Since its listing last November, Five Star Business has been on a steady course at the bourses. Since then the stock has gone up close to 30%.

The stock’s steady performance has been backed by strong financials. In the fourth quarter of FY23, the company posted a 35% year-on-year increase in net interest income, reaching ₹423.4 crore compared with ₹313.6 crore in the previous quarter of FY22. The company’s net profit for the same period rose by 43% to ₹169 crore, driven by robust growth in loan disbursals and collections.

With the growing interest in the company, we sat down with CFO Srikanth Gopalakrishnan to know about the company’s plans for the future. Here are the excerpts from the interview.

Transitioning To A Listed Entity

Talking about the transition Gopalakrishnan told Benzinga India that it was not a huge change for the company as it was already very strong on things like internal governance and transparency. “We have always set ourselves very high governance standards. We also had a very strong board as well.”

“We were almost following things as if we were a listed company. We used to have quarterly financials, we used to have monthly financials, and we used to present that, obviously, to the board and not to the public. But then also being a debt-listed entity, we were anyway doing a limited review in September and an audit in March. And come December 2021, if I remember right, I think, you know, quarterly financials also became applicable for debt-listed entities.”

The company’s start to being a listed company was a little rough as the IPO did not receive much interest. The Five Star Business Finance IPO was subscribed only 70%. Addressing the rough start Gopalakrishnan said, “We went through a lot of ups and downs in our listing process. We probably had one of the fastest turnarounds from submitting a DRHP (draft red herring prospectus) to SEBI (Securities and Exchange Board of India) and then getting that approved. But thereafter some events or the other – be it regulatory or geopolitical or macroeconomic – hit the markets. And, you know, it sort of culminated in our IPO not being subscribed fully. So it was, you know – I don’t want to couch it – definitely a difficult period for the company.”

The Start Of The New Financial Year

Talking about how business has been in the first quarter of FY24, Gopalakrishnan said that “Q1 has seen similar numbers and the demand was strong. The collections have really held up very well. The asset quality is holding up extremely well. You’ll pretty much see a very, very atypical Q1.”

“Generally, you know, after a very strong Q4, Q1 tends to be a little muted. But I think our Q1 has been very strong from a growth perspective and a demand perspective. We have done better disbursals in Q1 and collections have been extremely robust and in line with Q4, which will also get reflected in the asset quality and the resultant profitability will be very strong.

So, the 35% growth is here to stay, we are not seeing any risks to that from the demand perspective and it is not just growth but quality growth, so I think overall a very strong quarter for us.”

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Expansion Plans

The company has been guiding of opening 50-60 new branches annually. However, most of these proposed branches are in the company’s current stronghold of south India. This strategy has worried some market analysts about the company’s future prospects.

Addressing the topic, Gopalakrishnan said, “It is never the intent of the company to stay in the South alone. Definitely, we want to expand. What we are trying to say is that the market in the South is extremely large and we have not still tapped it fully.

“Given that we are a South-based vendor, our focus for the next three years will be penetrating the South further than what we have already done. From that perspective, we will put in a lot of effort in the four states of the South and maybe include Madhya Pradesh in the central part of the country because these are proven areas for us. The market is large and we don’t see demand saturating in these five states for the next three years.”

“Having said that, we are definitely looking at regions like obviously Uttar Pradesh where we already have some presence, we also marked our presence in Rajasthan in Q1 and are also looking at Gujarat. So what we are trying to say is that we will continue to keep focusing on the non-south geographies also.

But the growth during the next three years will be led by the South. At the same time, we would have gotten to know the non-South markets and the growth thereafter will be led by the other states.”

Diversification

The company has been a pioneer in small and medium-sized business loans and mortgaged loans, but with the changing landscape and the introductions of so many new credit-based products launched by fintech and other players, we asked Gopalakrishnan if Five Star has any plans of diversifying its offerings.

“Not immediately. Like we have been guiding in the interviews as well as in the earnings calls, in the next three years, we definitely want to take benefit of the larger opportunity that’s available to us by penetrating the geographies deeper, by getting a lot more customers.

So organically, we are not looking at any diversification for the next three years. Obviously, post that, there will be a need to diversify. You know, you can’t have a single product and run ₹20,000 crore-₹25,000 crore AUM (assets under management) company. We have done vehicle loans in the past, so the knowledge of underwriting that, is already available within the system. We also have done housing in the past. We had a housing finance subsidiary that was merged back into the parent. So affordable housing and vehicles are products that we will definitely be looking at.”

The Underwriting Process

In simple words, underwriting refers to the evaluation process conducted by a lender to determine the creditworthiness of an applicant and determine if they should be approved for a loan.

Five Star’s underwriting process has been lauded by several market experts. Global brokerage firm Nomura in its recent note was all praises for the company’s underwriting process. “Five Star's key strength is in its strong underwriting practices, which have led to superior asset quality performance through cycles,” the brokerage had noted.

So we asked Gopalakrishnan to take us through the company’s underwriting process.

“Our underwriting is based on three key factors: We establish the person’s character, we estimate his cash flows and we also take the collateral. So by character, what do we mean? We mean his intent to repay the loan. So some of the facets of his character can be gauged through credit bureau reports in terms of how his behaviour during other loans has been. But more importantly, we do things like neighbourhood checks, trade checks, etc.

There can be two barbershops in the same locality. But one guy may be opening his shop 12 hours a day, while the other guy may be opening for two hours in the morning and two hours in the evening. So the cash flows of each of these guys can be very, very different. So, you know, the intent of the borrower is to run his business in the right manner. “

“We also try to also gauge the behaviour of the customer and the family towards repayment. So is it a fighting family? Is it a cohesive family? Does the guy have any bad habits? you know, is he politically affiliated? does he have any other issues? So these are things that we painstakingly collect through our checks.

And the last is actually the collateral, we physically verify the collateral, measure it, and compare it with the documents. We will also take an external legal opinion on this property, which we also get cross-checked by a panel of lawyers who we have on our rolls. So there is absolutely no compromise on the title of the property.

So it’s a very watertight process and only after seeing and checking all of these things is the money disbursed into the borrower’s bank account.”

Regulations

In the past few years, RBI has made several changes to tighten regulations in the NBFC (non-banking financial companies) space. Even in its annual report released this May, the central bank stressed that it is looking to strengthen NBFC regulations even further this financial year.

Responding to the changes and how they have impacted the sector Gopalakrishnan said: “Of course, the RBI has been doing a lot of these things over the last 18-24 months, you know, right from the scale-based regulatory framework for the NBFCs to aligning the DPD (days past due) norms with the banks, and making chief risk officer, chief compliance officer, all of these mandatory for NBFCs.

“I don’t think now there is any arbitrage that is left between a bank and an NBFC today where RBI can come in and tighten things even further. And we are happy, you know, with whatever has been going on because – I don’t want to name names – but there were practices that were not consistent across the various NBFCs. The good part is that all these regulatory guidelines will now make NBFCs at par with the banks. So I think definitely these are extremely good signs for the sector.”

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