Five-Star Business Finance reported a 37% year-on-year increase in net profit for the June quarter, reaching ₹252 crore compared to ₹184 crore in the same quarter last year. The Chennai-based non-banking finance company’s total revenue from operations grew by 38% year-on-year, amounting to ₹6,614 crore. As of June 2024, the company’s total assets stood at ₹10,344 crore, reflecting a 36% year-on-year growth.

We sat down with the company's CFO Srikanth Gopalakrishnan to gain more insights on the company's quarterly results and the outlook for the year ahead.

Q1 Review

“We saw a very typical Q1. It was a good Q1. We saw good numbers across growth, profitability and quality,” said Gopalakrishnan on the June quarter performance.

“Obviously, you know, when you’re coming back after a strong quarter in Q4, you will generally see a little bit of a muted quarter in Q1 and that’s what we saw, but barring the marginal impact that we saw for a typical Q1 and because of the heat wave elections and all that, it has been a very good Q1 for us,” the executive added.

He also added that the quarter was a special one as the company crossed the ₹10,000 crore mark in terms of assets under management. “We have crossed the AUM of ₹10,000 crore in this quarter. So it’s a very, very memorable occasion that will stay in our minds for a long time to come.”

The Year Ahead

We asked the CFO that after a steady performance in traditionally weaker quarters what were the company’s expectations for the coming quarters?

“No change in the guidance. We are guiding for 30% plus growth for this full year while we did about 36% for year-on-year in this quarter. I think this number will be more like around 30-32% for this financial year, which is the same guidance that we’ve been giving.”

Gopalakrishnan added that the company is not seeing any stress from a liquidity perspective, neither from the quantum of borrowings nor from the rates on the borrowings.

“We are also getting some very good lenders into our borrowing table. IFC did the NCD (non-convertible debenture) issue and we’re also in talks with some capital market mutual funds, hopefully, that should get converted in this quarter,” the CFO added.

“One of the important things that we did during this quarter was to bring down our cash collection proportion. It was 53-47. Digital was 53 and cash was 47. And if you recall last time we had guided that we should be ending this with about 70-30 by the end of the year. But already in Q1, we have reached 65% of digital penetration and only 35% is cash.

So I think our guidances are whatever guidance we have been giving is holding up. There is no change in our guidance, either upward or downward. We are very confident of achieving all the guidance that we, that we put out last quarter,” the CFO added.

Outlook On NIMs

The company’s net interest margin saw moderation during the April-June quarter, so we asked the CFO what was the outlook on the key metric going forward.

“This is again, something that we have guided because, in a steady state, which is about 2 to 3 years from here onwards, we will see spread compressing because we’ll be passing on some of the benefits of the cost of funds to our borrowers. In fact, from this month onwards, you will see our yields go down, and the borrowers will get a benefit of about 50 to 75 basis points of interest rate benefit to them,” Gopalakrishnan explained.

So in a steady state, which is a three-year timeline going forward, we are guiding for a 13% kind of a spreads number and about 15% kind of number on NIMs.

He added that currently both of these are about 100-150 basis points higher than that. He further said that at a steady state ROA (return on assets) “of about 6.75 to 7% at a leverage of 3.5x to 4x we should be able to easily achieve 20-22% or north of that from an ROE perspective.”

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Expansion

The company has been aggressively expanding its presence across geographies. Last year the company added around 147 branches. So we asked Gopalakrishnan about how the quarter was in terms of expansion and the company’s plans going forward.

“In terms of that expansion this year again, will be a strong year from a branch expansion perspective. But the way that you should look at this is it will be a combination of new branches as well as split branches. So last year we opened about 147 branches, but about roughly you know, one-third of that were split branches,” Gopalakrishnan explained.

He added that the company will continue the strategy of splitting the bigger branches into smaller ones. He said that the company expects to open close to 175 to 200 branches this year. But out of that, it will be roughly 50% new branches and 50% split branches.

In terms of the areas that the company is focusing on, Gopalakrishnan said that a good amount of expansion will be seen in Tamil Nadu, Karnataka and Andhra. He added that “the pace of growth in Karnataka and Tamil Nadu will be a little faster this year as compared to the last year.”

The CFO said that Madhya Pradesh has been a very successful experiment for them and Maharashtra after the initial teething issues, is back on its growth track doing very well from both disbursal and quality perspectives. “We will also try and see, what we can do in Uttar Prades, Rajasthan, in terms of learning these areas so that they can be the geographies that can lead our growth, maybe, let’s say post-FY27.

Is A Rate Cut Coming?

There has been a lot of talk of a rate cut happening in the second half of the year. So, we asked the CFO if he think the same and how could it impact the company.

“I think we are still you know, my personal view and our internal view is that yes, I think the rate cuts will happen in the second half of this year, whether it’s in Q3 or Q4 is anybody’s guess, but second half of the year, we should see some rate cuts. If that happens, obviously, we’ll stand to benefit from that.”

He explained that the company has a 65-35 floating to fixed borrowing mix. Out of the 65%, the company has around 62% which are MCLR linked and about 38% which are external benchmark linked. “So all of these at various points in time are going to get lower because of the rate cuts that will come through.”

Gopalakrishnan also added “that whether the benefit will be very, very meaningful, will also depend on when the rate cut happens. For example, if it happens in Q4, you will not see any visible impact of the rate cut benefit coming through in this financial year. It will probably come in the next financial year.”

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