Core promoter’s unassuming stake, private-equity-turned-promoter’s negative cost of residual holding and selling shareholders’ heavily discounted cost do not augur well for share price prospects post lock-in period.
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FIVE-STAR BUSINESS FINANCE OFFER AT A GLANCE |
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| Offer Type | Book Built |
| Platform | Main Frame |
| Offer Size | Rs 1,960 Cr |
| Fresh Issue | NIL |
| Offer for Sale | Rs 1,960 Cr (4,13,50,316 equity shares) |
| Face Value | Re 1 |
| Price Band | Rs 450 – 474 |
| Mkt/Bid Lot | 31 Nos. |
| Implied M-Cap | Rs 13,811 Cr |
| Equity Cap | Rs 29.14 Cr |
| Free Float | 66.35% |
| Lead Manager | ICICI Securities, Edelweiss Financial, Kotak Mahindra Cap, Nomura Financial |
| Registrar | KFin Technologies |
| Listing | BSE, NSE |
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INDICATIVE ISSUE SCHEDULE |
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| Opening :09-Nov-2022 | Closing :11-Nov-2022 |
| Allotment :16-Nov-2022 | Refunding :17-Nov-2022 |
| Demat Credit :18-Nov-2022 | Trading :21-Nov-2022 |
The Offer
Chennai-based Five-Star Business Finance Ltd (FSBFL) is entering the capital market with an offer for sale of Rs 1960 Cr (4,13,50,316 equity shares) from two private equity-turned-promoters and three private equity investors. The offer is being made through the book-building route with a price band of Rs 450-474 for Re 1 paid-up share.
Applicants for the IPO should bid for a minimum lot of 31 shares and multiples thereof. The shares are proposed to be listed on the main frame of BSE and NSE on Monday, November 21, 2022. ICICI Securities, Edelweiss Financial, Kotak Mahindra Capital and Nomura Financial Advisory have been roped in as the lead-managers to the offer. KFin Technologies will act as the registrar to the issue. The bidding opens on Wednesday, November 09, 2022, and closes on Friday, November 11, 2022.
The objects of the offer are to carry out the offer for sale of equity shares by the selling shareholders and achieve the benefits of listing on the stock exchanges.
Lineage
During the leasing and finance boom in early 80’s nine people, namely, R. Varalakshmi, R. Baskaran, D.Meera, R. Suguna , M.K. Mohan, S.D.V Chandru, K.Dhinakaran, C.Kalavathy and C.Suguanthi joined together and incorporated Five-Star Business Credits Private Ltd at Chennai on May 7, 1984. For reasons best known only to the signatories, the company remained dormant or in low key for many years.
In 2006 the company rearranged its portfolio for advances by shifting focus to financing in immoveable properties and crossed Rs 25 Cr in 2010. The company expanded its geographical presence outside Tamil Nadu to Karnataka and Andhra Pradesh in 2014. Same year, it received funding from Mauritius-registered Matrix Partners and loan book crossed the Rs 100 Cr-mark.
The company’s name was changed from Five-Star Business Credits to Five-Star Business Finance in the year 2016. During the last five years, the company’s growth has been phenomenal. Number of branches increased from 100 in 2017 to 200 in 2020. Loan book crossed Rs 4000 Cr in fiscal 2021 and Rs 1000 Cr was added in fiscal 2022.
Mean while, pursuant to a resolution passed by the Board of Directors dated October 21, 2021, three individual shareholders, Lakshmipathy Deenadayalan, his spouse Hema Lakshmipathy and daughter Shritha Lakshmipathy, and two institutional (private equity) investors, Matrix Partners India Investment and SCI Investments, have been identified as Promoters.
Through the offer for sale, Matrix’s residual cost of holding would become negative and SCI’s cost will be reduced from Rs 81.72 to Rs 19.50 as against the IPO cap price of Rs 474. The core individual promoters and their associates would hold only 18.74% in a capital of over Rs 29 Cr.
Key Management
One of the newly designated individual-promoter Lakshmipathy Deenadayalan (48), who has been an Executive Director of the company since July 2002, is now the Chairman and Managing Director. He does not seem to have any finance background. He holds a bachelor’s degree in computer science and engineering. Hence, he will be depending on the professional management to run the show.
