Branch Expansion And Cost Efficiency Will Improve Asset Quality

Key Takeaways

• Strategic branch expansion and diversification of funding sources could drive revenue growth and enhance financial flexibility, improving earnings and key financial metrics.
  
• Focus on customer profiling and cost reduction measures may sustain high asset quality and enhance margins, boosting profitability prospects.
  
• Rising NPAs and credit risks, coupled with decreased collection efficiency and proactive lending rate cuts, may pressure profitability amidst regulatory challenges.

Catalysts

Operates as a non-banking financial company in India.

• Five-Star Business Finance's addition of 19 branches in Q4, bringing the total to 748 branches, indicates a strategic expansion which could drive future AUM growth, potentially increasing revenues as they tap into new regions and customer segments.
  
• Proactive measures to reduce the cost of borrowings and the expected easing of interest rates could provide Five-Star with lower financial costs, potentially improving net margins and profitability.
  
• The focus on increasing average ticket size to better profile customers, rather than expanding to riskier segments, may lead to sustained high asset quality, positively impacting net margins by reducing future credit costs.
  
• Anticipated improvements in economic conditions and consumer confidence, along with middle-income tax ops, could lead to an increase in loan demand and business activities among borrowers, driving future revenue growth.
  
• Continued diversification of funding sources and a drop in bank borrowings could provide financial flexibility and a lower cost of funds, positively impacting earnings and potentially leading to improved ROA and ROE in the coming quarters.

Five-Star Business Finance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Five-Star Business Finance's revenue will grow by 20.4% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 50.9% today to 46.0% in 3 years time.
• Analysts expect earnings to reach ₹16.9 billion (and earnings per share of ₹57.8) by about May 2028, up from ₹10.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 22.8x on those 2028 earnings, up from 19.4x today. This future PE is greater than the current PE for the IN Consumer Finance industry at 19.2x.
• Analysts expect the number of shares outstanding to grow by 0.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.61%, as per the Simply Wall St company report.

Five-Star Business Finance Future Earnings Per Share Growth

Risks

• The disruption in Karnataka significantly impacted collections, contributing to an increase in NPAs from 1.62% to 1.97%, which could affect future earnings and asset quality.
  
• The decrease in collection efficiency from 98% to 97.7% shows stress in the system, particularly within the smaller ticket size segment, impacting revenue.
  
• The proactive reduction of lending rates by 200 basis points might pressure net interest margins and profitability if borrowing costs do not decrease significantly.
  
• The increase in gross Stage 3 assets and the high provision coverage ratio (PCR) suggest rising credit risks, which could affect provisioning costs and profitability.
  
• Potential disruption from the new Tamil Nadu ordinance, although expected to be manageable, could also impact collections and asset quality.

Valuation

• The analysts have a consensus price target of ₹835.545 for Five-Star Business Finance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹935.0, and the most bearish reporting a price target of just ₹724.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹36.8 billion, earnings will come to ₹16.9 billion, and it would be trading on a PE ratio of 22.8x, assuming you use a discount rate of 15.6%.
  
• Given the current share price of ₹705.95, the analyst price target of ₹835.55 is 15.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.