Motilal Oswal has initiated coverage on Five Star Business Finance with a 'BUY' rating and a price target of ₹600. The brokerage highlights the company's entry into a growth phase following a period of portfolio repair. Investors may note that the stock has seen volatility over the past year, as the company continues to navigate competition in the secured small business lending space.
What Happened
Motilal Oswal Securities has initiated coverage on Five Star Business Finance Ltd., assigning a 'BUY' rating and setting a price target of ₹600. The move comes as the brokerage highlights the company's strategic transition, noting that it has successfully navigated a year focused on portfolio repair and is now moving into a calibrated growth phase. The brokerage anticipates a compound annual growth rate (CAGR) of approximately 21% in Assets Under Management (AUM) and 12% in Profit After Tax (PAT) for the company between fiscal years 2026 and 2028.
Business Model And Context
Five Star Business Finance is a non-deposit-taking NBFC that focuses on providing secured business loans to micro-entrepreneurs and self-employed individuals in urban, semi-urban, and rural areas. Unlike traditional microfinance institutions that often offer unsecured loans, Five Star's model relies heavily on collateral—specifically, residential property. The company targets individuals who are often excluded from formal banking channels, such as small shop owners, tailors, and mechanics. For the fiscal year 2026, the company reported revenue of approximately ₹3,218 crore, marking a 13% increase from the previous year, with a profit after tax of ₹1,098.7 crore.
The Growth And Valuation Perspective
Motilal Oswal’s projections are based on the expectation that Five Star's management will continue to prioritize asset quality and collection efficiency. The brokerage estimates that the company's Return on Assets (RoA) could reach 6.6% and Return on Equity (RoE) could hit 15% by FY28. Currently, the stock trades at approximately 1.7 times its projected FY27 Price-to-Book Value (P/BV). The ₹600 target price set by the brokerage is based on an assumption of 1.8 times the March 2028 estimated Price-to-Book Value.
Competitive Landscape And Risks
The small business lending sector in India is highly competitive, with several other NBFCs and banks targeting similar segments. One of the key risks for investors to monitor is the competitive pressure in the Loan Against Property (LAP) and MSME lending space, which could impact interest margins and growth. Additionally, while the company has focused on improving its portfolio quality, any future deterioration in asset quality—specifically within its micro-LAP segment—could pressure profitability. The company has previously faced challenges related to unsecured lending and microfinance-related stress, which management has been actively working to resolve.
What Investors Should Track Next
Investors may want to monitor several factors to understand the company's performance going forward. Key monitorables include the company's ability to maintain asset quality as it scales, the trend in Net Interest Margins (NIMs) amidst competitive pricing, and the speed of execution regarding its geographical expansion plans. Furthermore, future updates on growth in the AUM and any shifts in the credit cost trajectory will be important for assessing if the company can meet the growth and return targets projected by the brokerage.