Thirty-eight years after its inception, Five Star Finance listed on the stock exchanges on Monday, November 21, albeit at a discount of 5 percent to its issue price of Rs 474 per share.
A traditional non-banking financial company (NBFC) offering secured loans to small and medium businesses, Five Star Finance was backed by marquee venture capital firms including Sequoia Capital and Matrix Partners, private equity firms Norwest and TPG, all of whom exited through the initial public offering (IPO).
In an interview with Moneycontrol, the company’s chief executive officer Rangarajan Krishnan and chief financial officer Srikanth Gopalakrishnan said they remain confident of the NBFCs growth prospects despite the threat of a global recession and high-interest rate fears.
Krishnan detailed the company’s growth levers, which include expanding its branch network, increasing the ticket size of loans offered and strengthening its technological capabilities.
By the end of FY23, the company’s assets under management (AUM) are expected to grow to Rs 7,000 crore from Rs 5,300 crore at the end of the quarter ended June 30, 2022, said Gopalakrishnan.
Five Star Business Finance recorded a profit of Rs 453.5 crore for the financial year ended March 2022, up from Rs 359 crore in previous year and Rs 262 crore in FY20. As of 30 June, 2022, the company’s gross non-performing asset (NPA) ratio was at 1.12 percent while the net NPA ratio was at 0.68 percent.
Edited excerpts from the interview:
How do you feel now that you have made the transition to being a listed company?
Rangarajan Krishnan: We have been in existence for more than 30 years now. So the ambition to become listed is a very well thought out decision which we have taken over a long period of time. We have been preparing ourselves not just in terms of financials and numbers, but also in terms of governance in terms of the board, in terms of management. We have done a whole host of stuff for the last five years to get to this point. So I think it is definitely fantastic to finally being listed today.
How do you look at the sense of responsibility that will kick in? Do you fear this sense of responsibility?
Krishnan: One hundred percent. The decision to get listed wasn’t taken overnight. We have been preparing for this well over the last three to four years. So I think there’s a lot of sense of responsibility because for the first time public shareholders are coming into our focus. But we are very confident with the rate at which we have grown and the systems that we have built so far, the governance metrics that we have put in place, and we are confident of delivering the best, across the board.
You have listed in a bear market. Was that a worry for you? Were you nervous about how investors would react to the IPO?
Srikanth Gopalakrishnan: We had more than six investors on board (before the IPO). So this was a collective call that we had to take in terms of both getting listed and the timing of this thing. The markets, as you rightly pointed out, are choppy but you can’t really time the market to perfection across various parameters.
Our confidence of, you know, getting past the line and making sure that we are forming a fundamentally good listed company arises from the good fundamentals that we are carrying. From that perspective, our investors have always been supportive, and they are very confident with the way we have delivered our results, consistently over a long period of time now.
What is your growth plan when it comes to AUMs?
Gopalakrishnan: At the end of the June 30, 2022, quarter, we were at Rs 5,300 crore of AUMs. For the September quarter, i.e. Q2FY23, the AUM number should be over Rs 5,700 crore. In the last couple of years, we have been a little cautious in terms of growth. During COVID-19 our focus was more on collections, and we gave growth a little bit of a back seat.
Historically, we have been growing at a swift pace. We believe that we should be growing at about 45 percent CAGR (compound annual growth rate) in the next three to four years. Which would typically mean, I think, for this year (FY23), we should be close to Rs 7,000 crore of AUMs.
What impact did COVID-19 have on your business and by when do you expect demand to bounce back to pre-COVID levels?
Gopalakrishnan: Demand was never the issue. We consciously went on the back foot in terms of growth because things were uncertain over the last two years. There’s no point in just focusing on disbursing. Asset quality is of paramount importance.
So, it was a conscious call to have reduced growth to an extent, but I think in the last 12 months, we opened almost close to 80 branches. Because that kind of confidence comes to you from the strong demand, the green shoots that you see on the ground. It’s really picking up and I think we should get to record levels quite soon.
What are your expansion plans in terms of setting up new branches and also in terms of geographies within the country? Currently, you are focused on the South, do you see that mix changing in the near future?
Krishnan: On the branch expansion part, we are confident of putting up 50 to 60 branches every year. Because we are also cautious, we don’t want to put in too many branches that you are not able to get ahead in terms of culture and performance. So 50 to 60 is a comfortable number that we have been doing consistently even during pre-COVID times.
We will continue to remain focused on South Indian states extremely strongly because that is where our strength comes from. We have more than three decades of experience operating in the South. Our understanding of the market, the teams we have built, the infrastructure, the leadership teams across all the states… At the end of the day, it’s a very localised business so unless you have strong teams on the ground, you will not have the confidence to expand really fast. So South is where our heart is, South is where our confidence lies and for the foreseeable future, I think we will definitely be dominated by South.
We will continue to invest in the central states like Maharashtra, Madhya Pradesh and Chhattisgarh, we also have plans to enter one or two neighbourhood states from here, but I think these are for learning, it’s not going to be a rapid expansion in these states. We will take our time to settle down, understand the realities of the metrics before pressing the button on those states. But I think in about three to five years or beyond that, these regions will become important for us.
Will you look at reducing your lending rates in the near future? Will that have any impact on your margins?
Gopalakrishnan: In 2020, our borrowing cost was 11.4 percent. However, in the first six months of FY23, we raised money at 8.6 percent. So we have seen close to 3 percentage points reduction in borrowing costs. Yes, the interest rate cycle has taken a different turn so our borrowing costs will also go up.
In an ideal scenario, we would have passed some of these benefits to our borrowers. Given that we don’t know how the situation will shape up, we are playing a wait-and-watch game. There is a definite headroom available for us to pass on some of these benefits to the borrower. Once the interest rate settles, we will take a measured call in terms of passing on some of these benefits to borrowers. We are also hopeful of some rating upgrades in the next few quarters. With that we feel confident that we should be able to give at least 100-200 basis points of benefits to our borrowers over the next few quarters.
You are operating in a very competitive space. Moreover, a number of new players offering unsecured loans have seen tremendous growth post the pandemic. How do you see that impacting your growth?
Krishnan: Competition will definitely come up over the years. But we are specialists in what we do. Our branches are largely in between tier III and VI markets. We are not there in tier I, tier II and metros. So the penetration of a lot of other players is not as high in markets between tier III and tier VI cities and towns. Secondly, most fintechs are largely focusing on smaller-ticket, smaller-tenor loans, while we take a fairly long-term call on our clients and we go up to seven years. That confidence on a long-term call on our client profile comes from the deep work that we do from an underwriting perspective. However, there is a lot of room for many other companies to serve (this client base).
How does the company plan to invest further for growth and expansion? Considering the proceeds of the IPO have fully been dedicated to investors who exited...
Krishnan: The reason why the IPO proceeds are not being used in the business is because we are very well capitalised. Secondly, we are a profit-making company. So that gives us enough room to invest in the future. In the future there are three levers of growth that we will have. Firstly, we will continue to invest in and open new branches. In the last 12 months we have already opened 80 branches.We will also continue to put more people in each of those branches, because it’s far easier to penetrate geographies where you are already well-established, rather than putting in new branches. Lastly, our growth, to an extent, will also come from a little bit of ticket size increases in line with inflation and customer requirements. We will also invest strongly in technology. Technology adoption is a key requirement for any business, more so for lending businesses now. We have identified a number of areas where there can be a strong technology investment. We have been fairly consistent in doing that over the last few years.