Rangarajan Krishnan is the Chief Executive Officer of the company. He holds a bachelor’s degree in commerce and a master of business administration. He has also completed a post graduate programme in management from Indian School of Business. He was previously associated with The World Bank, HDFC Bank, Spark Financial Holdings (formerly, Spark Capital Advisors) and Standard Chartered Bank India in various roles. He joined the company in August 2015 as Chief Operating Officer and was promoted to CEO in May 2018.
Srikanth Gopalakrishnan, who joined FSBFL in October 2015, is the Chief Financial Officer of the company. He holds a bachelor’s degree in commerce and a master of business administration. He was earlier associated with Citibank India in various roles and was the chief financial officer of Asirvad Microfinance.
Stakeholders
Of the equity capital of Rs 29.14 Cr, the three individual promoters collectively hold 17.77%. As they are not participating in offer for sale, they will continue to hold the same stake post-IPO. Individual promoters’ relatives and associates will also continue to hold 0.97%.
Institutional promoters Matrix Partners and SCI investments, who hold 12.51% and 8.82% respectively, will have 7.3% and 7.61% post-OFS. PE funds TPG Asia VII SF and Norwest Venture Partners, who hold 21.53% and 10.21% respectively under public category, will have 16.46% and 7.59% respectively after the OFS. Employees and others who add up to more than 3000 people hold about 28% of the capital.
Business
FSBFL is a non-banking finance company (NBFC) providing secured business loans to micro-entrepreneurs and self-employed individuals who are largely excluded by traditional financing institutions. The loans are secured by the borrowers’ property, predominantly being self–occupied residential premises.
The company claims to have developed a business model that is predicated on arriving at an appropriate risk framework, with the optimal instalment to income ratio to ensure that its customers have the necessary means to repay the loan after meeting their regular obligations and other event-based capital requirements.
Customers in small business finance segment are generally self-employed non-professionals (carpenter, plumber, vegetable vendor, small shop keepers, etc.) and micro entrepreneurs, people who may not have income proofs. Given the lack of income proofs, the underwriting process typically requires detailed personal discussion with the borrower as well as acquaintances and neighbours to assess the source of income and pattern of cash inflows and outflows as well as the stability and behavioural aspects of the borrower.
Financial Track
Though more than three and a half decades old, FSBFL has experienced considerable growth only in recent years. Its total income grew from Rs 409 Cr in fiscal 2019 to Rs 1256 Cr in fiscal 2022. Net profit for the period surged from Rs 156 Cr to Rs 454 Cr.
During this period, the company’s loan assets bulged from Rs 2096 Cr to 5102 Cr and net worth increased from Rs 1365 Cr to Rs 3710 Cr. Borrowings, after peaking at Rs 3425 Cr in fiscal 2021, have declined to Rs 2520 Cr in June 2022, keeping the debt/equity at less than 0.7:1. However, the company has not paid any dividend despite having attractive bottom line.
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Five-Star Business Financials (Amount in Lakh) |
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| Period Ended |
Jun-22 |
Mar-22 | Mar-21 | Mar-20 |
Mar-19 |
| Months |
3 |
12 | 12 | 12 |
12 |
| Interest income |
33522 |
120377 | 101488 | 74683 |
38974 |
| Fee Income |
123 |
2940 | 2168 | 2971 |
1327 |
| Fair Value Change |
152 |
2090 | 1319 | 1018 |
590 |
| Operating Income |
33797 |
125406 | 104974 | 78672 |
40891 |
| Other income |
109 |
211 | 151 | 63 |
– |
| Total Income |
33906 |
125617 | 105126 | 78735 |
40891 |
| Employee Cost |
7189 |
23612 | 16372 | 12711 |
7653 |
| Finance cost |
6480 |
30060 | 32519 | 21694 |
7721 |
| Depreciation |
362 |
1225 | 1139 | 1007 |
738 |
| Tax |
4694 |
15959 | 12594 | 10056 |
6978 |
| Net Profit |
13943 |
45355 | 35899 | 26195 |
15641 |
| Equity Capital |
2914 |
2913 | 2565 | 2558 |
2390 |
| Reserves |
382784 |
368122 | 229253 | 191900 |
134099 |
| Net Worth |
385698 |
371035 | 231817 | 194458 |
136489 |
| Borrowings |
252032 |
255883 | 342520 | 236369 |
96003 |
| Debt/Equity |
0.7 |
0.7 | 1.5 | 1.2 |
0.7 |
| Loan Assets |
545435 |
510241 | 435875 | 383080 |
209586 |
Valuation
The non-dividend paying FSBFL has kept a price band of Rs 450-474 for its Re 1 paid-up share. The cap price (Rs 474) discounts the company’s fiscal 2022 earnings more than 30 times which may compare well with select peers like UGRO Capital, Poonawalla Fincorp, Capri Global, etc. Nevertheless, as compared to the more popular Chennai compatriot Shriram City Union (SCU), the valuation of FSBFL looks very steep.
