are very happy on it.

But when the circular came as all suddenly on November 12th, so it needed some time for us to go back to the customer and explain the importance of the due date rather than due month.

So for last nine months, we are able to see a very-very good traction that customer is able to appreciate the logic of paying on due date rather than paying the, during the month.

So that has Five-Star Business Finance Limited November 30, 2022 moved from, if I say in September, almost close to 90%, 93% of the customers are paying on the due date, because the culture has changed at the ground level, not only from Five Star, all the NBFCs have moved the culture from due month to due date.

So that also has helped the sector very well.

October month onwards, it is stacking up very well.

In fact, we have crossed touching 95% of the customers paying on the due date.

So as we see the first quarter, that is a December quarter onwards, the difference between the growth Stage 3 and the circular NPA will not be more than 100 bps is what Srikanth just said.

Nidhesh Jain

Secondly, if you could give some details about the customer segment in terms of how many of the customers that we are originating will be new to credit.

What could be the distribution of CIBIL score, let's say, customers more than the 750 CIBIL score of customers between 350 to 750 or some data around that, that would be helpful?

Rangarajan K.

So 25% of our customers will be absolutely new to credit, having not taken any loans from the formal segment, but 75% of our customers will have a credit bureau footprint.

But typically, we see them having footprint in one of the following three products.

It could be a micro finance loan.

It could be a two-wheeler loan or it could be a gold loan.

So these are the three primary products that the customers have taken.

But most of these customers would not have taken a loan of a similar ticket size from another lender or for a similar product that we have.

So for at least three-fourth of the customers that we finance, we will be the first lender to give them a ticket size between INR 3 lakhs to INR 5 lakhs for a business loan purpose, which is secured.

The other products that they would have taken is mostly not based on underwriting, but it's based on a product-based lending, be it gold or be it vehicles or be it a micro finance loan.

So I think that's it, we rely more on high mark scores rather than CIBIL scores.

I think just given the nature of the customers and the loans that they could have taken, scores are a little bit misguiding in this segment in the sense that somebody could have just taken a micro finance loan of INR 20,000 and could have a CIBIL score of 750 plus.

It may mean nothing when we are taking a call for a seven-year tenure on this customer for loan ticket size, which is much higher than a micro finance loan.

So we don't look at spread of scores.

For us, what is more important is the character assessment that we do on the ground and the cash flows that we're able to get it.

So while the scores are important, but I think the way we look at the scores is if there is a default, what is the product in which he has defaulted.

If it's a secured product, at least if it's a loan ticket where at least he has taken INR 1 lakh to INR 2 lakhs and then there is a default, we take those more seriously than any kind of a score which is emanating from an ordinary product.

Nidhesh Jain

And then thirdly, sir, on the profitability.

So sir, how do we really think about the profitability from the customers that we are generating 7%, 8% ROA in your mind is reasonable.

And I'm coming on a context that in some other segments, we have seen vendors making super number profit of 7%, 8% ROA for two to three years, then competition came in and then the ROAs and Five-Star Business Finance Limited November 30, 2022 growth, both have completely gone away from those segments.

So shouldn't it be a good strategy to operate at 18%, 20% yield and make the segment extremely unattractive for the new incumbency.

We are getting to know that a lot of new NBFCs are trying to enter in the segment.

Your point is valid it’s a difficult segment to crack a lot of these companies will not be successful, but by even make this segment so attractive that new companies will enter this segment to operate?

Moderator · Conference Operator

We have the next question from the line of Piran Engineer from CLSA.

Piran Engineer

Some of these might be basic, because I'm new to the company.

Just wanted to understand one thing as to how you all ensure Stage 2 does not slip into Stage 3?

Because if I look at your 30 to 60 buckets or 60 to 90 buckets, they're reasonably elevated, like more of the NBFCs are what you can expect.

But then the 90-plus bucket is 1%.

So if you could just talk a bit about what steps you all take to ensure that the 60 DPD loan does not become 90 DPD?

That will be really helpful.

Moderator · Conference Operator

We have the next question from the line of Gaurav Kochar from Mirae Asset Managers.

Gaurav Kochar

Firstly, if I split the number of branches that you've, roughly 50 would be in the newer geographies and 300 would be in the older geographies.

In FY '22, you had given the breakup of super branches and the normal branches.

So roughly around 140 branches were super branches.

My question is, how long does it take for a branch to turn into a super branch?

And I wanted some cost ratios.

So, the cost to AUM at a company aggregate level is around 6%.

I just Five-Star Business Finance Limited November 30, 2022 wanted some sense on what is the initial cost to asset for a branch before it turns into a super branch?

Moderator · Conference Operator

We have the next question from the line of Franklin Moraes from Equentis Wealth Advisory.

Five-Star Business Finance Limited November 30, 2022

Franklin Moraes: · So just to clarify, we just gave six months moratorium for all the restructuring, what we have

So, in terms of your shift to the new RBI regulation, you mentioned there could be an increase in gross NPAs.

So just wanted to understand, will there be a corresponding provisioning impact as well?

And in terms of your restructuring book, what is the collection efficiency?

Okay.

And what is the moratorium percentage in this book?

Okay.

So basically, nothing is in the moratorium as of now.

So whatever collection inefficiencies are there from probably the coming quarters will be fully paid?

So just to clarify, we just gave six months moratorium for all the restructuring, what we have done in June of last year.

It's very short moratorium.

Sure, sure.

In terms of your CAR, there has been a reduction of about 7% on a 6-month basis.

So just wanted to understand like maybe on an annualized basis, can we see maybe 10% to 15% of car reduction it depending on your AUM growth?

Okay.

Sir, and my last question is, recently, we have seen that the FTX issue blowing up wherein Sequoia has been impacted and they had to write down the investment and Sequoia is a major investor in our company as well.

So have we got any confirmation from them like whether they would continue to hold their investments?

Or is there any threat of them exiting?

Moderator · Conference Operator

Thank you as that was the last question for today.

I would now like to hand the conference over to Mr. Lakshmipathy Deenadayalan for closing comments.

Over to you, Chairman, sir.

Lakshmipathy D.: · Yes. Thank you for all the participants who participated in the first conference call of Five Star.

Yes.

Thank you for all the participants who participated in the first conference call of Five Star.

As we have been speaking with many, many people from the road shows and calls.

I think we will take more time to explain our business model because, as I said in the opening comments, this is a very niche segment, both in quantum of the loan and the tenure of the loan that we give to our customers is very unique.

So we keep explaining this in more calls to come.

Just to closing comment, please expect a good growth, good quality and good profitability to continue in Five Star.

Thanking you and meeting you in the next conference call, which is Q3 of December.

Moderator · Conference Operator

Thank you very much, sir.

On behalf of Five Star Business Finance Limited, that concludes this conference.

Thank you for joining us, and you may now disconnect your lines.

Thank you very much, sir.

Have a great day.