The domestic brokerage house Motilal Oswal is betting on Five Star Business Finance as the company maintained strong asset quality despite a challenging external environment. The brokerage firm has a Buy rating on the stock, with a target price of Rs 900, an upside of 28%.
As per Motilal Oswal, the company’s valuations will re-rate when the company emerges from the current macro weakness without any significant impact on its asset quality and again embarks on a stronger AUM growth trajectory.
“We believe that the company is sweetly positioned to leverage the strong target opportunity in the small business loans (SBL with a ticket size of Rs 5,00,000) segment,” said Motilal Oswal.
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Five Star currently trades at an estimated price-to-book value of 2.3 times of FY27. The stock has undergone a decent correction following the company’s downward revision in its AUM growth guidance, coupled with customer overleveraging, which raised concerns about any potential deterioration in asset quality.
Also, the company continues to strengthen its business model through a combination of improvements in its underwriting model and investments in technology to drive operational efficiency and better productivity of its branches and employees.
However, the company may report near-term compression in net interest margin following a 200 basis points reduction in incremental lending yields since November 2024. In Q4 FY25, the full impact of the lower yields will be visible on NIMs, which will be the first quarter. A combination of lower yields and increasing leverage on the balance sheet will lead to some NIM moderation, which could be offset slightly by a gradual dip in its cost of borrowings in a declining rate environment.
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The share price of Five Star has fallen 0.68% in the past five trading sessions. The stock has wiped out more than 3% in the last one month and 16% in the previous six months. In the last one year, Five Star’s share price has declined almost 6%.
To compare, the benchmark index, Nifty 50 has fallen 1.6% in the last five days. It has given a return of 5.4% in the last one month.
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