Five-Star Business IPO review (May apply)

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Review By Dilip Davda on November 4, 2022

•    FBFL enjoys a niche place among financiers in the southern region.
•    It has posted growth in its top and bottom lines.
•    The management is confident in maintaining the growth trends.
•    Based on its recent financial data, the issue is fully priced. 
•    Well-informed investors may consider parking funds for long-term rewards. 

ABOUT COMPANY:
Five-Star Business Finance Ltd. (FBFL) is an NBFC-ND-SI providing secured business loans to micro-entrepreneurs and self-employed individuals, each of whom is largely excluded by traditional financing institutions. The company is headquartered in Chennai, Tamil Nadu with a strong presence in south India, and all of its loans are secured by our borrowers' property, predominantly SORP. 

According to the CRISIL Report, among its compared peers (being NBFCs in India) - within a subset of large peers (with more than Rs. 3000 cr. in Gross Term Loans), FBFL has the fastest Gross Term Loans growth, with a compound annual growth rate ("CAGR") of 65.0% (Financial Year 2017 to 2021), FBFL has on Gross Term Loans of 7.5%, across the period covering Financial Years 2022, 2021 and 2020; and the company is among the three best for gross non-performing assets (being Stage 3 Gross Term Loans which are 90+ Days-Past-Due ("DPD")) as a percentage of Gross Term Loans as of March 31, 2022, while it has the best asset quality among lenders identified by CRISIL as engaged in extending MSME business loans, with other lenders reporting 90+ DPD more than 2%.

The company has an extensive network of 311 branches, as of June 30, 2022, spread across approximately 150 districts, eight states, and one union territory, with Tamil Nadu, Andhra Pradesh, Telangana, and Karnataka being its key states. Such key states collectively accounted for approximately 85% of the branch network by number, as of June 30, 2022. As of June 30, 2022, approximately 95% of its branches were located in cities and towns with populations of up to one million. As of June 30, 2022, the company had a total of 6,077 employees.

ISSUE DETAILS/CAPITAL HISTORY:
To unlock the value, listing benefits and providing exit to some of its stakeholders, FBFL is coming out with an Offer for Sale (OFS) of equity shares via a book-building route. The company has announced OFS worth Rs. 1960.01 cr. (approx. 41350435 shares at the upper price band), i.e. it is having a secondary issue as a whole and no fresh equity shares are being issued. It has announced a price band of Rs. 450 - Rs. 474 per share having a face value of Re. 1 each. The issue opens for subscription on November 09, 2022, and will close on November 11, 2022. A minimum application is to be made for 31 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 14.19% of the post-issue paid-up equity capital of the company. 

The joint Book Running Lead Managers (BRLMs) to this issue are ICICI Securities Ltd., Edelweiss Financial Services Ltd., Kotak Mahindra Capital Co. Ltd., and Nomura Financial Advisory and Securities (India) Pvt. Ltd. while KFin Technologies Ltd. is the registrar to the issue. 

Having issued initial equity shares at par, the company issued further equity in the price range of Rs. 10 to Rs. 351.87 per share (FV of Re. 1 basis) between June 2010 and June 2022.  The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 0.50, Rs. 6.10, Rs. 14.18, Rs. 32.68, Rs. 81.72, Rs. 115.83, Rs. 131.84, and Rs. 186.04 per share. Few shares issued at a discounted value to promoters have resulted in below par value cost of acquisition of shares by them. 

This being a purely secondary issue, FBFL's paid-up equity capital post this IPO will remain the same at Rs. 29.14 cr. Based on the upper price band of the IPO, the company is looking for a market cap of Rs. 13810.75 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, FBFL has posted a total income/net profit of Rs. 787.35 cr. / Rs. 261.95 cr. (FY20), Rs. 1051.26 cr. / Rs. 358.99 cr. (FY21), Rs. 1256.17 cr. / Rs. 453.55 cr. (FY22). For the Q1 of FY23 ended on June 30, 2022, it earned a net profit of Rs. 139.43 on a total income of Rs. 339.06 cr. 

For the last three fiscals, FBFL has reported an average EPS of Rs. 14.18 and an average RoNW of 15.11%. The issue is priced at a P/BV of xx based on its NAV of Rs. 132.38 as of June 30, 2022.

If we annualize FY23 earnings and attribute it to the post-IPO fully diluted equity capital, then the asking price is at a P/E of around 24.76. Thus the issue appears fully priced based on its recent financial data. 

DIVIDEND POLICY:
The company has not declared any dividend for the reported periods of the offer document. It will adopt a prudent dividend policy post-listing based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer documents, FBFL has shown Aavas Financiers, Aptus Value Housing, and AU SFB as their listed peers. They are currently trading at a P/E of 37.37, 46.21, and 32.62 (as of November 04, 2022). However, they are not truly comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORDS:
The four BRLMs associated with the offer have handled 64 public issues in the last three fiscals, out of which 22 issues closed below the issue price on the listing date. 

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