SCU, which pays a dividend of 370% at a decent pay-out ratio of about 23%, is currently available at a P/E multiple of less than 11x and its Price/Book Value is only 1.4x, which are more attractive than FSBFL’s.
A pertinent question that arises here is if the prospects were so encouraging to justify the steep IPO valuation, why should the core promoters be staking in less than 19%? Also, why should the private-equity-turned-promoter dilute their stake from 21% to 15%? With such a low controlling interest will they be able to ward off any takeover threat? How committed are the private-equity-turned-promoters will be known after eighteen months when the lock-in period lapses!
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How Five-Star Business Finance compares with select peers |
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Financials |
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| (Amount in Cr) |
Five-Star Business |
Poonawalla Fincorp | Capri Global | Shriram City Union |
UGRO Capital |
| Market Cap |
13811 |
24078 | 13065 | 12504 |
1233 |
| Borrowing |
2559 |
8381 | 4375 | 20664 |
1098 |
| Fixed Assets |
33 |
200 | 37 | 251 |
62 |
| Operating Income |
1256 |
2004 | 969 | 7073 |
307 |
| Other Income |
0 |
37 | 13 | 5 |
6 |
| Interest |
301 |
716 | 331 | 2813 |
137 |
| Net Profit |
454 |
377 | 206 | 1170 |
15 |
| Equity Capital |
29 |
153 | 35 | 67 |
71 |
| Reserves |
3828 |
5903 | 1887 | 9212 |
896 |
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Stock Features |
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| Current Price (Rs) |
474 |
315 | 743 | 1870 |
175 |
| Face Value (Rs) |
1 |
2 | 2 | 10 |
10 |
| Book Value |
132.37 |
79.15 | 109.39 | 1387.57 |
136.99 |
| Core Promoter Stake % |
18.74 |
61.48 | 74.68 | 36.86 |
2.87 |
| Debt/Equity |
0.69 |
1.38 | 2.28 | 2.96 |
1.14 |
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Profitability |
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| Net Margin % |
36.1 |
18.5 | 20.9 | 16.5 |
4.6 |
| Earnings Per Share |
15.57 |
4.93 | 11.70 | 172.95 |
2.06 |
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Growth |
|||||
| CAGR 3Yr Sales % |
45.4 |
-6.5 | 18.1 | 5.3 |
102.9 |
| CAGR 3Yr EBIDTA % |
44.7 |
-7.8 | 15.1 | 6.3 |
226.4 |
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Return |
|||||
| RONW % |
11.8 |
6.2 | 10.7 | 12.6 |
1.5 |
| ROCE % |
16.7 |
8.4 | 9.6 | 14.6 |
7.6 |
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Discounting |
|||||
| Price/Earnings |
30.5 |
63.9 | 63.5 | 10.8 |
84.7 |
| Price/Book Value |
3.6 |
4.0 | 6.8 | 1.4 |
1.3 |
| Price/Revenue |
11.0 |
12.0 | 13.5 | 1.8 |
4.0 |
| Price/Fixed Assets |
420.9 |
120.2 | 356.1 | 49.7 |
20.0 |
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Distribution |
|||||
| Dividend % |
0 |
20 | 25 | 370 |
0 |
| Yield % |
0 |
0.1 | 0.1 | 2 |
0 |
| Pay-out % |
0 |
8.1 | 4.3 | 21.2 |
0 |