Incorporated in 1984 by Mr VK Ranganathan Five star finance in its previous avatar was mostly a “me too” local low ticket auto/secured lending financier around Chennai. In 2002 his son in law, Mr LakshmiPathy Deenadayalan (Pathy) took over reins of the company and transformed it into the business finance company it is today. In 2002, Five star finance’s portfolio mainly comprised of 2&3 wheeler & consumer goods financing with high NPA’s and no significant advantage over the more established players in the region. Pathy realized that this was not sustainable and spent the next 8-10 years trying, testing & perfecting a new business model moving away from conventional auto (2/3 Wheel ) finance to a business finance company. Five star business Finance (FSBF) currently is a non-deposit taking NBFC (used to be a deposit taking NBFC, surrendered the license) providing secured business loans to micro-entrepreneurs and self-employed individuals, each of whom are largely excluded by traditional financing institutions. Over 95% of their loan portfolio comprises loans from between ₹0.1 million to ₹1.0 million, with the median ticket size being between 3-5 lakhs.
In simple words, FSBF offers business loans to micro/small entrepreneurs (think small shop keepers, mechanic shops, hardware traders, welding job / work units etc.) in tier 3 – tier 7 cities. These businesses are largely unbanked and are excluded from most formal sources of financing. The only option these Micro entrepreneurs have is the local money lender (FSBF’s main competitor apart from a few small firms CSL etc.), and therefore these customers to a large extent are not very price sensitive (Read high yields 22-24% and therefore wide spreads 12-13%)
This is different from a microfinance institution in 2 important ways. Firstly the lending is asset backed & secondly loans are made to individuals instead of SHG (self-help groups) etc. The main collateral for these loans is a self-occupied (Pakka) house, with an RCC foundation.
Additionally, a rising interest rate environment does not have a significant impact on FSBF’s business, firstly because of the wide spreads (low customer price sensitivity), and secondly as they grow, season their book and establish more credibility in their business model, the higher their credit rating gets and therefore the lower their cost of funds in the commercial debt markets, as evidenced by their declining overall cost of funds in the past 2 years despite a rising interest rate cycle.
In 2014, FSBF stepped on the growth pedal after perfecting its lending model, by raising private equity capital, professionalizing the management structure & investing in strong IT systems so that the company could grow at a faster clip & orchestrate their operations at scale.
Growth – Since 2017 the company has grown its top line 15x, Grown its book 12x and PAT 23x. All this while maintaining a reasonable asset quality average GNPA 1.5% and NNPA 1% (excluding temporary shocks such as Demon, Covid, GST implementation etc.)
There is a lot more one can write about their personnel strategy, their cluster-based growth strategy etc. The mechanics of how they keep their asset quality the way it is etc. But in the interest of keeping this short (and not a 70-page report 
) so as to introduce this company to the VP community, I have chosen not to get too deep in the weeds in this first post. The important data points have been captured in the table above. Additionally, I have curated a set of informative videos (7+ hours of video) below, for those interested in gaining a significantly deeper understanding of the business.
In conclusion, Five Star business finance is basically a sub-prime LAP lender & is trying to disrupt the “money lender” / Loan Shark market in India. They have been able to execute extremely well thus far. They have grown their book by 50x in less than 7 years, have weathered the most serious shocks in the lending business (Covid / Demon) successfully and are on the cusp of a major geographic expansion. The company does not have any major “organized” competitor (There are several companies doing low ticket 8-12 lakh housing finance but none in the 3-5 Lakh business finance segment). In my opinion the company should do well in the coming positive macro cycle & does therefore deserve a closer look.
Significant Shareholders – Matrix Partners, TPG Capital, KKR (recently sold in the IPO) & Several others.
Disclosure: Invested. May increase/decrease allocation in the future, biased. Do your own due diligence before investing.
Reference Videos:
IPO Adda: Five Star Business Finance's Rs 1,960 Crore IPO | BQ Prime
Understanding the Trillion-Dollar lending market in India ft. Rangarajan Krishnan
Five Star Business Finance Ltd - Go Goa Conference
#YTMasterclass: Success Story of Five Star Capitals with D Lakshmipathy | CNBC TV18
Five Star Business Finance IPO Review | Conversation with Management of FSBF| Subscribe or Avoid?
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