Five-Star Business Finance Limited
Q2 FY26
Call date · October 29, 2025
1 · Management Commentary
Key Positives
- Downtrend from Q1 arrested; Q2 marked by stability across key metrics.
- PAT at Rs. 286 crores, up 7% QoQ; ROA improved from 7.24% to 7.49%, ROE from 16.57% to 16.91%.
- Collection efficiency improved: overall collection efficiency rose from 96.3% in Q1 to 96.7% in Q2; unique customer collections stable at 95.1%.
- Cost of funds declined by 27 bps; incremental debt cost at 8.56%.
- Robust liquidity: Rs. 2,360 crores on balance sheet.
- Onboarded J.P. Morgan for a Rs. 650 crore PTC investment.
Key Negatives
- Disbursements dropped to Rs. 1,196 crores (vs. Rs. 1,290 crores in Q1) due to tighter onboarding controls.
- Early bucket (30+ DPD) pool above 12%, highest since COVID.
- Credit cost marginally higher at 1.34% (vs. Q1); guidance revised to 1.25–1.35% of total assets for at least 18–24 months.
- Provision coverage ratio on Stage-3 assets dropped (now over 45%) due to write-offs.
Forward Guidance
- Capex: Continued investment in branches and staff; 33 branches and 769 business/collection officers added in Q2.
- New products: Housing loan product launched in October in 125–150 branches; expected to contribute Rs. 100–150 crores to AUM in FY26.
- Growth: Expect stronger disbursement and AUM growth in Q3 and Q4; FY26 AUM growth guidance maintained at 25%.
- Credit cost: Guidance maintained at 1.25–1.35% of total assets.
- Strategic focus: Tighter underwriting, shift to higher ticket size (Rs. 3–10 lakhs), legal recovery efforts, and ongoing infrastructure build-out.
2 · Q&A Highlights
Q 1 (Asset Quality & Credit Cost): How do you see early bucket delinquencies and credit costs evolving, and is the revised credit cost guidance sustainable?
A (Management):
• Focus is on stabilizing all DPD buckets in Q3, with reversals expected in Q4.
• Credit cost guidance of 1.25–1.35% (of total assets) to hold for at least 18–24 months due to sub-3 lakh segment stress and need for operational flexibility.
Q 2 (Disbursement & Growth Outlook): When will disbursement run-rate pick up, and is the 25% AUM growth guidance for FY26 achievable?
A (Management):
• Disbursement run-rate expected to improve in Q3 and be much stronger in Q4 as staff adapt to new controls.
• Achieving Rs. 1,600–1,800 crores quarterly disbursement is feasible; FY26 AUM growth guidance unchanged.
Q 3 (Underwriting & Customer Profile): What changes have been made to sourcing/underwriting, and how is the customer focus shifting?
A (Management):
• Increased rejection ratio (from 25% in Q1 to 41% in Q2) due to added supervisory layers and tighter controls.
• Shift in focus to Rs. 3–10 lakh ticket size; more robust underwriting and legal recovery teams in place.
Q 4 (Geographic & Product Mix): Are there specific geographies or products driving/worsening performance?
A (Management):
• No major geographic outliers except Karnataka (portfolio ~5–6%) and some improvement in Andhra Pradesh.
• Higher delinquencies in sub-3 lakh ticket size; housing loan product launched in select branches, targeting 7–8 lakh ticket size.
Q 5 (OPEX & Staffing): How will OPEX/asset ratio evolve with increased hiring and investments?
A (Management):
• OPEX to average assets ratio expected to remain at 5–5.5% in the short to medium term due to ongoing investments in people and technology.
Q 6 (Write-offs & Provisioning): What is the outlook for write-offs and provision coverage?
A (Management):
• Write-offs in H2 will be slightly elevated; provision coverage on Stage-3 assets to remain guided by ECL model (40–45%), not targeting a specific number.
Q 7 (Housing Loan Product): What are the plans and expectations for the new housing loan product?
A (Management):
• Launched in 125–150 branches; targeting 7–8 lakh ticket size, yields of 16–18%, and lending tenures up to 15 years.
• No immediate plan for separate housing finance license; expect Rs. 100–150 crores AUM in FY26.
Q 8 (Fee Income & Securitization): What is driving fee income growth and how will securitization impact P&L?
A (Management):
• Fee income growth driven by legal and inspection fees; no insurance commission included.
• Securitization (PTC) transactions are on-book and treated as borrowings, not resulting in upfront income.
3 · Other Key Numbers
- Disbursements: Rs. 1,196 crores in Q2 (vs. Rs. 1,290 crores in Q1)
- PAT: Rs. 286 crores (7% QoQ growth)
- Return on Assets (ROA): 7.49% (Q1: 7.24%)
- Return on Equity (ROE): 16.91% (Q1: 16.57%)
- Collection efficiency (unique customers): 95.1% (unchanged QoQ)
- Overall collection efficiency: 96.7% (Q1: 96.3%)
- Cost of funds: 9.27%; incremental debt cost: 8.56%
- Incremental debt availed: Rs. 1,068 crores in Q2
- Liquidity on balance sheet: Rs. 2,360 crores
- Net worth: Rs. 6,800+ crores as of September 30, 2025
- Yield on assets: 23.2%
- Spread: ~13.9%; steady-state guidance 13–13.5%
- NIM: Not disclosed
- Credit cost: 1.34% (Q2); guidance 1.25–1.35% of total assets
- Provision coverage ratio (PCR) on Stage-3: over 45%
- Write-offs in Q2: Rs. 49 crores
- Branches added in Q2: 33
- Business and collection officers added in Q2: 769
- Total staff added in Q2: ~1,000 (600 business, 200 collection)
- Digital penetration: 82% (targeting 85%)
- Housing loan AUM target for FY26: Rs. 100–150 crores
- Average housing loan ticket size: Rs. 7–8 lakhs
- Fee income: Rs. 11.2 crores in Q2 (Rs. 9.6 crores in Q1; Rs. 6.7 crores in Q2 FY25)
- NPA recovery in Q2: Rs. 20 crores; full-year target Rs. 75–80 crores
- Provision coverage on overall book: ~1.9%
- Securitization (PTC) as % of borrowings: 20%
- Branch breakeven: 6–9 months; portfolio of Rs. 2.5–3 crores per branch
- AUM growth in Tamil Nadu: 10% in Q2; expected to improve to 30% of overall AUM in six months
All figures as stated in the call. If not disclosed, marked as such.