Motilal Oswal’s Positive Outlook on Five Star Business Finance Amid Market Challenges

Motilal Oswal, a prominent domestic brokerage firm, is expressing confidence in Five Star Business Finance, highlighting its resilience in asset quality amid a tough economic landscape. The firm has issued a Buy recommendation for the stock, setting a target price of Rs 900, which suggests a potential upside of 28%.

Strong Asset Quality and Growth Potential

According to Motilal Oswal’s analysis, Five Star is well-positioned to rebound as it navigates through current macroeconomic challenges. The brokerage believes that the company’s valuations will improve as it maintains its asset quality while pursuing a robust growth trajectory in assets under management (AUM).

• Key Quote: "Five Star is strategically positioned to capitalize on the promising opportunities in the small business loans (SBL) sector, particularly loans around Rs 500,000," stated a representative from Motilal Oswal.

Valuation Insights and Market Correction

Currently, Five Star Business Finance is valued at an estimated 2.3 times price-to-book ratio for FY27. The stock has recently experienced a notable decline, attributed to the company’s revised AUM growth forecasts and concerns over customer overleveraging, which raised alarms about the potential risk to asset quality.

• Business Model Enhancements: The company is actively refining its business model by upgrading its underwriting processes and investing in technology. These efforts aim to enhance operational efficiency and boost the productivity of its branches and workforce.

Impact of Lending Yield Reductions

In the near term, Five Star may face a contraction in its net interest margin (NIM) due to a 200 basis points decrease in incremental lending yields since November 2024. The consequences of these lower yields are expected to be fully realized in the fourth quarter of FY25, marking a significant impact on NIM performance.

• The interplay of reduced yields and increased balance sheet leverage may lead to moderate NIMs, although this might be slightly counterbalanced by a gradual decrease in borrowing costs in a declining interest rate environment.

Five Star’s Stock Performance Overview

In the past week, Five Star’s share price has decreased by 0.68%, reflecting a more than 3% decline over the last month and a 16% drop over the previous six months. Year-to-date, the stock has seen an overall decline of nearly 6%.

In contrast, the Nifty 50 index has decreased by 1.6% over the last five trading days, yet it has managed to deliver a 5.4% return over the month. However, the index has experienced a 9.6% downturn in the past six months, providing a 3.8% overall return for investors over the last year.

Conclusion

With its strategic positioning and ongoing improvements, Five Star Business Finance is poised for potential growth. Investors looking for opportunities in the market may find this stock worth considering, especially given Motilal Oswal’s optimistic rating and target price outlook.